Thriving cattle market requires attention to details
Doug's Market Intel: Sure, it's easy to make money now, but keeping and maximizing those profits takes discipline.
October 13, 2023
Right now, it is darn easy to make money in the stocker segment. With the Value of Gain (VOG) well above the Cost of Gain (COG) on cattle weighing up to 700 lbs., one really doesn’t need a calculator. Almost every day right now, I am getting texts from people who attended one of my schools to report that they are capturing some outstanding margins. Some are even selling heifers and replacing them with steers, and still making three figures.
I don’t want to be a downer and ruin the party for everyone, but there are a few things to mention. It won’t always be this easy, and the margins won’t always be this big. Stay focused on being profitable and remain disciplined.
There are some other things that are not so simple, and certainly not as much fun. Again, there is no excuse for not looking into what I am going to cover this week since we all have a phone with a calculator in our pocket.
Some of us have done an outstanding job of earning lots of cash. This unfortunately means taxes. It may be well worth the time, and expense, to sit down with the accountant and figure out where you’re at. Years ago there was a year similar to this one where it was easy to make huge trades. I was having fun and kept at it. I was young and having the biggest year of my life, up to that point. I didn’t realize my last trade of the year would become a problem. That trade pushed me into the next tax bracket and ended up costing me more than it made me.
If the situation in the last paragraph wasn’t painful enough, my CPA made a mistake that year. I told him it was wrong, but I couldn’t find the error. Since I was up against the deadline to file, I decided to go ahead with the plan that I would file an amended return later to get my money back from the IRS. That was more expensive than I thought it would be, and when you ask for that much money back from the IRS, they decide they want to take a little closer look at you. Knowing your numbers, along with giving yourself time to do things like double checking, can save money and headaches.
Some of you have been taught to be capital gains traders. Aside from this strategy thumbing its nose at one of the three pillars of generating profit which is turnover, it could cost you money. We must know our situation and our numbers before making a decision. Some of us may be better off trading stock and paying ordinary income tax. The amount of money we could make from the trade may net us more in the end than what the tax savings would be if we held out for capital gains. The capital gains strategy also ignores the law of time. Will you save enough in taxes to offset the opportunity cost of generating positive cash flow during that time? We need to look into these things and gain clear answers.
The next thing we need to know and run numbers on is interest rates. I was looking into a venture outside of raising cattle. It still was based on the sell/buy marketing that I do. I briefly ran the idea past my banker, and from that short discussion, he liked the idea. I knew I needed to dig into it a little deeper, and when I asked what my interest rate would be, the idea became stillborn. There was no point pursuing this new venture because the interest rate would suck too much cash out of the deal to make it worth my effort.
When we use borrowed money, it is our name on the bottom line; we are taking the risk and doing the work. There has to be enough left over after making the payment to make it worth our effort. What “enough” is will vary from one person to the next. Have that figure in mind. If you can’t reach that figure, you may have to make the hard decision of not signing the loan papers. I have been on the phone with people the last few weeks that are finding alternate ways of getting financed. I don’t like doing leg work much myself, but with interest rates where they are, we can make time.
I have done some stupid things and have failed to do certain things that have cost me time and money. I learned at a young age how to make money, and that is the easy part. I didn’t learn to be a businessman until after these painful lessons. I paid the tuition, learned the lesson and now am sharing the lesson with you. We have to do the things of running the business we don’t like to do, so we can do the things that we do like to do.
I already mentioned the super VOG on cattle under 700 lbs. Some of the feeders between 700 and 1,000lbs had a VOG between 50 cents and $1.00. We need to know what it is costing us to put on a pound, not keep, and what the market is paying us to do and just as importantly what it is not paying us to do. Some people are clearly subsidizing the buyers and devaluing their feed by holding and feeding animals to weights that they are clearly not getting paid for. As easy as it should be right now to make money some feed yards are bypassing profitable buybacks that the market is offering and buying what they want to buy. This is self-sabotage since they are ignoring the price relationships and the ratio of dollars to pounds and buying a loss.
Feeder bulls were up to 50 back and unweaned calves were anywhere from 10 back to bringing more than weaned animals.
The fortune tellers who predicted the good times to come to the cow business may finally be proven correct, even though it took a year, not to mention the lost income from following their advice. At the monthly female specials the factories steadily and strongly sold over their Intrinsic Values. Thin-fleshed and off-colored cows were the only ones to sell below IV. Pairs were well over their IV. Age and stage of pregnancy didn’t affect price of bred females much. The big surprise was that bred heifers were the highest selling breds in the offerings, but there were not many of these.
As I mentioned the price was steady throughout and good broken mouth cows were only $500 back from the bred heifers. Not much of a bell curve, not much depreciation either. This is another example not to follow the five-year-old and out plan. The prices paid at the monthly specials were higher than we’ve seen in a while. This could be a hint of what demand could really be. For the legit sell/buy trader who actually pays attention to the relationships, the trade was pairs to breds, or between different sales.
The females that sold on regular weekly auctions were not shown the same kind of love from buyers. Great trades could be made selling at a monthly special and buying back at the weekly auction.
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