Recapping where we left off last week, I’m exposing the bogus ideal of the 5-year-old and out plan or the no depreciation cow herd. It is supposed to increase gross income, which is implied will increase gross margin, and improve the balance sheet. As I mentioned last week the numbers are manipulated and when this is corrected it fails to accomplish what it is supposed to. This is also not a sell/buy method.

Don’t be delusional

I mentioned that several people asked me to prove my stance on it through a simulation because just looking back at what the market has done was not good enough for them. Personally, ignoring the lessons from 2023 is delusional, since bred heifers were dead equity (if we have more in her than she’s worth we didn’t capture any appreciation) and five-year-old cows were the bottom of the bell curve. I know what I am writing here hurts some people because they really want to believe in an easy cookie cutter recipe. The truth hurts, the thing is delusion harms. I have heard too many horror stories from people who have tried some of the cozeners bogus ideals, so I stick to facts and sell/buy.

Pay attention to the numbers

When doing the simulations I’m shackled to the numbers. This meant I had to address costs. There was a cost attached to the open heifers, a different cost attached to the bred heifers, and a yearly cost to keep the cows. I did not artificially bump up stocking rate. Since there was a post floating around on social media along the same lines as the no depreciation herd that said a key factor to ranch profitability is being fully stocked, I was told to do this as well.

Related:Predicting the future

In regard to that post did y’all notice how dated the prices were? At that time in history the relationships were different, and it underscores dealing with today. I was also told to figure 30 percent of heifers exposed were not going to breed up, and we agreed on a 16 percent fall out rate since that is about average. The prices I used were from the October female sale in Salina Kansas and their feeder auction that same week. I watched the entire sale and wrote down every draft.

The control group

My first calculations were a control group, because we must have a baseline. The control is a 100 head herd that has an inventory of 10 head of each age from heifers retained to 10-year-old cows. Since this is the control group it is what I used for the stocking rate.

The control group is conventional. Pick out the replacement heifers and sell all the rest of the calves. Cull all ten-year-old cows. The difference in my calculations now will include fall out rate and 95% of the calves born will be weaned.

Related:Plan now to maximize cow profits in 2025

10-year cycle

I carried these simulations out for 10 years, to begin with, since everyone is obsessed with a ten-year cycle. I later carried it out to 20 for my own curiosity and I’ll share the results of that later.

I won’t bore readers with all the math and jump to the end since that is what we are really comparing. At the end of the decade the cow herd got younger due to fall out rates creating a necessity to retain more heifers. This factors in at the end of the decade when calculating inventory valuation.

Profit is what matters

At the end of the decade this program would net, pretax, $301,905 (30K a year). Notice I am using net income and not gross sales like the cozener example. Revenue feeds the ego; profit feeds the family. The inventory valuation increased from $213,800 to $246,335. Like I said the fallout rate factors in at the end.

Market movement

In this scenario several things stand out to me. First, net income is good because at this time in the market cull cows were $350 higher than five weight heifers that were retained. With the drop in weigh-up prices and the rise in heifer prices that we have now, this market movement will affect the outcome if using December prices. 

Related:Why trend spotting breaks your cattle marketing strategy

The second thing that stands out to me is the power of the market at the time and the superpower of cows being able to replicate themselves. If a producer has no clue what they are doing when it comes to marketing this proves they can still, make money based off just those two things. 

Thirdly, 20 percent of the income is from cull cows. Ag economists tell us all the time that 20% comes from culls and that is why they write nonconclusive articles about adding value to them.

No depreciation?

The second scenario I ran was my first attempt at no depreciation. I ran this to phase out the mature cows and get the herd’s age down to where it’s finally selling 5-year-old cows annually.  I ran this one where the operation was only keeping raised heifers, yet I was realistic and sold a handful of heifers because not all of them are going to be good enough to keep.

At the point of ten years, it never got to selling 5-year-olds as breeding stock. Due to the fall out rate, production lag, and the requirement of using retained heifers there were never enough cows in production to produce enough heifers and keep fully stocked. I decided to give it more time and carried it out for twenty years and it still never got to the point of selling 5-year-olds. I did notice something else though and I’ll share that at the end.

Looking at the income

The gross pretax income was $319,850, beating the control group by only $18,000 over the decade.  Inventory valuation increases to $256,550(10K more than the control) which was an increase of 20 percent.

As readers can see it barely accomplished what it’s supposed to even though it never got to the point of selling 5-year-old breeding stock nor did it have the huge impact we’re told it would.  There were a couple years in the beginning where yearly income condensed to nothing due to production lag of the heifers. 20 percent of gross income was still generated from cull cows due to the 16 percent fallout rate.

In my third attempt at the no depreciation ideal, I sold every cow over four years old in year one.  This meant that to remain fully stocked and keep females in the pipeline I had to buy heifers. I am still using the parameters of 16 percent fallout and 30 percent open on heifers.

Paying the bills

With there only being a few hundred dollars per head difference between culls and the replacement five weight heifers, annual income got hammered. In this scenario there’s enough cash flow to pay the bills, but there was nothing left to support the family in the early years. Income does pick up after a few years once the boughten open heifers the first year finally are sold as 5-year-old breeding stock.

Due to not enough productive females in the herd it had to buy replacement heifers each year. This never allowed net income to catch up. At the end of the decade net pretax income was $249,000 or 20% less than the control group. When we use real-world numbers, instead of manipulating them, this program is doing the opposite of what we are told it will do.

One thing that helped me build and scale my operation was positive cash flow, and this scenario destroyed it. I’m starting to understand why I receive so many angry messages from people who’ve put the cozener’s bogus programs into practice. Inventory valuation does go up 22 percent. This increase offsets the decrease in net income but doesn’t support the family.

Cash or finance?

Since none of the scenarios worked like we’re told they will I decided to put this attempt on steroids. We’re also told that with inventory valuation increasing we can borrow more. In this case we lease a neighboring ranch and buy replacement heifers to run on it. Since our cash position doesn’t allow us to buy them and cover operating costs outright, I borrowed 100 percent for this heifer program, which is achievable if we own all the cows outright.

Due to fallout rate and the production lag, there was barely enough money to cover the interest payment at the end of year one. This meant I had to borrow more money to cover expenses and the purchase of the following year’s heifers, even though I’m still selling calves and mature cows.

Making a profit

By the time I got to year eight and had done several turns selling the heifers that were purchased as five-year-old breeding stock it was clear this scenario was underwater with no possibility of repaying the loans at the end of the decade. I have no issue with using borrowed money, the thing is we need to be getting paid more than the banker since we are doing all the work and taking the risk.

This scenario also proves the point of needing to know how to make money with 100 head before expanding. The idea of getting bigger to be profitable only ensured this operation would go broke faster.

Year 14 in 20-year cycle

I said above I’d close the loop on what happened when I carried scenarios out twenty years. At year 14 things hit equilibrium. In each case I was culling the exact same number of cows each year and buying back the exact same number of replacements and selling the exact same number of breeding stock of exactly the same age. This doesn’t reflect reality and reenforces my disdain for projections by proving their faultiness.

Christmas present

Next week I’m going to give you all a Christmas present and turn a negative into a positive by doing examples that work. Spoiler: next week will involve legit sell/buy marketing.