Here’s a great article by Alan Newport which describes some of the ideas I talk about regarding marketing breeding stock.
How they work:
Buy-Sell: A plan is developed to own an animal with many assumptions and estimates .What it will cost, how much it will gain and what it will bring. With this hope and that is all there is, we come up with a break even value.There will be a set time frame that we will own the animal. Where I ranch this is buy one in late fall, winter it and sell in late July.
Sell-Buy: Sell some money and buy the most undervalued animal. Carry this animal along to a point that we find a trade that is profitable. We know what our cost to carry is.We can weigh the animal and know what our inventory is and we can get very close to the price. With that knowledge, sell the overvalued one buy the undervalued one. With this transaction you have created cash flow, pick up profit and most of the time bought a smaller animal back. The smaller animal eats less feed and there are fewer pounds at risk if the market goes down.
Continue reading Sell-Buy vs. Buy-Sell
Today the price of cattle is high in relationship to where they were. They may be cheap to where they may be going. We don’t know what the market is going to do. What we do know is what the market is today and the relationship of the price to what we have in inventory.
The inventory is made up of three things:
- animals that we own
Time is a fourth resource we have both from the perspective of what we do with it or how much time we keep an animal before we sell it. There is a risk of the market changing in animals that take a long time before selling so we need to factor that into our decisions.
To find the relationships of the animals that we own, we need to compare the value of them and the cost to carry them to the weight or time frame when they are overvalued. The prices that are used are good only for “TODAY” to compare and find the ones we want to sell and keep.
Example, prices from Joplin Sale 2/13/2012:
425#Steers @$202/cwt = $858
425# Heifers @$175/cwt = $743
Young Bred Heifers $1700
6 Year Old Cow
7-9 Years Old Cow $1,400
Old Cow 1050#@.89/# = $934
Heifers to Steers Comparison
All marketing is based on the numbers and relationship between the values of different classes of animals. The first relationship is steers to heifers. The $115 dollar difference ($858-743) is based on a $27 dollars/cwt difference.
Value to me is a $10 spread between steers and heifers. In other words, when the spread between steers and heifers is over $10 the heifer is undervalued and the better buy. Or, in this case the heifer is the one to keep because she is undervalued to the steer. Because the steers are overvalued to the heifers, they are a sell.
425# TO 475# Steer Comparison
Now that we know the steers are a sell to the heifers, we need more numbers to find out if the time is right to sell them. The numbers that we need are the cost to carry and the value of that gain. My cost to carry a calf on dry native range plus 38% cubes is 50 cents per day. That is the value of the grass at custom rates and the cost of the cubes. They will gain about ¾ pound per day.
425# steer @ $202/cwt = $858
475# Steer @ $195/cwt = $926
50# gain value = $68
50# gain cost = <$33>
Net value = $35
We now know that if we keep the 425-pound steer to a 475-pound steer we will gross $68. It will take 66 days to get there and the sale date will be April 19. At a cost of $33 dollars, the net dollars are $35. The value of gain was $1.36 ($68/50# gain).
425# TO 525# Steer Comparison
425# steer@$202 = $858
525# steer @$182 = $955
100# gain value $ 97
100# gain cost <$66>
By adding 100 pounds we got $97. It would take 132 days at a cost of $66. Net dollars would be $31.The value of gain was $.97/pound. When you compare the 475 pound steer to the 525 pound steer, the value of gain drops by $0.58. Carrying the 425 pound calf to 475 pound was good, but the next 50 pounds was not. For me in Northeast Oklahoma, it easy to sell into grass fever which is in April when the 475 pound calf would sell. The 525# calf would sell in June when the fever is out of the market.
What the numbers tell on the steers is that 425# calf is a buy compared to the 475# calf “TODAY” and the 525# tells that “TODAY” the market is not paying as much for the 50# from 475 to 525 pounds as it would for the 50 pounds from 425 to 475. This information tells me I should sell the 475-pound calf.
Heifer vs. 6 Year Old Cow Comparison
When looking at the heifers and cows we see that value of the young cows is higher than the heifers and also the old cows. We will now look at the relationship of the heifers and cows. My cost to carry a heifer to the point it is bred is $255. This cost is based on custom grazing rates for the grass and labor and feed at cost. The numbers tell us that a 6 year old cow will drop in value as she becomes a 7 year old.
Sell 6 year old cow = $1700
Keep 425# heifer = $< 743>
Cost to carry = $< 255>
Cash from Trade = $702
What we have done is sold a 6 year old cow and keep one of our heifers. By doing this we have given up the sale of the calf the cow would have had which at today’s market is worth $720 ($800 calf value x 90% calf crop = $720). By doing this trade we have sold a cow that is ready to drop in value and replaced her with a heifer that is appreciating in value. We also have $702 in cash in the bank. The difference in the cash we have now and the sale of the cow’s calf is $18 dollars. However, there are other gains with this trade including: picked up 4 years in a younger cow, removing the cost of carrying the cow for a year, and reducing the market risk with the time of carry to sale.
7-9 Year Old Cow vs. 10+ Year Old Cow Comparison
Sell 7-9 year old cow = $1400
Keep heifer = $<743>
Cost to carry = $< 255>
Cash = $402
Old cow = $943
Keep heifer = $<743>
Cost to carry = $<255>
Cash = $<55>
The calves from 6 year old cows and older carry a big depreciation cost, but you can see how the longer you hold on to a cow the more costs there are as well.
As I gain more knowledge of the relationships of the market two things are paradigm changes for me.
When calving with nature, not only are costs lower, calving rates go up and animals sell into the best markets.
Longevity may carry some costs with it. Depreciation is not a straight line. It’s more like going over a cliff. With longevity you need to know the value to you and how you are going to handle the costs along with its benefits.
The market is always changing and the animals that we own value is changing. This relationship of the market and change(weight gain, weaned, later stage of pregnancy) in the animals creates opportunity to sell the overvalued buy or keep the undervalued animals and pick up the cash difference.
This is very important in a high market. By pulling the cash out of the inventory while maintaining the inventory a cushion is being built in cash reserves for the down turn in the market when it happens.
|What you do:||Sell 5 year old cow/calf pair for $2900
Keep Weaned Heifer cost of $1500
$2900 – $1500 = $1400 income
Calf Sales income of $1250
|Annual Cost to Carry:||– $1.50/day (heifer eats less than a cow) x 365 days = – $550||– $2.00/day (cow eats more than a heifer) x 365 days = – $750|
|Annual Depreciation:||$0||– $200|
|Value after one year:||We have a bred heifer and $850 cash. We have picked up 4 years and the cash.||We have $350 cash and a 6 year old, bred cow.|
Bud Williams used to begin his marketing schools by talking about knowing yourself. Know what you will do and what you won’t do. If you will not sell a steer before he weighs 800 pounds or sell a perfectly good 5 year old cow, then stick with what you “will” do.
|Buy / Sell||Sell / Buy|
|Buy an animal;
then sell and pay expenses;
see if there is profit or loss
|Sell an animal and pay expenses;
then buy another animal.
Profit is the difference between the Net Sale and replacement cost.
|Buy / Sell||Sell / Buy|
|Buy 515# Steer @ $196.50 = $1011
Sell 750# Steer @ $135.00 = $1012
Net Loss $194
|Sell 750# Steer @ $135.00 = $1012
Buy 525# Bull @ $125.00 = $656
Gross Margin = $356
Positive Cash Flow $161
|If we stop right here, we have lost $194. Look to the right, if we then buy the 525# bull calf, we can still make money.|
What is the difference? Only difference is structure of the business.
Buy / Sell is a philosophy that is at the whim of the market. But you never know if there will be profit.
Sell / Buy is a philosophy that shows when there is a profit to be taken today. But there is only a profit if you act today.
It is important to know what the market is willing to pay for.
Skill of Grazier
- Steer vs. bull
- Guaranteed open heifers
- Guaranteed Bred heifers
- Packaging (Singles into Groups)
- How, When, Where you sell
Do you have an unfair advantage?
- Skills (see above)
- Low Cost of Gain – Summer? Winter?
- Proximity to source of cattle (available abundant opportunities)
- Turnover Time (How many times a year can you turn your money over?)
If the market never moves, the value of your cow herd inventory still changes.
- Cow Depreciation
- Heifer Appreciation
Follow the life of a heifer calf through the cow herd:
400# heifer calf @ $1.70 = $680
800# Yearling Heifer @ $1.40 = $1120
20 month old Bred Heifer = $1500
2 Yr Old w/calf = $2000
3,4,5 Yr old w calf = $2000
6 -7 Yr old w/calf = $1500
8-9 Yr Old w/calf = $1200
10+ Yr Old w/calf = $1000
As the age of the individual cows change, the inventory value changes.
Cost of Carrying animals made simple: An animal eats its weight every month.
- 1000# cow eats 1000# of grass / month.
- 400# calf eats 400# of grass / month.
Ranch Example: A
This ranch has 50 calving age females, sells 5 cull cows/year, keeps 5 replacement heifers/year.
Heifer calves 400# @ $170 = $680 X 5 = $3,400
Yearling Heifers 800# @ $140 = $1120 X 5 = $5,600
2 Yr old = $2000 X 5 = $10,000
3, 4, Yr old = $2000 X10 = $20,000
5 Yr old = $2000 X 5 = $10,000
6, 7, Yr old = $1500 X 10 = $15,000
8, 9, Yr old = $1200 X 10 = $12,000
10+ Yr old = $1000 X 10 = $10,000
Total 60 Head = $86,000 Value of Inventory
Sales each year are 45 calves = 5 cull cows
If we continue this program, inventory value is static. There is no management of Inventory Value.
Ranch Example B:
What If we sell every animal that is at the point of depreciation or beyond and replace with heifer calves to grow into cows. In the future sell all cows at depreciation point (5 Year/Old)
Sell all 5-10= Year Old Cows 35 head = $47,000
Buy 70 400# Heifer Calves @ $680 = $47,600
Two years later the Inventory is:
2 Yr Old heifers, 75 Head (5 raised, 70 purchased) @ $2000 = $150,000
3-4 Yr Old cows, 10 Head @ $2000 = $20,000
Value of Inventory $170,000
Plus if we keep all heifer calves to breed those 2 years:
8 Heifer Calves @ $680 = $5,440
8 Yearling Heifers @ $1120 = $8,960
Total calves and heifers $14,400
Total ranch inventory = $184,400 ($170,000 + $14,400) plus have sold an additional 10, 5 YR old cows = $20,000
Change in Inventory Value is $184,400 – $86,000 = $98,400
Sales are: What do you want them to be?
Sell all calves? Keep all heifers, sell all high value animals?
What you do with this information is up to you. The point is to be aware there is a lot of money to be made by actively managing Inventory Value.
- Cash It In?
- Let It Ride?
- You get to decide!
Decrease Expenses or Increase Production?
Net Income 20,000
|Increase Production 10%||Decrease Expenses 10%|
An Ounce of Grass
What is one ounce of grass worth?
- 43,560 sq ft/acre @ 9 sq ft/yard = 4840 sq yards/acre
- 4840 yards X 1 oz = 4840 oz
- 4840 ounces/acre @ 16 oz/lb= 302.5 lbs grass/acre
- 302.5# grass/acre X 50% utilization rate = 151 lbs grass/acre
- 151# grass/acre @ 12# grass require/lb of gain =12.6# gain/acre
- 12.6# gain/acre @ $.50/lb/gain = $6.30/acre
Economic Impact of 1 ounce of grass/ sq yard
- Oklahoma has 20,783,165 Grazing landAcres = $130,933,940
- Kansas has 17,905470 Grazing landAcres = $112,804,460
There has been a lot of discussion about how cow depreciation is one of the biggest costs in the cow calf business, yet cow depreciation and the amount of shrink when selling animals are two of the costs that could be mitigated if they were only tracked.
When I talk about tracking cow depreciation it involves knowing your inventory value so you will recognize when your inventory value begins to drop and depreciation sets in.
First let me give you some background to this thought process.
It dawned on me some time ago that to be able to have depreciation, you also have to have appreciation. If you look at the price of a cull cow and a weaned heifer calf they are the same. At the time I’m writing this, an 1,100-pound cow sells for about $1,210 and a 500-pound weaned calf sells for about $1,205. It is a change in the value of this heifer calf as she grows and matures where the appreciation comes in.
At the time I’m writing this, it is also true the longer you keep a weaned heifer calf the more valuable she is. Keep her to be a yearling, or bred heifer, and she just keeps moving up in value. If she starts giving you calves you can start collecting the calf dividend, too.
Then when she’s 5 or 6 years old she has reached her maximum appreciated value and given you all the calf dividends without a cost of depreciation. After that point, the calves she raises will have to cover the depreciation cost that’s incurred in her inventory value. That’s because she begins to truly depreciate, or decline in value.
To take advantage of capturing appreciation we need to have some shifts in our paradigms — which are the mental maps we have fixed in our minds and which we use to make decisions.
Paradigm one- it costs too much to develop bred heifers.
We as an industry cannot stand an open cow. This is where the heifer development centers came to be. They had great success in getting heifers bred but at a huge cost. And the breed-up on the first-calf heifer was terrible. One of the best profit centers that I was involved in was buying these open first-calf heifers and re-breeding them and either selling them or using them in my own cow herd.
By developing these heifers in sync with the nature you greatly cut your costs and also develop a heifer that matures earlier. By doing this you can rough heifers through the winter and take advantage of compensatory gain in the summer and have a very adequate-sized heifer to breed.
Then you turn the bulls in for a short time and you will have selected for your early maturing heifers that will breed.The ones that won’t breed can be sold as heavy feeder heifers.
This is where the rub within the industry comes: You could have from 30% to 60% open heifers. And let me tell you, as the open pen is filling up and there’s a handful in the bred pen everyone around gets nervous. Everyone talks about selection but very few people do it.
I’ll get on my soap box for a moment –What we have done in the cow business is made it so that the beef cow has quit working for us and now we work for her with all the inputs that we make available to her, or in other words enable her.
The fact is, my method of buying, raising and breeding heifers is where selection can be done at a reasonable cost. Those open heifers can be sold as feeder heifers or you can put a bull back with them and breed them. Then they have a chance to grow more and they’re just what everybody wants – a big, black, bred heifer. Oklahoma State University research shows that 50% of these heifers will be open again in their lifetime. This is where I have a problem with breeding heifers to calve as 3-year-olds. You have enabled later-maturing heifers to breed and now the ones don’t breed are cows and sell at a discount compared to feeder heifers.
Paradigm two-Having too many open heifers when breeding them back for their second calf.
Actually, however, this is more a problem of poor marketing and the lack of understanding of the markets than it is one of open heifers.
The open first-calf heifer that weighs 900 pounds is worth about $1,395 at the time I write this, and you’ve weaned a $1,300 calf off her. If she was on inventory for $2,700, you now have a pair that’s worth $2,695. So you take away the $500 cost to carry her on grass from the $2,695 and you have a value of $2,195. That shows we’ve lost $505 on that open heifer.
Another way to look at it is we take that open heifer that is worth $1,395 put $300 additional cost to carry in her now we have a $2,700 bred 3-year-old cow. Now you can add value of the bred cow in the value of her calf and take away the combined carry cost for that longer period. So that would be $2,700+ $1,300- $800 = $3,200. I realize they will not all re-breed, but the fact that we’ve taken a $505 negative to a $3,200 value is positive and it really changes the nature of this business.
The main thing I’m trying to point out here that we put a lot of selection pressure and did it profitably.
Paradigm three- Heavy weaning weights equal profit.
Wrong! There are two paradigms in the cow-calf business that eat up all hope of profit. They are heavy weaning weights and cow longevity.
Heavy weaning weights are eaten up by costs and you don’t get paid for the extra pounds.
Cow longevity is eaten up by depreciation.
I was watching Superior Livestock Auction’s Week in the Rockies sale recently. A ranch sold four lots of steer calves. One lot weighed 365 pounds and brought $4.05/pound = $1,478 each. Lot two weighed 440 pounds and brought $3.67/pound = $1614. Lot 3 weighed 485 pounds and brought $3.15/pound = $1,527 each. Lot four weighed 530 pounds and brought $2.92/pound = $1,547. As you can see in this example the market wasn’t willing to pay for any gain over 440 pounds. The market was telling you that you can make the 365 pound calves bigger and is willing to give you $1.81 for the value of gain.
It’s all about producing the most economic calf that your country can produce. This does not mean you should be the low-cost producer, but the most economical producer.
There is a time when a little bit of inputs will make great gains in the bottom line. An example of this is making sure that the rumen of your cow has all the degradable proteins they need every day of the year.
Then at weaning you can let the market tell you that you need to sell or keep the calves and put more weight on.
This is all about marketing. Understand where the appreciation comes from and where the depreciation goes.
“No rock has ever gone so high that it hasn’t come down.”
This statement was told to me by Gordon Hazard many years ago. We were in a stocker-cattle meeting in Columbus, Mississippi put on by Alan Nations of the Stockman Grass Farmer. However, we were not talking about throwing rocks. We were talking about cattle markets.
It leads directly to the question of what we should do to prepare us for when the rock comes down, an event likely to make or break us. I am 63 years old as I write this, and I think it’s time to cash my chips in. That’s because I’m out of time, and time is one of the most important things to understand in the cattle business.
So what do you do if you’re not old enough to cash chips in? At this point we need to be thankful that Bud Williams taught us what we need to do. What you are about to read is Wallace Olson’s interpretation of what Bud Williams taught me.
As a market breaks, our inventory value is going to go down. There are only two times in the business that you need to worry about inventory value. One is when you start. The other is when you quit. Everything in the middle is just the relationship of what you sell and what you buy.
The most important thing that I learned from Bud is you deal in today. What you paid for what you own doesn’t matter. It is only what their value is today and what you can either buy, or, if what you own is undervalued, then it’s also about what you keep.
So starting out you need to get in with the least amount of capital in an animal. And over the recent few years that has been a heifer calf which is a small as you can handle. The reason for the smallest capital investment is it takes the least amount of turns to get your investment paid for.
Here’s an example from the Joplin Regional Stockyards on May 4, 2015. You could buy a 200-pound heifer calf for $640. On the same day a 500-heifer pound calf was $1,235. So the market was willing to give you $1.98 pound per pound of gain. At the same time a 400-pound heifer calf was $1,060 and putting on the same 300 pounds that we put on the 200-pound heifer to 500 pounds that paid $1.36 value gain. So you see with this example, by using an average cost of one dollar per pound to put on that gain they would both make some money. But the 200-pound heifer, if you could handle it, made 62 cents per pound more. Also, when you look at the capital invested in the feed needed to run the smaller heifer, she is a much better deal. The big question here is whether you can handle small calves.
Hopefully someday when you quit, you will have the most overvalued animal in your inventory. Today that is a $3,500 cow with calf. Or it may be a 950-pound steer. But when you exit you should be planning to sell out the most overvalued animal there is. One added advantage about the cow is some of the income she produces can be capital gains.
At this high point in cattle pricing, many people might be saying we need to just sell out, cash in our chips. The problem with this idea is you do not know what the markets going to do. You can only react to what is happening today.
So as stated above, if you’re not ready to quit, your inventory value is irrelevant. What you need to be focused on is cash flow. The number one biggest problem is when the market breaks, people lock up and won’t sell. I do not know how many times I’ve heard people when they get ready to ship their grass cattle say, “By god I won’t take that price. I’m going to feed them.” So now they’re fixing to do two stupid things. They are going to keep some animals that are going down in value and make them bigger so then they have even more pounds going down in value. They are going to tie up an immense amount of capital on something that will keep going down as the markets drop. This is why letting go of what we paid for something is so important.
Instead we need to be looking at the trade that can be made. It’s the margin of what we can sell to what we can buy back. This is very important.
Here’s an example: In the spring of 2012 I had some 500-pound steers and I was going to sell my first $1,000 steers. So when trading them I couldn’t get $2/pound for the 500-pound steers. The price was a $1.96 per pound. But when we weighed them up they weighed 515 pounds. I ended up with $1,011. Now we move this story forward to July at Joplin regional stockyards and the man who bought the steers and sold them on video auction. They weighed 750 pounds and brought a $1.35/pound. That is a total value of $1,012. So if you’re doing buy-sell marketing calculations, the gentleman who bought those steers made $1. So as I figured it, he had a $195 cost carry in them at a fairly typical daily grazing cost. So looking at it as a buy-sell transaction, the man lost $194.
The alternative is to do this as a sell-buy transaction: Suppose we are going to buy the same 515-pound steer for $1011. To use this is just a capital investment. So we sell 750-pound steers for $1012. We need to see what we can buyback. At that time you could find525-pound cutting bulls for $1.25 per cwt. or about $656.
Sell 750-pound steer $1012
Buy 525-pound bull $656
Gross margin $356
Minus costs $195
How can this be? On the same steer, looking at the business one way it lost $194. Changing our viewpoint to a different structure gives us a $161 profit.
This points out the importance of Sell-Buy marketing. It gives us the ability to stay in the market when the market goes down because you’re now able to buyback cheaper and still make a profit. This is the importance of cash flow. This positive cash flow over time will make up the loss of inventory value.
The importance of marketing was something Bud was always pointing out to me. You can increase your production, but until you sell at a profit it’s just something to do.
Further, here’s an example how higher production can work against you: If you increase your carrying capacity by 50% and if the market breaks, now you have 150% the number of animals going down in value. Manage your inventory well and market well and you overcome this.
Managing your inventory not only works in a down market, but it also works in a drought. Bud always said you need to have enough money and grass. If you have managed your grass to have forage even in a drought, then you can balance your inventory to match that grass by wise destocking instead of panic selling. You may be long on money for a time, but you’ll not be getting poorer from too much cattle inventory and poor marketing of cattle at the height of the drought. Neither will you be trying to feed your way out of that drought.
These are things I was able to do in the drought years of 2011 and 2012.
If you are always on top of your inventory you will have the money and the grass you need when the animals can be bought at a profit. Then you can allocate your time to what is most profitable.