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Capture both types of profit boosters

Alan Newport Doug Ferguson
Doug Ferguson manages calves on grass May through October and uses his backgrounding lot the rest through the winter months to keep him selling cattle and buying back in the same market for a profit.
Nebraska stocker operator shows how to increase profit margin and increase turnover.

It's long been accepted there are two fundamental ways to increase profits in any business. Doug Ferguson of Beatrice, Nebraska, has managed to apply both to his beef cattle business.

Method 1: Increase profit margin. Ferguson stays completely up on the cattle markets each day in his region, looking for opportunities to sell livestock from his inventory at an above-typical price, and to buy back livestock for his inventory at below-typical price. These "bargains" and "opportunities," wherein a class of cattle falls below or rises above their normal place in the market's system of rollback by weight for stocker cattle or age and condition for cows, exist many days in nearly every market.

Ferguson says sometimes these bargains can be huge, and he cites several examples from recent years.

Method 2: Increase turnover. Because Ferguson buys and sells more frequently than most cattle operations, and at a profit, he is able to turn his investment dollars over more quickly -- whether they be his own or borrowed money.

He told Beef Producer that he turned over some of his money 7.5 times last year. To think about the value of such things, if you turn over $100,000 one time in a year -- meaning you buy and sell $100,000 worth of cattle one time -- and make 10%, that's a $10,000 profit. If you turn over $100,000 three times in a year and make only 5% per turn, that's $15,000, still 50% more annual profit.

An added bonus for Ferguson is that he has removed some of the danger of market declines, a common problem through the commodity-producing industries, and especially in the seasonal patterns of the beef business. Ferguson's use of sell-buy marketing and accounting lets him always measure the value of calves sold against the cost of calves bought back in the same market. You can read a feature story on his way of thinking in the November 2013 issue of Beef Producer online, on page 12 and page 13.

Sell-buy marketing is often called "Bud Williams marketing." It was also touted by the late Mississippi veterinarian and grazier Gordon Hazard, and these days is taught by Wally Olson of Oklahoma and Tina and Richard McConnell of Kansas.

Ferguson came from a very traditional farming family and still lives and operates in a traditional farming area, which means he is surrounded by a lot of corn and soybean fields and not a lot of grass/pasture. Nonetheless, in the last 10 years he has grown his business from a small, part-time operation to a business that provides him a living and is beginning to build his net worth.

On the surface, Ferguson's stocker operation looks a lot like other stocker operations in his region. He grazes cattle during the growing season and fills in during the non-growing season with a backgrounding lot. He makes money on the differential of buying and selling, and also putting weight on cattle. However, it is the finer points of what is essentially money management in which Ferguson differs.

To succeed at this kind of marketing, Ferguson says you must know these things:

  • Your costs, therefore what it requires for you to make a profit.
  • Weights and gains (performance), therefore you need scales.
  • Actual prices today and what you can buy or sell to create profits or future opportunities.

Although Ferguson says it pays to know cattle price cycles, because they are real and somewhat repetitive, he also says you can't count on them for decision-making. Instead, everything comes down to the bid you get or make today.

"Don't bet the farm and your children's future on the cycles," he says.

Ferguson spends time every single day reviewing the markets, looking for variations in price patterns that can offer buying or selling opportunities. This is absolutely critical, he says.

In the fall of 2016, Ferguson's daily study and market familiarity showed him no one wanted to pay anything for feeder bulls. They were priced dramatically below their normal market discount. As a result, he loaded up on them and was able to profit not only by upgrading bulls to feeder steers, not only from putting on weight, but also from a true and large gain in price per pound as the market realigned.

It is this intimate knowledge, together with regular trips to local sale barns, which lets Ferguson buy and sell more frequently and more profitably than typical stocker-backgrounders.

Selling your banker on sell-buy marketing

As Ferguson grew his cattle business, he began to need more money than his own, and more money than the line of credit he first was granted from a local bank.

He knew he was facing bankers married to the ideology of buying stocker cattle, putting weight on them and selling them, with all accounting done on that same set of cattle. It is an orthodoxy.

Therefore he created a detailed business plan, complete with extensive receipts from his sell-buy marketing program over the year past. Then he went banker shopping.

Because of his great records and his solid business performance, Ferguson says one banker could see the cash flow and liked the business plan. Because it was a new proposal, the banker had to take it before a committee. Among that committee of bankers, Ferguson recalls one in particular understood and approved.

"He's not interested in the buy," the banker said. "He's working on the sell-to-buy difference."

Tips on interpreting cattle market reports

You can get an idea about the market relationships Ferguson uses in any weekly summary from many Agricultural Marketing Service reports.

Most people understand that lighter cattle (younger cattle) are typically priced the highest on a per-pound or per-hundredweight basis, and heaviest cattle are priced the lowest. This is variously called price rollback or price slide. The total amount of price rollback from the lightest to the heaviest cattle varies considerably over time, depending on overall demand, supply and other factors. For example, on May 29 of this year the total rollback listed on the Oklahoma City AMS report was $57.97 ($177.68 to $119.71 from 450 pounds to 950 pounds).

Typically more important, however, is the variation and changes in value between weight classes. This is where a quick look, even without detailed analysis, can often find opportunities. In that same report, the price difference between weight classes is relatively evenly spaced, without major anomalies. They were:

450 pounds -- $177.68

550 pounds -- $161.37

650 pounds -- $151.05

750 pounds -- $141.64

850 pounds -- $133.33

950 pounds -- $119.71

Notice each step up in weight and down in price tends to be $7-10, with the exception of the lightest and heaviest classes. This report wasn't showing any great opportunities. If it were, one or more weight classes might be almost the same as or even higher or lower than a class above or below it.

As grass fever arrives in the spring, for example, cattle weighing 450-500 pounds rise dramatically in price compared with cattle on either side of them. This tells a market analyst like Ferguson that it's a great time to sell these midweight cattle, if he has any. That grass-fever timeframe may also find cattle in the 650-pound weight range sell at extremely cheap prices by comparison, which may suggest a buying opportunity.

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