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Adding value remains key at this time for most cattle and weight classes.

Doug Ferguson

May 8, 2020

8 Min Read

The market is always changing, so in spirit with that I am changing things up a bit on this blog. Since I get a lot of questions I am going to do a mail-bag edition this week and address some of them.

First, I want to highlight a good trade from Colorado. This guy sold some steers that he thought were of a certain weight. When the cattle were weighed and sold they were heavier than he thought, putting them well into an undervalued weight class. As he was telling me his story he did not hesitate to take responsibility for his error in judgment. That’s so important. We can’t fix or improve anything until we take responsibility for ourselves. Knowing he missed the mark he remained calm, knowing that if he blew up, things would continue to unravel. Now regular readers will know that I say the market tries to take care of us, and it did just that for my buddy. He was able to sell his steers and trade his dollars straight across for young cow-calf pairs.

He informed me it’s dry in part of Colorado so the cows are thin. The calves are weighing around 150 pounds and doing well. Here’s what I like about his trade. He sold an undervalued weight of steer, and replaced it with something even more undervalued that gives him many different options to add value. He can eventually split the pair, feeding and culling the cow. He can rebreed the cow and keep her or resell her as a bred cow, and keep the calf. He really can’t go wrong.

He has done a good job managing his grass. While others in his area don’t have much, he does. He has taken good care of his inventory triangle -- money, feed and cattle. Now is his moment to shine.

Marketing savvy

I want to dissect this a bit more because there is something really good here. Part of making money is being in the right place at the right time. That is socially accepted common knowledge. The trick is to be aware you are in the right place at the right time. My buddy was aware. He knew he messed up letting his steers get too big, he stayed calm thinking something would pop up. When it did he didn’t hesitate to buy the pairs. This is what having a firm grasp on sell-buy marketing can do for you. It highlights the relationships between cattle, showing us the way to make profitable trades, and upgrade cattle, basically upgrading our inventory.

I want to pause here and take a moment to talk about something no one talks about: Emotional income. When my buddy called to tell me about his trade he was rightfully proud of himself, and he chose to share his joy with me. I like sharing good trades with my friends, and with you readers, and I like it when people share their trades with me. This reaffirms that good things are possible and being done no matter what direction the market is going. It shares hope.

When we make good trades we bank this emotional income. We feel good about ourselves and it builds up our confidence, in both our abilities and the market. This helps to build momentum of creating even more good trades.Figuring cost

The most common question I get is “What do you think the market will do?” Simple answer: The market will do what it wants to, when it wants to, all because it can. That’s a disappointing response, but it’s the truth. No one has ever done a good job predicting the market.

Figuring costs

The next most frequent question I get is about overhead costs, especially if the number of cattle we have in inventory changes. I don’t know why the number of cattle in inventory would change: We sell one, we buy one. But maybe something happened and some had to liquidated.

I do not know that I have the correct answer, since different operations face different circumstances. I’ll share my viewpoint and hope this helps.

For those who don’t know the difference between direct and overhead costs. A direct cost is what’s tied directly to the cattle and will change up or down based on how many cattle you have. These are things like feed and vaccine. Overheads are everything else.

Here’s how I calculate my overheads. I add up my salary, repair/upgrades to facilities, electric bill, legal/accounting fees, insurance (life, health, disability property), and so on. So lets assume there are $100,000 worth of overheads, and we have 500 head. I divide that by 360 days since there will be days the pens are empty (I tend to refill quickly because I like having cattle around). This gives us a daily yardage cost of 55 cents. If our inventory numbers drop to 350 head our daily yardage cost will go up to 80 cents.

I took the time to add that 80-cent cost to the cost of feed (backgrounding ration), vaccine, and selling expenses, and a modest profit of $60 per head, and came up with a $1.41 break-profit cost of gain. This number seems high. That reduction in numbers really swings the needle.

The thing is I watched an auction yesterday on the internet and was writing down prices. There were some 612-pound black weaned steers that brought $1.52. There were 437-pound black unweaned steers that brought $1.51. Here’s a handy rule of thumb: when the sell price and the buy price are the same, that number will be the return on the gain (ROG). So I know right off the ROG is in the $1.50s. With that being higher than our break-profit cost of gain there will be “excess” profit (more that what was figured in as a cost). Even though this reduction in numbers puts the operation at a disadvantage, it’s still possible to utilize the market in a manner that will be profitable.

Adding value

The last question I’ll address is this one: With these lousy prices and poor VOG what should I be buying?

I wish I had a definition of “lousy prices.” Because of this blog I have notes from every week. I looked back to the first week of January. That week no one was complaining of prices, and there were many willing sellers, so many that sale barns had to cap their sales. Some weights in some places are selling higher than they did in January. Some weights these days are only $5 lower than in January. And some weights are over $30 lower than in January, this is happening with the heavy feeders. Now that I got that off my chest I’ll get serious.

We should always focus on buying cattle we can add value to. With poor VOG this is more difficult and we need to be even more selective when we buy. Just go back to the examples above. We can add value to the four-weight steers by weaning them. My buddy can add value to his thin cows by putting some flesh on them. We can add some value by changing lightweight feeder bulls to steers. Even with the poor VOG, the market is trying to help us, it’s just that it may require doing some work that people don’t like to do.

It’s my opinion that if something happens twice it’s the beginning of a pattern. For the last few weeks we have seen a heavier-weight feeder bring less dollars per head than the weight class right below it. This is only happening on the steers, and it happened again this week. I went back through the last few weeks of market reports and this is being caused by an erratic slide between weights. For every one hundred pounds on steers the slide may be $12, then $7, then $3, then $26, then $3. This is making the VOG vary greatly. The heifer side is seeing a tighter, more consistent slide. This is giving them both a better and more consistent VOG.

With that being said the VOG drops off enough that it still isn’t paying to put weight on over the 600-pound range. Even though fats saw a good boost in price this week the only profitable buy-backs remain only on heavy feeders.

About this week

This week unweaned cattle were $6-16 back, feeder bulls were $10 back, and replacement heifers caught a $14-20 premium. Southern markets were undervalued compared to plains markets.

I caught a female sale this week. It was interesting. I could not pinpoint a depreciation scale based on age. Bred cows in the first trimester were selling just over the scale, while bred cows that were third-trimester were bringing a few hundred dollars more. Stage of pregnancy seemed to have more to do with price than age or condition.

Pairs were bringing considerably more than bred cows. Price seemed to be affected more by condition of the cow and size of the calf than the cow’s age.

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

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