What’s your next replacement?

Cattlemaster Doug Ferguson reminds everyone not to sell anything unless you have the replacement already identified.

Doug Ferguson

March 22, 2024

6 Min Read

The upcoming marketing school that we are holding in April is another sell out. My wife is working on setting up more schools for later this year, and we hope to announce those dates and locations soon.

The chatter on the seats at auctions is always entertaining to me. People see the market differently. Some think they need to jump in and just buy them, after all you can’t make money if you don’t own them. Others have dismissed the idea of buying anything at all, after all you can’t lose money if you don’t own them. All seem to agree on one thing: when this market settles itself out, some will be holding a bag of gold while others are left holding a bag of garbage. “Uncharted waters” is a phrase I heard over and over this week.

Flyweights sale

I am getting a kick out of watching flyweights sell. A buyer’s and an auctioneer’s first job are to be an appraiser. Sex, type, condition, weaned, vaccination history and weight all factor in. Then the auctioneer must decide where to try to start them. I have seen auctioneers back up 40 to start some, then the very next draft he’ll knock them off 60 higher than where he started them. The selling price becomes more predictable as they get heavier.

With some feeder bulls selling up to 40 back of steers, unweaned calves selling up to 35 back, fleshy cattle selling up to 20 back and replacement quality heifers catching premiums of $5 -13 dollars, it makes the task of appraising a bit more difficult.

Value of gain

The Value of Gain (VOG) was well above Cost of Gain (COG) on cattle weighing five hundred pounds and lighter. The trough effect, or inverted bell curve, settles in. Some of the heavier weights experienced leapfrogs, to VOG of as low as $8 to put on 100 pounds of gain. Then as the cattle get to weighing 800 pounds-900 pounds, the VOG comes back up.

This week as I examine the relationships between feeder cattle. I have never in 20 years of doing sell/buy marketing seen the opportunities to capture margins as big as is possible right now.  Due to the natural law of polarity, I have also never seen trades that will lose as much money as some can right now. If we do not know what we are doing and are not intentional about our marketing, we are playing a risky game. This is the beauty of sell/buy marketing; it tells us what we can and cannot do on any given day to prosper ourselves. No guessing involved.

Know your market area

I have been receiving a high volume of phone calls over the last two weeks. I am going to single one call out because we can all learn a lesson. This caller reads this blog every week, and shortly into our conversation, it was clear to me that he attended a faux sell/buy school. He was really excited about what he sold his pairs for and was agreeing with what I wrote last week about the market sending up flares. When I asked what the replacement was going to be, he became uncomfortable. He didn’t know. We never sell anything unless we have the replacement already identified.

He then proceeded to tell me that if he bought some heifers and ran them out for a while, he could capture all this appreciation, especially if he bred them. This caller lives not too far from me, so I am very familiar with the market in his area.

He was describing the 4/5year-old and out plan. This is not sell/buy marketing. He had it in his head that he deflected all this depreciation. The thing is, he didn’t deflect any. Bred heifers to 8-year-old cows all sell within $250 of each other if they are similar type and condition. Then there is a $250 drop in price and that price is what all the older cows bring. 

Improve the balance sheet?

Broken mouth bred cows are worth $700 more than the heifers he was thinking of using as replacements. He thought that because he was told this, not keeping the cows until they were old would improve his balance sheet. In the past that has held up, but this is now, and the value on the balance sheet would be higher if he held onto them. This dynamic will change again.

He also mentioned his gross margin will improve. If we do good trades, this will prove accurate through the power of turnover.  I asked him if he could buy those heifers and develop and breed them for less than what it would cost to buy bred heifers. When the answer finally came back, he said he could not. It became clear that he was on the verge of doing a horrible trade. The good news is that he realized the idea that was given to him was flawed and that he could still salvage the situation he had gotten himself into.

Pay attention to the gross margin

I decided to take it one step further with him. At the school he had attended, he was given the idea of subtracting the depreciation of the cow from the value of the calf. What if we did the silly math the other way, and since it would cost more to develop the heifers and breed them than what they are worth as bred heifers, we subtract that difference from his gross margin (GM) that was looking so good. When we did this, his GM almost evaporated completely. Let’s also not forget what I wrote above about the VOG shrinking as these heifers are growing. For this strategy to work, the market will have to continue to go up to bail him out. His GM may look good in the short term, but when the market takes a downturn his GM will go negative.

This led to another point. When we sell an animal, it has a valu, and the animal we replace it with also has value. We must be sure we are getting paid more than the value difference that we sold into the market. Unfortunately, this caller had no idea what that meant; he wasn’t taught how to examine the relationships between breeding stock. Not knowing this step is what will get people into trouble.

Run the numbers in your market

Run your numbers for your local area. There are some places where cows may depreciate in price as they age, and by selling them, a producer there may very well deflect depreciation.  There may be situations where this may very well improve GM, but if we are doing good legit sell/buy trades, we will improve our GM by default. 

I really appreciate the call. We answered an old question: What is the value of an old cow?

The opinions of Doug Ferguson are not necessarily those of beefproducer.com, beefmagazine.com or Farm Progress.

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