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Evaluating change, but making the right move

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Watch each Friday for Doug Ferguson's Market Intel blog on Beef Producer and BEEF magazine.
Time to look at the true cost/benefit value of the entire herd. And it won't be easy.

Several years ago I stopped in at the local tobacco outlet store to get some cigars. The clerk handed me my change, and after I looked at it I made a deal with the clerk to buy his change drawer, and I had to throw in a little cash for him too for his effort to get the deal done.

When I bought those cigars that day I noticed some rare and valuable coins were placed in my hand when the clerk made change. My first thought was someone stole grandma’s coins to buy a pack of cheap off brand cigarettes. I was willing to place the bet that there were more of those coins in the drawer, and I guessed right.

I am not a coin collector, I have just picked up a little knowledge from some auctions I have been to. This was a really good sell/buy trade. I bought the drawer for face value, paid the clerk his commission, and walked out with collector value in a plastic bag.

I have never done this kind of thing before, it was a change of behavior for me. Here is what makes change hard: we can measure what we are giving up, but we have no way to measure what we are going to gain, if anything. I had no way of knowing if there were more of those coins in the drawer, but I knew I’d be out the ten dollar commission if there weren’t.

I am going to pinpoint you cow calf producers this week because you are the most resistant to change. I get it, I used to be the same way. Those cows and calves are a family legacy, and that brand has been handed down through the generations. There is a certain way of doing things.

I remember the first time I was exposed to Kit Pharo’s philosophies of raising cattle. I thought someone needed to clue him in, to put it mildly. His ideas represented change and it made me uncomfortable. Then one day I was doing book work and I enterprised things out for the first time, and realized my cow herd was losing money, while my other enterprises were making money. I still remember the feeling of denial. I triple checked the numbers for errors and I finally had to face it, and the pain set in.

I remembered Kit’s philosophy that I stumbled across years earlier. I jumped in with both feet and made the changes. I tore off the band aid and it hurt. I didn’t just pull off hair I ripped some skin off with it. That first year was rough, and I was really second guessing what I had done. People in my family had run cows for generations and I may have just been the one to fail. After that year things got much better and started to gain momentum. The change was worth it in the long run. When you go through something like that and succeed making changes gets a little easier.

Aiming for best

When I taught the marketing school a couple months back, I talked to the students about the different levels of resonance. Every next level of your life will demand a different version of you, for better or worse. I love this quote from Bud Williams “There is no limit to better”. That means there will be changes.

We all have changes we can make to in order to better our operations. We can tweak a grazing plan to get the full value of our grass. We can market our cattle in a way to capture appreciation value and deflect depreciation cost. We can learn about relationship values so that we can put our money to better use. Maybe we manage our herd differently. Maybe we need to make the toughest change of all and delete an enterprise from our business.

The market is always changing. Last week I wrote there was appreciation value to be captured by breeding open heifers. This week that is not the case. The market was clear that it is more expensive to breed heifers than to buy them already bred. There was a premium paid for AI bred heifers again, and buyers still preferred the bigger ones that weighted over 1000#.

Three to seven-year-old cows sold very well. A bred three-year-old appreciated in value by several hundred dollars over a bred heifer, and that value depreciated only slightly up to age seven. I do not expect this to become a trend, especially since seven year old cows brought more than the AI bred heifers!

Here is what I will say is trending, bred three- to five-year-old cows are in high demand, if in good flesh. They are appreciating in value and maintaining that value over bred heifers. It seems hit or miss if bred heifers will bring enough to cover their expenses. Another trend is a cows teeth will cost you more than your kid’s teeth. Once they are called spreaders or broken mouth the depreciation expense is at least $200 per year of age from that of a six-year-old cow. And the last trend is late calving cows are discounted.

Cow calf people I am going to make you uncomfortable. I am suggesting you examine these female sales and identify if you have some of these overvalued females in your inventory and consider selling them and replace them with the younger undervalued ones. This will do two things for you. First, you’ll deflect some serious depreciation when your cows teeth start to wear, and you can easily capture the appreciation value when replacing with these undervalued young females.

Rethinking the cowherd

For those of you who aren’t hyperventilating now that I suggest selling good cows, hold on. What if we replaced with the late breds, and move the calving date back from January to May. I realize that’s a big decision. I moved my calving date back and you couldn’t pay me enough to calve in January again, or early April. Consider a few things though. First if we did this trade of selling 3 to 6-year-old cows due to calve in Jan/Feb. and replaced with younger cows due in May, we still have the same number of cows, only now we have $900/head in our pocket. It won’t take trading very many head before you have five figures in cash. What will you do with it?

One more thing to consider. A percentage of calves typically die within the first three weeks. I can’t help but wonder how many of those deaths are weather related, given the time of year most people choose to calve. This loss will go down when calving later.

I also realize there is the fear of having smaller calves at weaning time. That’s easy, just wean later. Or wean and then kick them back out with the cows to graze. You could background them and sell later when they are overvalued. Here’s the deal, guys like me are looking to buy cattle all year round. The big feedlots have even expressed they wish the cow calf sector would spread out the supply of cattle a little better by calving at different times. My point is don’t worry about selling those calves it will work out its just going to take a little different management.

In the feeder markets the Value of Gain (VOG) seems to have lost its balance again. Buyers are still zeroing in a certain weights giving those weights an attractive VOG, while other weights have a VOG that is only a third of the Cost of Gain (COG). This is setting up some really good feeder to feeder trades. Three weights and six weights seemed to be mostly ignored by buyers. The VOG falls off on cattle weighing eight hundred in most places. In Nebraska the VOG remained positive up to 900#.

This week unweaned cattle were 6-8 dollars back. Feeder bulls were 3-22 back, the bigger they are the bigger the discount. Another thing to be cautious of is getting these cattle to fleshy. This week we saw a discount on those in Nebraska of 8 dollars. This is easy to do since the weather has been pleasant.

Nothing has changed with fats. The only profitable buy backs are on the heifer side and now some six weight steers.

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