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Turning a profit in a strange cattle year

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Watch each Friday for Doug Ferguson's Market Intel blog on Beef Producer and BEEF magazine.
Trying to predict what the market will do, is gambling. It’s better to focus on the math and consider the sell/buy approach.

Some people tell me it has been a strange year. I agree, but the thing is they’ve all been strange years since Covid. It is so easy to get all caught up in how things are different. Then yesterday I heard the Bon Jovi song with the lyrics “The more things change, the more things stay the same.”

In the past year gas is up around 26%, even though the voice on the radio points out to us how it’s dropped every day for the last two months. Electricity is up 16% and food is up 12%. I’m getting these stats from some financial articles I read, and I really think they need to go back and check the food increase, because it seems much higher than that to me.

Also, since the start of the year I read that the average mortgage payment has risen ore than 38%. We’ve just seen the sharpest downturn in housing since 2008. And speaking of 2008 Zerohedge had a chart recently showing how the stock market is behaving exactly like it did before the crash of 08.

I found another article extremely interesting. It showed how housing takes a hard dive every 14 years. The most recent were in 1994, and 2008 and now 2022 is looking much the same. We also recall we had a market crash in 2001 and anyone that owned cattle in 2015 sure remembers that one. What we have is a seven year cycle and guess what year it is.

Getting the right focus

When I went through Ann Barnhardt’s marketing school years ago she taught us to ignore market cycles and focus on the math and the relationships between classes of cattle. The marketing skills she taught me and that I now teach others has prospered me, even during the “ugly” times. It’s my opinion we should pay attention to these things and be ready.

Being ready does not mean plan on a crash. That is forecasting which is a form of gambling called betting on the come. We would be betting that history will repeat itself. We have all made a bet on a sure thing and lost before. What I mean by being ready is having the skill and market literacy to be able to continue to trade in a bear market and still make it cash flow.

In my marketing schools I have an example of a hardware store selling nail guns. The market deflates 75% and cash flows beautifully and even gives us a 30% ROI. We need to know how to market our cattle the same way retail markets their goods, and that is with the sell/buy method. Think about this, even though the price of gas went down we don’t see gas stations going out of business or even complaining do we. It is because of the price relationship between the gallons sold and the gallons they are replacing back into their tanks.

Anyone who has crunched some numbers in their business lately is feeling the effect of the rising prices of pretty much everything. The topic I am currently approached about the most is what to do about the high Cost of Gain (COG).

Before I get into the high COG I want to address another thing. Some people already have their minds made up, and they fall back on this old paradigm. They believe they need to save money in the good years to make it through the lean years. Folks this is a poverty mindset. If you do not have a prosperity mindset the money you do have in inventory will do exactly what your mindset is, and it will leave you and find someone else who welcomes it. Money flows to those who invite it, and it stays with those who welcome it. This is why I am so big on having the right mindset. We should be able to welcome money no matter what the conditions or what happens in some goofy year.

Taking on high Cost of Gain

So, what do we do about these high COGs? We use market literacy and evaluate what we have available to us. This week in Oklahoma we could sell eight weight steers and buy back weaned five weight steers with a Return on Gain (ROG) of $1.77. In Nebraska we could sell six weight steers and buy back bawling four weight steers with a ROG of $1.79. In Missouri we could sell seven weight heifers and buy back three weight heifers with a ROG of $1.71. In Kansas we could sell nine weight steers and buy back bawling five weight feeder bulls with a ROG of $2.17

I can do this until the sun comes up tomorrow. What does any of this mean? As long as the ROG is higher than our COG, and I know you are all adding in some profit or cost of living money at bare minimum into the COG, we are making good trades. The problem is if we know how to calculate a ROG. I have no idea how people think they can make some money in the cattle business if they don’t know how to do that. I guess that’s why they don’t need to go to Vegas, they gamble every day

Let me point out I can find these trades in different states, using different weights to sell and different weights to buy back, and as you’ve seen above I can do it with different sexes. Even with a high COG the market is pretty liquid and for those with a lower COG the market is extremely liquid right now.

Before I move on to cows, I’ll wrap up the feeder portion here. Feeder bulls were up to 40 back and bawling calves were up to 25 back. Since I get misquoted all the time, I want to be clear, I have not bought any bawling calves yet. The people that have bought bawlers are telling me it’s been tough to keep them healthy.

They’ve had their fill already and that is why we can see such a discount for unweaned calves. If you are going to wean them commit to it and do a good job. Some of the weaned cattle that come through look a bit suspicious, like they may have had a hard time during the weaning phase, and they will be discounted as well. Some people have had weaned cattle fall apart recently and they prefer to buy them off the cow so they know they are fresh. This is a moving target, to wean or not to wean. The simple answer is if you are going to do it, do a good job at it.

For the cow/calf folks who may be wondering what to do about your high costs. First off, I would suggest being willing to sell some of your breeding stock. The margins between different ages and stages have been very attractive the past year.

Last weekend I got to see a female sale. It the first one I’ve seen where the offering included a little bit of everything. The female market is over-valued. Everything sold above its intrinsic value.

When we compare similar type and age of pairs to breds, the pairs are over-valued. When we compare age to age their weight affects their value in a big way, even more than stage of pregnancy. The most blown-up example of this is the first-calf heifer. If she is under 1,000-pounds she’s a blue light special.

Offsetting high cattle costs

Now how about this to offset some high costs. Sell the spreader and broken mouth pairs and replace with a bred heifer that is under 1,000-pounds and in first stage. The pair has a higher intrinsic value than the heifer but, the actual price difference between the two shows we could be getting paid much more for that value than it is really worth. Not to mention we got rid of the old cow and replaced with a much younger one and we got paid to do it!

Maybe you have an abundance of feed and because of that your bred heifers are the ones that weigh over 1,000-pounds. Some of them sold well enough that we could sell one of them and buy two of the one-and-done cows, and still have a little cash left over after buying the second cow. Not to mention we no longer have to worry about pulling calves because we have mature cows that know what they are doing.

If what I think is about to happen actually happens, sell/buy skill is the only thing that will keep you in the black.

The opinions of Doug Ferguson are not necessarily those of beefmagazine.com or Farm Progress.

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