Remitall Catalina 24H -- See a Pattern?

[HerefordSire]

There were a couple of excellent replies concerning the reproduction limit principal I discovered (or interpreted depending on how you want to look at it does not matter to me as I would rather be a unknown hermit with a couple of close friends). I have barely scratched the surface of the interesting features of the theory. Two replies really made me think very intense most of the night and into the dawn. Each had to do with resource limitations. "How I am going to support 37,700 females?" In other words, "I understand the theory but the reality of me providing support for the exponential growth of females is beyond my ability." If I interpreted this correctly, the idea is there, the will in there, but the wherewithal is not there. This is an easy obstacle to overcome. The solution to the obstacle is mostly mental.

Although I don't intend to stick around much longer, I am preparing another couple of writings to show how understanding reproduction limits can actually lead to exponential growth for the haves and have-nots. You see, all of us are really "haves" just not in the form we think the currency should be in.

Let us say the average national net profit after taxes for each female for breeders is $100. The actual number may be higher or lower depending upon market conditions. This figure theoretically includes all fixed and variable costs of the breeder. You can plug your own number in. The following laws are dependent upon necessary resources being available, environment the cattle live in is habitat friendly, and the success rate is inline with the reproduction limit, in other words, perfection.

(1) If all costs to the breeder were variable costs, the total costs would also be exponential in line with exponential reproduction growth rates * the potential market prices received, and the potential net profit would be based upon the constant spread of the two.

(2) On the other hand, if all costs to the breeder were fixed, the total costs would be constant, and the potential net profit would be exponential as the reproduction rate * the potential market prices received, would also be exponential.

(3) When total costs are a combination of fixed and variable cost as in most all cases, the potential net profit is the difference in the total costs which are sub-exponential, and the reproduction rate * the potential market prices received which is exponential.

The net profit simply comes down to playing the spread with a downside market hedge for protection, as we are not guaranteed the potential market prices received and we are not guaranteed perfection. To finance the operation in return for a portion of the sub-exponential spread as seen with a mixture of fixed and variable costs above is the main reason why an equity investor would consider funding the operation.

Of course, the actual equity funding also depends on the collateral. When commencing operations, the breeder may or may not pay 20% of the cost of the initial heifers. In the case of 100 $800 replacement heifers, the breeder could pay $16,000 and the investor $64,000. After the first year of operations where 100 female calves are given birth, the breeder does not need to make an additional investment as the investor still retains interest in the initial collateral and the new collateral, namely the 200 females and possibly a land deed. However, the investor must agree to finance each year of growth in return for a split of the potential sub-exponential net profit. If the entity is a sub-chapter S Corporation, the losses theoretically flow through in providing another incentive for an investor to proceed with funding. In an equity transaction, if would be very important for the landowner, the breeder in this case, to retain at least 51% of the common shares when the company is eventually funded.

In an equity underwriting, the net profit potential would be sub-exponential. In a credit underwriting, the net profit potential becomes exponential but more collateral may be necessary upon startup.

In order to understand the collateral side of an equity funding, the breeder and the investor group must completely understand what the implications of sub-exponential net profit entails as in the case of an operation having a mixture of fixed and variable costs. The higher the percentage of fixed costs relative to total costs, the larger the potential net profit. Remember, we would be negotiating a hedged sub-exponential spread. Do not underestimate the momentum in this curved accelerating spread. In other words, the spread widens with time and it is most narrow when starting the operation.

We can visualize the spread geometrically in its natural state. Imagine a growth spiral (see past posted web link) where the difference in the curved black spiral lines are widening as time passes. This imaginary spiral represents the biological reproduction limit, or breeder perfection. Say the curved total fixed and variable costs are in a different color line and are moving in the same direction as time passes. The difference between the two curving lines is widening as time passes just not at the same rate as the reproduction limit. This widening of the spread has important ramifications.

The need for future additional collateral from the breeder is eliminated as long as the equity percentage is constant with time. Secondly, the average age of the females decrease with time, to a limit, thereby providing additional interim widening of the curved spread as the market pricing favors younger female flavors. Inherent economies of scale received as time passes provides additional widening of the curved spread. I can continue, but before I do, you should understand these elegant concepts from the point of view from an investor group.

Before, I write more about the collateral objection of rockett2222, does everyone agree the widening potential profit is attractive enough for an investor to consider funding? In other words, do I have to back this concept with numbers so we can view the data practically?

Maybe the light switch will turn on now. Let us focus on fixed land cost and variable feed cost since these are the largest cost items in a breeding operation. I am showing you this so you can see the sub-exponential widening spread dependent an investor groups sees based upon on the law of female reproduction limits.

I will purchase, with cash, one ugly open yearling heifer which cost $800. She came from a documented line of longevity and fertile genetics. I intend to always AI her with sexed female semen from a bull containing longevity and fertile genetics. Each female is expected to produce a calf every year except a heifer which is expected to produce a female calf at two years. If a female calf dies, I buy a new female calf from the same genetic lines. If a heifer dies, I buy a heifer from the same genetic lines. If a cow dies, I buy a younger cow from the same genetic lines. If a bred cow or heifer dies, I buy a bred cow or heifer from the same genetic lines. All females will receive rations prescribed by the local extension center administered by me and will received all vaccinations and health treatments from the local vet so that the herd is always state certified.

I have a full time job that pays all overhead. I purchased 294.33 acres in 2004. Payments for 240 months after $300K purchase with $30K down at 5.75% APR is $1,895 per month. As part of the land negotiation with the realtor and the seller, I financed a $15K 84 month balloon note at the same rate with the realtor who later sold the note to the seller. Total payment for land is $1,967 per month, or $23,610 per year. This is a fixed payment and is amortized. Any appreciation in the land is additional revenue when I liquidate. The land will support one head per acre per year as it is fertile black land (gumbo).

Feed for the operation is mainly Bermuda grass on the farm including grazing and hay production and storage. I leave the hay bales outside in the weather. I do all the work. I pay $5 per month per female for molasses tubs containing 30% protein containing sufficient minerals. I am leaving out all other variable costs, such as semen, fertilizer, seed for winter ryegrass and clover, diesel fuel to produce hay, maintenance, worming medicine, vet bills, recommended rations by the extension office, etc., except for the tubs which is $5 * 12 months, or $60 per year.

A little more than a year later after I bought the land, I financed cattle working equipment, tractor and implements including hay baling equipment, female pairs, embryo production, fencing equipment, and several other items. These are all fixed costs to me as I locked in low historic interest rates. However, I am leaving these items out for simplicity just like I am leaving out all the other variable costs other than the tubs.

So here is what I have when I start operations for one yearling heifer and 294 acres:

Total Costs = 23,670
Fixed Costs = 23,610
Variable Costs = 60

Reproduction Limits:

Year 00: Count = 001 or 1 Heifer
Year 01: Count = 002 or 1 Cow, I Heifer calf
Year 02: Count = 003 or 1 Cow, 1 Heifer calf, 1 Heifer
Year 03: Count = 005 or Combination of Cows, Heifers, and Heifer calves
.
.
.
Year 12: Count = 233 or Combination of Cows, Heifers, and Heifer calves
Year 13: Count = 377 or Combination of Cows, Heifers, and Heifer calves

Costs (T = total cost and F = fixed cost and V = variable cost):

Yr 00: Count = 001 or T = 23,670 and F = 23,610 and V = 00,060
Yr 01: Count = 002 or T = 23,730 and F = 23,610 and V = 00,120
Yr 02: Count = 003 or T = 23,790 and F = 23,610 and V = 00,180
Yr 03: Count = 005 or T = 23,970 and F = 23,610 and V = 00,300
.
.
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Yr 12: Count = 233 or T = 37,580 and F = 23,610 and V = 13,980
Yr 13: Count = 377 or T = 46,230 and F = 23,610 and V = 22,620


Potential Revenue Limits at $800 per female:

Yr 00: Count = 001 or $000,800
Yr 01: Count = 002 or $001,600
Yr 02: Count = 003 or $002,400
Yr 03: Count = 005 or $004,000
.
.
.
Yr 12: Count = 233 or $186,400
Yr 13: Count = 377 or $301,600


Total Cost (T) relative to Potential Revenue (PR):

Yr 00: Count = 001 or T = $023,670 and PR = $000,800 or 003.38%
Yr 01: Count = 002 or T = $023,730 and PR = $001,600 or 006.74%
Yr 02: Count = 003 or T = $023,790 and PR = $002,400 or 010.09%
Yr 03: Count = 005 or T = $023,970 and PR = $004,000 or 016.69%
.
.
.
Yr 12: Count = 233 or T = $037,580 and PR = $186,400 or 0496.01%
Yr 13: Count = 377 or T = $046,230 and PR = $301,600 or 0652.39%

Did the light turn on yet for anyone?

Thirteen years have passed since I purchased one female yearling. I have not received any salary and have not sold any females. All cash flow items have been paid out of my salary from my outside job. I have primed the pump. I paid the initiation fee. I set the company up with an open ended widening spread and have not hedged to the downside yet. I have maximized the land and resources I invested in and I am now is position to take advantage of nature's law of reproduction limits. This is where an investor group steps in. As you can see in the previous text, no money has hit the bottom line and I am hungry. Now, I am theoretically going to drop the cash to the bottom line after five short years. This is the plan.

Instead of commercial breeding stock, I will breed registered stock as registered stock has documented genetics and should be worth at least $200 more in revenue than commercial stock with the same cost structure as they do not usually consume more. Specifically, instead of using $800 potential revenue per female $1,000 is used. Instead of an ugly cow, I will commence operations with a beautiful cow. Instead of ignoring carcass, the first registered yearling I buy will be the highest valued female I can afford with a dam and sire that have proven carcass value with high accuracy numbers in addition to the other requirements already defined.

An investor group theoretically invests in the company after year 13 and is expected to cover all future overhead in return for 49% piece of the action in the form of common stock. I as a breeder, retain 51% of all book and profit. However, since I primed the pump and paid the initiation fee, I tack on a premium of $25,000 per year salary for 13 years that I intentionally deferred, or $325,000. Additionally, there can be a premium added for land ownership as rural land is a limited resource and should appreciate. I add $1,000 per acre for 13 years of ownership for 294.33 acres, or $294,330. Therefore, the premium I add to book value is the current equity in the company plus the premium of $619,330. This premium is used when defining the split of equity between the investor group and myself and is not paid until liquidation takes place after the 18th year. I am expected to retain 51% of the common shares from year 14 through year 18 when the company is terminated. The land and all assets will be liquidated. All liabilities will be paid.

The specific years of investor financial commitment are years, 14, 15, 16, 17, and the 18th years. One of the key strategies in the entire plan besides taking advantage of the natural law of reproduction efficiency, is during these years of outside involvement, no additional land will be purchased. Instead of one female per acre, the number will drastically increase and all feed resources required will be purchased and guaranteed by corn futures contracts. Hay will be purchased upon contractual agreements from local farmers for five years. Likewise, all female inventories will be hedged to the downside as to the market price with live cattle futures contracts.

So here is the state of the company when the investor funds the operation:

Female Count = 377
Total Costs = 46,230
Fixed Costs = 23,610
Variable Costs = 22,620

Reproduction Limits:

Year 13: Count = 0,377 = 01.28 females per acre
Year 14: Count = 0,610 = 02.73 females per acre
Year 15: Count = 0,987 = 03.35 females per acre
Year 16: Count = 1,597 = 05.43 females per acre
Year 17: Count = 2,584 = 08.78 females per acre
Year 18: Count = 4,181 = 14.21 females per acre

Costs (T = total cost and F = fixed cost and V = variable cost):

Yr 13: Count = 0,377 or T = 046,230 and F = 23,610 and V = 022,620
Yr 14: Count = 0,610 or T = 060,210 and F = 23,610 and V = 036,600
Yr 15: Count = 0,987 or T = 082,830 and F = 23,610 and V = 059,220
Yr 16: Count = 1,597 or T = 119,430 and F = 23,610 and V = 095,820
Yr 17: Count = 2,584 or T = 178,650 and F = 23,610 and V = 155,040
Yr 18: Count = 4,181 or T = 274,470 and F = 23,610 and V = 250,860

Potential Revenue Limits at $1,000 per female:

Yr 13: Count = 0,377 or $0,377,000
Yr 14: Count = 0,610 or $0,610,000
Yr 15: Count = 0,987 or $0,987,000
Yr 16: Count = 1,597 or $1,597,000
Yr 17: Count = 2,584 or $2,584,000
Yr 18: Count = 4,181 or $4,181,000

Total Cost (T) relative to Potential Revenue (PR):

Yr 13: Count = 0,377 or T = $046,230 and PR = $0,377,000 or 0,652.39%
Yr 14: Count = 0,610 or T = $060,210 and PR = $0,610,000 or 0,815.49%
Yr 15: Count = 0,987 or T = $082,830 and PR = $0,987,000 or 1,191.60%
Yr 16: Count = 1,597 or T = $119,430 and PR = $1,597,000 or 1,337.84%
Yr 17: Count = 2,584 or T = $178,650 and PR = $2,584,000 or 1,446.40%
Yr 18: Count = 4,181 or T = $274,470 and PR = $4,181,000 or 1,523.30%

The widening spread combined with the reproduction limit is a function of fixed versus variable costs.

Did a light turn on yet?

Let me make it as simple as I can.

Ellie Mae and Jethro grew up and got married in Arkansas. They had a small vineyard and grew Cabernet Sauvignon grapes. Jethro loved to make wine from the grapes and Ellie Mae loved to make jam. Jethro expanded and started selling his vintage wine and became very successful. He ended up buying about 1000 acres of which 500 acres were vineyards. Ellie Mae loved to spend money shopping and Jethro loved to make and save money.

During this time, Ellie Mae couldn't get pregnant so she went to the doctor. The doctor prescribed a fertility drug and Ellie Mae became pregnant a month later. About nine months later, Ellie Mae gave birth to healthy quadruplets. They were all male and she named them Luck, Duck, Buck, and Chuck. Luck and Duck were just like their mother, and Buck and Chuck were just like their father.

When the boys got to be in seventh grade, they had one year more of education than their father. Jethro was very happy the boys received more than a sixth grade education. Jethro grew allot of grapes that year because there were millions of bees to pollinate the vines. He made an additional $20,000 more than he usually made and he was so happy the boys received a sixth grade education so fast and the fact he wanted to hide the money so he wouldn't have to pay taxes. So he decided to give each of the boys, as a gift, $5,000 a piece. Jethro also told the boys, each of them could have 125 acres but they couldn't sell the land until they turned 23 years old.

Luck took the cash & invested in a CD at the bank drawing 4% per year. Duck took the cash & bought 9 cows for $4K and a bull @ $1K & put them on his land. Buck took the cash & invested in a CD at the bank drawing 4% per year. Chuck took the cash & bought 1 beautiful cow @ $4,000 and put her on his land and bought $1K worth of female sexed semen.

A year later, Jethro had another good year with the grapes and Ellie Mae and Jethro wanted to hide the money so they wouldn't have to pay taxes again. This time though, Ellie Mae gave the boys $20,000 and told them to bury the cash somewhere on their land where no one knew just in case they wanted to go shopping. Lucky, Ducky, Bucky, and Chucky did want Ellie Mae said and buried their cash in the ground in secret hiding places in a double layered bread sack.

Each year the boys were faced with a new decision. Luck needed the money he made from his investment so he could go shopping so he renewed the CD at the same rate every year. Duck also needed the cash so he could go shopping so he sold 7 calves every year because one seemed to die each year, one always didn't settle each year, and he had to put back one replacement each year. Buck loved to save money so each year when his CD came due, he always rolled it over and invested the interest received and the original principal. Chuck loved to save money and didn't sell any female calves and he artificially inseminated each female a couple of months after she had a calf.

The following year, the bees did not pollinate the grapes and Jethro had to sell his 475 acres of his remaining 500 acres and got a job in town digging ditches since he had to pay all the family bulls. When the boys became 23 years old, this is what they had besides the 125 acres:

……..……..Luck……..……Duck…….....Buck………....Chuck
Yr 00…..5,000………..10 Head……..5,000………. 1 Cow
Yr 01…..5,000………..10 Head……..5,200………. 1 Cow, 1 Heifer Calf
Yr 02…..5,000………..10 Head……..5,408………. 1 Cow, 1 Heifer, 1 Heifer Calf
Yr 03…..5,000………..10 Head……..5,624………. 005 Head
Yr 04…..5,000………..10 Head……..5,849………. 008 Head
Yr 05…..5,000………..10 Head……..6,083………. 013 Head
Yr 06…..5,000………..10 Head……..6,327………. 021 Head
Yr 07…..5,000………..10 Head……..6,580………. 034 Head
Yr 08…..5,000………..10 Head……..6,843………. 055 Head
Yr 09…..5,000………..10 Head……..7,117………. 089 Head
Yr 10…..5,000………..10 Head……..7,402………. 144 Head

Jethro all of the sudden became ill. He had to sell all of his possessions because the price of medical attention was so high. The boys loved their father so much, they wanted to sell everything they had to help their father. All other them sold their 125 acres and gave it to the hospital. They were still short, so each had to sell their 10 year old investments. Luck and Buck cashed their CDs in and gave the doctor $12,402. Duck sold his 10 head by the pound for $6,000. Together they had $18,402 and they were still short $144,000. Chuck had to sell his female herd. This was hard to do because Chuck didn't take one dime out in 10 years just like his brother Buck. Chuck sold his herd for $1K per head and came up with the $144K. Jethro then died and Ellie Mae went looking for the secret hiding places where the money was buried so she could pay for the funeral.

Do you know where the two buck chuck wine originated?

http://cattletoday.com/forum/viewtopic.php?t=42384