November 3, 2023
I have been receiving an unusual amount of calls and emails asking about some things I have written or said in some podcasts, so in this week’s column I will address some of those.
I will start by addressing some questions I have gotten about the Value of Gain (VOG) and trading. When I write about VOG I am not talking about doing trades. All the VOG tells us is if it will pay us to feed on more weight. An example from this week is there is a noticeable dip in VOG on cattle weighing between 500 and 600 pounds.
Cattle below 500 pounds had a VOG of over $2, and cattle that weighed 700 pounds and up had a VOG of $1.60 up to $2. If we know what our Cost of Gain (COG) is, and it is below $1.60 the market is paying us to put more weight on cattle. Between 500-600 pounds it dipped to 78 cents.
If our COG is over a dollar, it is not paying us to put weight on. In fact, this would be the moment that if we sell these cattle we are subsidizing the buyer. We fed the weight on the animal then gave it away for less than it cost us to feed it on the cattle.
The weight bracket with best prices
The follow up question is usually something to the effect of my cattle weigh 550 pounds right now, what should I do? Since the VOG goes back up between when the cattle weigh over 600 pounds just feed your way through it and get them into a weight bracket that is seeing more demand from buyers.
It is important for all of us to know what the VOG looks like in the stocker/feeder market because we are all in it. The cow/calf operator produces the stockers. The stocker operator buys and sells stockers. The feed yards buy stockers.
Another question I’ve been getting a lot is if I will give out the cattle square and the other algebraic equations for making comparisons. The answer is no. It is not fair to the people who have paid and committed their time to attend a marketing school. I did give out the cattle square once and some people used it without knowing the theory behind it and they got into trouble.
Cost of gains
I have had some questions about cost to keep and COG. Why do I say that COG is the only way to go when calculating trades with stocker cattle? We must know exactly what it costs us to put on a pound of gain in order to make accurate comparisons. If we do not know our true and accurate COG we will end up bidding away VOG on replacement cattle. Money that should be staying in our inventory pyramid is flying the coop.
I recently wrote that the right education can increase the value of our time. Some people asked what kind of return they could expect in the cattle business.
To illustrate my point here I will also disclose they chose to attend someone else’s marketing school because mine didn’t fit into their schedule. The school they attended has established a pattern of dismissing early and that is what happened to these guys. As a result, they still have no idea how to calculate and compare relationships between cattle.
The right opportunity
I held a school at about the same time. Some of the people that attended that school have reached out to me to share some of the trades they have done.
Right now, a lot of people that attended my schools have earned their tuition and travel expenses back on their first trade and most are doing it with around 12 head. Within 60 days my school paid for itself, and these people are off to the races, and more paydays.
While the people who went a different direction are now calling me asking me what they should do. The difference on increasing value of time is clear. Opportunities are abundant, the question is do we have the ability to capture some of those opportunities?
As far as what kind of return to expect. That will vary with market conditions. Right now, margins are big, or should be, if we are doing a good job marketing and keeping our costs in line.
In the spring of ’22 our inputs went up 15 to 35% and the price of cattle did nothing. At that point margins were thin. I teach to aim for reasonable profits. We can’t do much if all we make is $5 per head. That is unreasonable.
It is also unreasonable to expect to make $600 per head profit, we would price ourselves out of the market trying to add that much profit into the equation (still on stocker cattle). Another thing to keep in mind is that the longer we own an animal the more we need to make from it, simply because it slows down turnover.
If we turn cattle quickly, we can do well just by capturing small margins because we are going to do it more frequently during the year. This is another reason to understand VOG. There have been times when the market doesn’t pay us to feed weight on, so the stocker operator with market literacy adds value by weaning, sorting and preconditioning the cattle and reselling them.
Some have asked why I seem to have completely stopped writing about cow depreciation. Right now, there is very little depreciation on the monthly female specials. There can be 8 years age difference and only about $300 difference in price, if the aged cow is in good body condition. The high value of cull cows is supporting this.
The other reason I don’t mention it is that I feel there has already been much written about it and that we are putting too much emphasis on the topic. What matters is the relationships between females. If we know how to accurately compare values, we can prosper ourselves, and improve our position in the market by controlling what we have in inventory.
That is another point I want to hit on. We can’t control what the market does to our inventory valuation. We can control what we have in inventory. Some have asked me about this returning to profitable calculation they have been taught and they are really stressed about it. That has nothing to do with sell/buy marketing. Calculating a ratio to figure out how many trades it will take to recapture our inventory value is pointless, because the market will change by the time we do the next trade and already the forecasted (which flies in the face of dealing with today) ratio is off. If we focus on positive cash flow, we will be just fine.
Simple vs. easy
Last topic is that I have said that raising cattle should be simple, but it is not easy. The two words are not synonymous. There are all kinds of things that make ranching difficult. The weather always stands out. The previous paragraph is an example of taking something that should be simple and making it more difficult than necessary. It’s only adding stress to people’s lives. Why not just stop at the point of doing a good job selling the overvalued animals and replacing it with an undervalued animal and generating some positive cash flow. Just let the market moving up and down do its thing on inventory valuation. The only time inventory valuation matters is when we retire. And there again, if we did a good job marketing, we probably reinvested some of it back into the operation and grew it building wealth.
This week replacement quality females caught a premium of up to eleven dollars. Feeder bulls were 35 back. When prices get high people understandably try to take advantage of high prices and high VOG, and feed flesh onto cattle. We need to be careful when doing this, and it comes back to what I wrote last week about being an appraiser. Fleshy cattle took a discount of up to 30 dollars. With that kind of discount, the seller ended up giving feed away. Another factor in the market is the end of harvest. Farmers are beginning to come to sales and the old truth holds true, the guys in the cowboy hats can’t outbid the guys in the seed corn caps. Farmers are bidding a premium of up to 30 dollars for cattle with a hard wean.
The opinions of Doug Ferguson are not necessarily those of beefmagazine.com or Farm Progress.
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