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Cow economics include deflation and inflation

More thoughts on making better money from cows.

A few months ago Beef Producer introduced readers to the fact cows actually appreciate and then depreciate, and also showed you how to make money from this knowledge. This month we'll show you how to work through cow-price inflation and deflation.

Cow appreciation and depreciation has been called the cow-price bell curve by Wally Olson, a Claremore, Oklahoma, rancher and cattle marketing teacher. Olson has showed readers that cows normally increase in value (appreciate) from the stage of a weaned heifer until about five years old, then decline in price until end of life (depreciation). This cycle has been relatively flat the past few months, however, with large cattle numbers and dairy cattle liquidation.

Recently, Olson has begun talking about cow inflation and deflation as another way of thinking about the price movement tied up in cattle cycles and seasonality.

"The market inflates and deflates," Olson says. "You can trade this, but you can't control it. You can actually have a lot more control over depreciation and appreciation."

The first key is always to track your livestock inventory, as well as your costs to carry them over time, such as a cost per day or cost per year. You also must understand the markets well enough to recognize overvaluation and undervaluation of some classes/categories of livestock. Then you can decide when a sale or trade will make money.

Olson explains how this concept of trading through a deflationary market trend made a profit for him during the market peak and downturn of 2014-2016.

"When heifers were at historic highs, the price difference between those heifers and a bred cow was also really high. That told me I could sell the cow and make a bred heifer and make a profit," Olson explains.

In a simplified explanation, he sold cows at peak value of 4 to 5 years old, as pairs with month-old calves, for $2,900. Then he bought a 550-pound weaned heifer calf for $1,200, spent $1 per day to keep her for a year (including bull cost) and created a bred heifer with a cost basis of $1,565. Subtracting that cost from the $2,900 left him a profit of roughly $1,335.

As prices worked down over the next couple years, Olson did this twice more. In 2015 he sold the bred heifer for $2,200 and bought a weaned heifer for $1,195, adding $365 in costs to keep her for a year, and pocketing another $640 cash on that trade.

In 2016 he sold the bred heifer for $1,600 and bought a weaned heifer for $685. He once again had $365 in costs to keep her a year and make her into a bred heifer. This put her total costs at $1,050. After adding in the $365 in carry costs, this left him with $1,050 invested in her (as of the next year).

At this point Olson says he calculated his inventory to include the bred heifer with a cost of $1,050 and $2,525 ($1,335+$640+$550) in cash from the three sell-buy trades.

This could work keeping heifers from your own herd or buying them, he adds.

If he had kept the cows at the peak of their value, they would have declined (deflated and depreciated) dramatically from the price he earned selling them in 2014. Three years of depreciation would typically move them down close the bottom of the cow-price bell curve and three years of market declines (deflation) would have taken another bite out of their value. For example, Olson has data from a fairly large herd dispersal in Kansas in January 2018 that shows cows 4 to 5 years old sold for $1,731-$1,853. Cows 8 years old in that dispersal sold for $1,366.

Olson says there are four parts to managing cow deflation and inflation.

  1. Understand and track the price relationships of livestock classes.
  2. Look forward at the relationships, not backward.
  3. Maintain and track your inventory.
  4. Build cash.
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