It takes money to make money.  We have all heard that line, and another one we’ve heard is that in order to be profitable we need to increase production.  After receiving some advertisements in the mail this week for products the senders claim I need to have to boost production and become profitable, I will examine Value of Gain (VOG) this week.

Before I move on the emphasis on the word become is mine. The use of that word strongly implies one of these advertisers doesn’t think the folks they sent that flier to are profitable but by buying their products we’ll become profitable.

Pricing creep feed

Pricing creep feed this week I got sticker shock. I was quoted the booking special if buying in bulk and it didn’t include delivery.  While VOG is good on feeder cattle right now I’ll skip the math and get right to it.  If selling #1 stockers and replacing them with #1 stockers the creep didn’t pencil out. What it did was drive the Cost of Gain so high that it disqualified any possible buy back of similar quality animals.  If selling the #1’s and replacing with #2’s the cattle square shows me that trade will work.  Sometime the difference between a good calf and a poorer one is what it has had to eat.  I am not saying this is the thing to do, I’m just pointing out what is possible.

Since the beginning of July the market has been heavily discounting cattle coming out of backgrounding yards compared to cattle coming off grass.  When doing my calculations I discounted the creep fed cattle by a small percentage of the backgrounding discount. Creep-fed cattle will take a slight discount for being greasy, fat, conditioned or what ever the slang term is in the area they are being sold. This discount affects the VOG, and we can’t forget the price slide for the heavier weight.

Conveniently the salesman never point this out.  I have seen some say that cattle of this weight are selling for this price and if you feed this stuff the cattle will be 50 pounds heavier and sell at the same price. No, they won’t, not even close.  Again, this is one of those things where I think they should be practitioners and prove it with a few hundred thousand of their own money.

Running a cattle square if feeding creep and replacing with #1’s the trade loses almost $80 per head. Without creep the square shows replacing with #1’s had a Return on Gain (ROG), which is the ratio of dollars to pounds on the trade, is a little above COG.  This means the producer can hit the profit target, and there is some excess profit over what was figured in.

Fertilizer applications

Another advertisement was for a fertilizer that will boost pasture growth by 25 percent, even in a drought.  It only cost a few dollars per acre. The thing is they left out the cost of application. 

Not having a clue what it costs to spray since I haven’t done it in over a decade, I turned to the University of Nebraska extension website to get custom application rates.  If running stocker cattle, they will only gain so much a day because there is only so much nutrition in the grass.  The rate of gain and VOG just isn’t there to offset the cost of applying the fertilizer.

If using this fertilizer in a cow/calf operation the 25 percent boost in pasture growth could extend the grazing season by a month (based off grass production in southeast Nebraska).  If there are two applications of the fertilizer the cost will be equal to the monthly cost to keep.  If it gives the 25 percent boost with one application that extra month would be half price. To be clear I didn’t assume they’d eat it all.  I did figure to leave some and trample some into this.

These examples right here are why I am not production focused; I am profit focused.  There’s a big difference. When we are in business it is our job to deploy capital, expenses are a part of it.  The thing is when we spend money, we need to recover what we spent, and then some, or why bother spending it in the first place.

Unweaned calves

This week there was a light test of unweaned calves. Some calves in the five-weight range and lighter outsold weaned cattle of the same weight and quality by up to $5.  Calves weighing 600 pounds and heavier took a solid $15 discount.  There are no bragging rights in that boost in production of heavy weaning weights when $100 or more per head is left on the table. For those of you who don’t know, buyers don’t want to mess with these heavy bawlers and they have to be discounted enough for someone to want to take them on.

Keeping costs in check

Some people just have to be on the finding out end of messing around.  Monday, I heard from several people who attended one of my marketing schools and they also attended someone else’s school.  Each one of these guys just marketed a pen from hell. These are the groups with high death loss, illness or just poor performance. They don’t happen often but if a person buys enough cattle over time they do happen occasionally.

These folks did their calculations and quickly discovered the cost to keep method left them dead in the water on the buy back. When they did the ROG calculations using COG, they could squeak out a buy back.  Two of them ended up in a “push” which means they were made whole, but there wasn’t any profit. Given their death loss percentage this was pretty good, so now the only thing they are out is the time of owning those cattle. The other guy managed to make a small margin.  The market has a way of helping us out if we are patient and do things correctly.  We can’t force it.

Capital is needed

Imagine this, using the cost to keep calculation had them priced out of the market. This is where the other schools say that the money is under-valued so it should be kept in inventory. Not only does this not complete the buy end of sell/buy marketing by being a dispersal sale, it also underscores what I wrote about above about deploying capital.  It also disregards the use of money as a fungible proxy used as a medium of exchange. 

The market was 10-20 higher at some auctions that have stayed hooked up and sell feeder cattle every week.  What if the market continues to go higher and they don’t get replaced? It will take more of that capital to buy fewer head, which only compounds the loss. Many people are concerned about inventory valuation, I am not because the only day that will matter is retirement.  Until then all that matters is positive cash-flow, and by holding the money too long it dries up cash flow.  And to make matters worse, inflation will devalue that money while they are holding it.

Goats, sheep vs. cattle

I don’t mention this in this column since it is posted on beef cattle websites, but there is a monster trade that is possible right now.  The interspecies trade of selling cattle and replacing them with sheep or goats has a huge margin. Since the sheep/goats are smaller there is a ratio that needs to be adhered to.  The other thing of note is the VOG on feeder goats blows the doors off the VOG on cattle right now. While that math is there the question is, are goat tight fences there?