Last week I mentioned there was some volatility in the market exposing profit potential. To demonstrate, here is a "fun with math" scenario from a young woman in Nebraska.
She sold 700-pound heifers for $1.37 and replaced with 400-pound heifers at $1.38. She has a return on the gain of $1.36 and a cost of gain of 82 cents, giving her $160-per-head profit.
Here’s the awesome part: She sold 28 head and has replaced the 28 head and "virgin bought" six more. When I say it's a virgin buy, I mean either the first cattle you buy or any expansion above the numbers that were your buy-back replacement animals. After paying her bills this young lady still has enough money to virgin buy four to six more head. Just look at how her business is growing.
I’m pretty sure this is the type of growth investors would be attracted to. And the thing is, it just takes one trip to the sale barn to begin investing. Do you suppose for an instant if this young woman keeps executing trades like this that she will have any interest in going to college? Most young people can’t or won't come back to the farm because there is no money in it. For 1% of the cost of going to college, your child (or you) can attend a sell-buy marketing school and learn the things they cannot and will not teach in college.
I oftentimes point to heifers as the best buy. Some people don’t want to do this because they are afraid they will not be able to step back up into steers. Not true. This is another real trade: Sell 710-pound heifers at $135.10 and replace with 540-pound steers and bulls at $1.36. This trade generated $98-per-head profit, along with upgrading to steers.
A friend showed me an article this week about adding value to cull cows. He wanted my opinion on it so we left the café and sat down to watch the weigh-cow sale. After an hour I had an opinion. The article mentioned how different scenarios played out the past several years, and most of the time they didn’t recover the added expense of trying to add value. What the markets did in the past has nothing to do with today, we market our cattle in the present. The thing is, if history repeats itself this guy will probably continue getting the same results. We know his way doesn’t work too well.
After watching the cow sale, and knowing what heifers between 400 and 800 pounds are bringing, it is clear that it is way easier to add value to a four- or five-weight heifer than to a weigh-cow.
I have to interject this before I continue. When you sell something you must replace it so you have something to sell next time. It could be something you buy or it could be a calf that was raised and retained. Either way it must be replaced or you will run out of stock to sell and not exactly be in business anymore.
If you sell a high-yielding cow and bought back a four-weight heifer to replace her you will roughly have enough cash left over to cover seven months of expenses for that four-weight. By that point she will be big enough to breed. You can either breed her at that time or sell her. The four weight will appreciate in value more than the cow will and offer more opportunities to capture some good profit. And she eats a lot less, stretching the feed budget.
My friend wasn’t quite understanding the over-valued/under-valued concept between cows and feeder heifers. I pointed out that there were four cow traders (some rebreed them and some feed them) in the sale barn that day and none of them were doing much bidding on cows. That’s a signal that the cows are over-valued. If they are bidding aggressively that’s a sign they are under-valued.
I recently wrote a blog about capturing added value. Some people didn’t read it. This week I sat in a few sales that had loads of short weaned cattle (two to three weeks). This turned off would-be buyers, who sat on their hands while those cattle sold. My best guess is this cost them $20 to $40 dollars per head, and that doesn’t include the expenses associated with weaning them.
At one sale I attended, a buyer wanted to hold all short-eared cattle. They started doing this at the beginning of the sale. Then the barn refused to sort anymore. The buyer got upset and left. Here’s the thing about that: He was making the market. Sellers would’ve netted more money, even after some sold at a discount, if the barn would’ve kept sorting for him. This is why you need to be present when you sell cattle. You hire the barn to be your agent. Make sure they are doing all they can for you.
Here’s my opinion on the short-ear thing. We all remember what last winter was like. Buyers may just have to start a pen for short eared cattle. It's pretty much a guarantee there will be enough of them to fill it. Cow-calf guys that are taking the discount may want to rethink their calving date.
This week the market was higher in some weights and lower in others. All this really did was smooth out the value of gain a bit. The value of gain seems to drop off somewhat around 700 to 800 pounds, then sharply drops over 900 pounds. There are many profitable feeder-feeder trades across the spectrum.
When we compare feeder prices to fats, it is tough to find profitable trades. They are there, but one will have to be patient and piece them together.
Feeder bulls were $6-$20 back, unweaned and short weaned cattle were $7-$12 back, replacement heifers caught a $4 premium.
Again this week I didn’t see enough breds or pairs to make a comparison. As I noted, there is some opportunity to capture some appreciation value-trading culls for young females.