Changing market picture brings cost focus
Rapidly rising input prices – both feed and fuel – are forcing more attention to cattle costs, and opportunities.
March 11, 2022
State basketball has been taking place in Nebraska this week. My daughter had a few days off from school, so I spent the money to get all the games on TV for her to watch. The effort the young athletes put into each game is impressive. And if we think about it that is the only thing they can control, along with their attitude. They can’t control the calls the refs make, or the plays the coach calls.
Feed yard owners and back-grounders have been putting in more effort lately as well. Usually when I ask someone what their Cost of Gain is they use the words “about, around, probably”. You ask now and they give you a number.
The price of corn going up and fuel skyrocketing has gotten people’s attention. This has them doing the important work of looking after their business, or working on the business, rather than just working in the business.
When we own animals, they cost us money every day. There is some labor, time and they are going to eat. All of which cost us money or should be costing us money. I say should be because some people don’t figure feed cost because they raised it, and they don’t figure their labor.
When we are in the cattle business we are also in the money, feed, time, and labor business. The point of owning animals, from a business standpoint, is to be a better way to sell feed, labor, time, and skill. Some people are figuring this out, as they’ve concluded they’d be better off to not own animals of their own and sell their feed to someone else, along with their labor and skill.
More effort must go in to working on our business right now than we have been accustomed to. From Tuesday evening to Wednesday afternoon diesel went up 50 cents in my hometown. It’s gone up $1.70 in nine days. This is a rapidly moving target. The cost for me to ship cattle is up 25% from two months ago. This changes the outcome of the math, which has an impact on the decisions made.
We need to know our cost to determine what is over- or under-valued to us. With some of these expenses going up as quickly as they are the value relationships can change just as fast.
Cow-calf challenges
Shifting to the cow/calf side of things not everyone there is paying attention as close as their customers are. One thing amazing to me is how few cow/calf people know how to figure intrinsic value and compare that to the actual value of breeding animals, yet some-how the market has a way of subconsciously adjusting these values to expenses.
This week I watched a cow sale online while putting together material for my upcoming marketing schools. I calculated the intrinsic value of the cattle sold using least cost production management, and there were classes that stood out as great sells and some that stood out as great buys.
Buyers at this particular auction were not bidding aggressively. One thing did stand out is that the people interested in buying bred heifers were using the 10 year calculator. This method never worked, as it leads people to over pay for the younger females.
I then decided to refigure the intrinsic value of the cows by using a production model that will feed them 7 bales per cow per year. People that feed hay to their cows feed between 6 and nine bales per year, that is why I settled on seven bales. I had to bump up labor expense because we are starting a tractor on a regular basis to do this substitute feeding. I used the market value of hay. I also left the profit per head the same, so our return is going to be lower.
The addition of hay and extra labor doubled the monthly expense to keep a cow. It is so bad it almost wipes out the intrinsic value of young cows. I wrote last fall that hay cost was as much as the value of her weaned calf. I’ll put it differently this time. The addition of hay and the other costs of running a cow makes the cost of production almost equal to the value of the product produced, which is the calf, and the value of the factory. (Nebraska prices)
By adding value to the things we have in inventory we give ourselves a chance to make a profit. Understanding the value of things may be the most important factor to know about marketing. This way we don’t completely erase the value of our cows or our feed, like above.
Here is another painful thing to face. Many people in my area use bale rings to feed hay to cows. It works great because they only have to fill all the rings once or twice a week. When we feed cows this way, they waste a lot of that hay. If a bale is worth $150 and the cows waste 10% and we feed 10 bales a week, why not just light $150 on fire every Monday in front of the wife before she leaves for work? While that cash is burning, we just won’t tell her about the baby calf that bedded down next to the bale ring and got stepped on and died. We’ll save that one for the weekend when she thinks she wants to go shopping.
I do not write these kinds of things to be a jerk. I want the cow-calf people to make money so they stay in business. Without them there is no cattle business, so we need them to hang around and prosper. The point is one management decision is costly, and the other leads to prosperity.
View from the market
The only thing to add about the female sale I saw this week is the bell curve was relatively flat. For the least cost producer there are opportunities to make some swaps and capture some value in the form of cash, and by allowing these producing animals to consume feed
The feeder markets were mixed. One auction was down hard from last week and another auction was up slightly from last week. Here’s the important part, these price changes changed the value of animals and their relationships to one another by making the value of gain more appealing especially on the heifer spectrum.
Trading steers under 600-pounds is profitable. Selling fats and buying replacement steers over 900-pounds is profitable. Trying to do anything between 6 and 9 weights is where it can get rough. The heifer side is extremely fluid right now, if you’ve managed to keep your cost of gain down.
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