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Watch each Friday for Doug Ferguson's Market Intel blog on Beef Producer.

Business structure part of profitable marketing

Return on the gain closed up this week and the cow bell curve continues showing classical appreciation and depreciation.

My 9-year-old daughter is playing basketball this year, and I now realize that March Madness got that name because by March you will take in so much basketball you will go mad. In the years past she did gymnastics. It’s been a bit of a change in dynamic going from an individual sport to a team sport. I haven’t really been big on team sports because it’s been my experience that team mates will let you down.

Our girls have been blown out in every game they’ve played until recently. Last weekend they won their first game, and went on to be undefeated in the tournament. The contributing difference was they played as a team this time and passed the ball.

This basketball allegory reminds me of the beef industry, in which there is so much infighting. The feeder blames the packer. The stocker blames the feeder, and the cow-calf guy blames everybody. There is a myth that only one segment can be profitable at a time. The truth is that if you structure your business correctly and market properly every segment can be profitable at the same time.

The problem I see with this infighting is that some groups are making things political and adding dramatization to their argument. Just like a basketball team, if you have drama or refuse to pass the ball to a certain player you will lose. If one player is trying to boost their stats it will cause a problem in the dynamic. Don’t get me wrong, I do think some of these fights are worth fighting, but most are not.

It makes sense to me that we should root for our customer. My main enterprise is stockers. I want the feeder to be profitable so he will come back to buy more cattle from me in the future. I want the cow calf operator to be successful so he will continue to produce cattle for me to buy. This seems so simple to me.

None of us should be running a 501(c)(3). We should not bid up cattle just to help the other guy. We should all earn the profits we take. It’s my opinion instead of spending time on cat fights, our time would be better spent working on our businesses. That would translate to something like basketball practice. Most of us are game players and do not like practice.

Friend and mentor Wally Olson shared a quote he got from Bud Williams: “Most people have the will to win. Very few have the will to prepare to win.”

That means very few of us spend time calculating gross margin or paying attention to marketing on a regular basis, and the statistics of the percentage of profitable operations reflect this. The game-day players are much worse than the practice players.

Between chores, travel time and games last weekend I did manage to take in some bred-female auctions last weekend. What I observed was bred heifers were selling $50-$250 back from a 3- to 6-year-old bred cow. For cows 6 years old or more there was steadily a $100 drop per year of age up to broken mouth, which were selling just a bit off the scale (weigh-up price).

On the cow bell curve it shows the females are appreciating in value up to 6 years of age, then depreciating after that. It would appear that the market is telling us to sell our cows by age six and replace with younger females. This helps us deflect depreciation expense and puts cash in the pocket, all while keeping our herd young and appreciating in value.

If we look at the far ends of the bell curve, a high-yielding weigh cow is worth roughly $150 dollars more than a five-weight heifer. Here’s why we need to work on our business. It seems very unlikely to me that one could buy a five-weight female now and run her out and breed her, for less than the price we can buy bred heifers. Some can, but how do you know if you don’t work on your business and know your costs and get them under control?

Some cattle people say, “I don’t need to go to Vegas, I gamble every day right here.” I don’t understand that approach. Vegas would be less work and probably more fun. Personally, I would rather put in the hours at the kitchen table preparing to win on game day. Sometimes this is something just as simple as watching an auction on line and taking a little longer lunch hour.

As for the feeder markets, perception will come into play on your viewpoint. If you sold last week and were buying back this week the drop in the market was like a late Christmas gift. Some auctions had more than a 50-cent slide on cattle that were a few hundred pounds difference in weight. It’s very difficult to have a value of gain higher than the cost of gain in that kind of market. The profitable trades were on cattle that were closer in weight.

I’ll share this example from a Kansas auction. It’s been a while since we did a Fun With Math example. A 495-pound steer brought $176 and a 340-pound steer brought $188. That gives a return on the gain (ROG) of close to $1.50. That’s the highest ROG I saw all week. When I calculated ROG between weight classes at different auctions from around the country, I found more ROG that were lower than the cost of gain.

Do not let this discourage you. Be patient and alert to what the market is doing. The market changed quickly last week, and changed quickly again this week.

Unweaned cattle were $6 back this week. Not enough feeder bulls in the offering to make a fair comparison. Lightweight southern cattle made a push to be overvalued (after figuring freight to Nebraska and commission). Heavier southern cattle were undervalued compared to plains markets.

The opinions of the author are not necessarily those of Beef Producer or Farm Progress.

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