April 16, 2021
A cattle buyer gets off the phone with the feedyard and begins telling those of us who were standing close by how good this one pen of his did. The feedyard just shipped them, and the cattle had an average daily gain of 3.8. Here’s the catch, no one knew the cost of gain.
Sometimes this entire industry is hung up on silly things that don’t matter. We really do not need to know ADG, but we absolutely must know the COG. You can’t calculate a return on gain without that piece of information. When I said that to him I got a blank stare and he admitted he had no idea what this crazy talk of mine meant.
The next morning, I decided to Google ROG just to see what would come up. I was certain someone other than me writes about it once in a while. To my surprise nothing came up. What I did stumble upon was alarming.
Check out this graphic from Michael Langemeier of Purdue University:
From January of 2010 through October of 2020 cattle feeding made a profit 50 out of the last 130 months. 20 of those months had a profit of $100 per head or greater with 46 months having a loss of $100 or more. The highest margin was in 2014 at around $275 and the greatest loss was in 2015 with losses of $500.
There is good news and bad news in all this. I’ll start with the bad news. This shows finishing cattle is a net negative cash flow business. Feedyards have been burning through equity for the last decade. When it goes on that long let's call it what it is, a trend. I doubt it will stop because that will require a change in thinking. Like Einstein said, "You can’t fix a problem with the same level of thinking that created it." Paradigm shifts are hard and that is why I don’t see this changing.
If you are a stocker or cow/calf operation this should be of great concern to you. When you see this are you more concerned with retail demand and exports, or are you more concerned if you will have a customer to buy your cattle 10 years from now? There are only two reasons to quit. One is retirement and the other is because you are losing too much money. If this chart is accurate its clear what is coming.
All these statistics tell us is what everyone else is thinking. We call group thinking culture. This chart shows the culture of cattle feeding.
What it means for you
Here’s the good news. These stats don’t have to reflect you. Since you are an individual you can make a different choice. If you have solid marketing skill you can establish and maintain positive cash flow no matter if the market is going up or down. Thing is you are going to have to go this one alone. Your buddies will not abandon the culture and follow you.
You can profit with cattle that have a high ADG or a low one. And it won’t matter if retail demand, exports and the board are up. That’s right. I said what I said, these things don’t matter!
What does matter is knowing your COG, and how to use it to calculate a ROG. You must have that information in order to do an algebraic equation to find the efficient market value of replacement cattle (the maximum amount you can pay and still replace at a profit).
That little number, the COG, will show you the relationships between cattle. It will help you discover what is under-valued and over-valued to each other on that day.
The other thing I feel is important is that we must focus on making a profit. That’s easy to do when things are going well. It's just as easy not to do when things aren’t going well. The moment we blame the feedyard for doing a lousy job, or we blame the packer buyer we just took our focus off making a profit. Blaming them and getting mad at them won’t do any good because they do not care. Keep focused on making a profit.
When we learn how to market cattle properly, we can run circles around our competition. Let’s face it, according to the graph above the bar is set pretty low.
Let’s put it to the test
We sold 1,400-pound fats at $1.25 and so did our neighbor. And we both have a COG of $1.00 (I am not adding profit to the COG just to keep the numbers easy and round)
Our neighbor who is bought in to the mainstream cattle feeding culture buys 730-pound steers at $1.54. His ROG is $.96. That is lower than the COG so he’s losing $29/head.
We do sell/buy marketing and ran the cattle squares to find the expected money value. We knew not to bid on those seven weights. We bought 1,005-pound steers at $1.25 (Rule of thumb: when the sell price and the buy price are the same, that price will be your ROG). This trade gives us a ROG of $1.25 which is higher than our dollar COG. We made $99 profit.
The board, retail demand, exports, ADG, packers and all the other trendy things people talk about had nothing to do with either of these trades. Just knowing when to bid or not to bid made the difference. Plain simple boring stuff, but there’s nothing boring about positive cash flow
I am not a fan of the cancel culture movement that is taking place in this country. Thing is if Mr. Langemeier’s slide is an accurate reflection of finishing cattle, it may be time to cancel the culture in the feedyards and replace it with a better paradigm, and a little math.
A look at the markets
This week the VOG started high with three weight cattle and gets lower bottoming out on seven weights then begins to come back up a bit. Here’s where knowing COG comes in for the stocker operators. It tells them to sell their cattle weighing around 600-pounds. It will cost more to put the next 100-pounds on than those pounds are currently worth.
Feeder bulls were 20-25 back, fleshy cattle were $6 back. Unweaned cattle were 0-14 dollars back. The discount, or lack of, were affected by how many bawlers were in the run. If you had the only bawlers of the day and it was a small group, you probably took the discount. This is a case of it would pay to call the barn and be sure other people were bringing bawling calves as well.
Replacement heifers only caught a $2 premium this week. That is smaller than premiums paid the previous two months. I am not sure if there just were not many replacement quality heifers available this week or if this is the beginning of the signal that people are done buying them.
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