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Finding real value in the cattle market

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Watch each Friday for Doug Ferguson's Market Intel blog on Beef Producer and BEEF magazine.
How you invest and understand the relationships between value and costs will require rethinking the standard marketing paradigm.

This week I was listening to a podcast and the guy on there said that the cost of college tuition has gone up 2,100% since the time our parents went to school. I thought that figure was way off so I did my own research.

What I found was that the cost of private school has gone up that much. Here’s the part that I feel really matters. When adjusted for inflation the cost of in state tuition has gone up 90% since 1960. The average starting salary for a person with a Bachelor’s degree has gone up 5.85%. It’s not hard to see the over-valued relationship here.

A quick Google search tells me that 38% of farmers today have a Bachelor’s degree or higher. Google also tells me that 2019 was the ranked 8th for the most farm bankruptcies, and it also suggests that number has climbed since then.

I didn’t search for how many farmers had a degree back in 1960 or how many bankruptcies there were because I am almost certain the number is much higher today.

Here is another interesting piece on value relationships I got from Chip Hines’ book “Time to Change”: “Steer calves weighing 450 pounds in 1960 would bring around 25 cents a pound. This is conservative as I did find some prices 2 or 3 cents more. This makes the calves worth $112.50 per head. A 1960 pickup would be $1,600 to $1,800 range. At $1,800 it would require 16 calves to purchase this pickup”

It would be easy to draw the conclusion that things were just easier for grandpa. The fact of life is he had some big challenges to overcome just like we do today. Spend some time talking to these veteran cattlemen and you will quickly notice they see things a little differently than we do. Paradigms control perception. The conclusion I am drawing from this is the group paradigm or culture has changed, and not for the better.

People have been misled to believe that higher education leads to more success. As you can see from the numbers above, when our parents went to school it was the right thing to do. That degree helped them earn more. This idea then became the cultural norm. It is hard to let go of a mental model that no longer serves us because paradigms are extremely hard to replace.

It is the paradigm that gets the result, not superior education. We have proof of this, more people with degrees in farming today than ever before yet they are corkscrewing the family operation into the ground. These are highly intelligent people, yet they can’t figure out how to make it work. They have the wrong mental model and that is why they can’t succeed. The softest way I can put this is that your credentials don’t mean much out here on the dirt roads, results do. All I must do is look at the results and I can tell what your mental model is.

Real-world cattle marketing

The mental model that succeeds in academia is not the same one that succeeds in the real world. This is why students that got A’s usually end up working for C students and dropouts. Earlier this week there was an online article about calculating the Value of Gain (VOG) written by an Ag Econ Assistant Professor, and this is where the two worlds collide because I was greatly offended that he misleads thousands of people in a $100 billion industry.

First, he decided to sell some steers in March. Looking at a calendar to determine when to sell only allows us to deflect responsibility when we sell if things don’t go right. He then misused Futures. Futures were never intended to be a crystal ball to forecast prices. Then he looked at historical basis, so now he is hoping history repeats itself. He then calculated the VOG from his start weight to his projected sell weight on his set sell date.

This was quite a process and frankly it was more work than I am accustomed to just explaining what he did. There were just so many unnecessary steps. There is a fancy word for this we hear all the time on market recaps on the radio: speculation. Speculation means to form a theory without evidence, and/or investing with the hope of a gain but also the risk of a loss. Sounds like gambling to me

There are so many “what ifs” that could happen to blow his scenario apart. One is happening today, and I am writing this two days after he wrote his.

All the VOG tells us is if the market is paying us to put weight on the animals. To determine that we must also know our cost of gain.

The author also suggests recalculating the VOG in the spring. That is 130 days without reevaluating if it is paying to put weight on. That is giving those steers free reign to lose as much money as they can by devaluing your feed if the market structure changes. In business we can’t be lazy, we got to do our paperwork. It should be routine.

A cattle market case study

Here’s the thing, we can’t predict the future we only exist in today and the only information we have that is important also exists in today, and that is the bid. The bid is perfect because we can use it to do algebraic equations that tell us if we can prosper ourselves or not.

Let’s do a fun with math from a real trade that took place in Nebraska. Sell 643-pound heifers at $175.75, and buy back bawling steers, bulls and heifers averaging 512-pound at $175.28. This swap gives the rancher a Return on the Gain (ROG) of $1.77. ROG is the ratio of dollars to pounds on the trade, or how much are we getting paid for those pounds. With a Break Profit Cost of Gain (profit is figured in as an expense) of $1.50 this trade gives us an excess profit, more than what was figured in, of $36 per head. Plus I am told that all the animals sold were heifers, and 52% of the buyback were males, so this is an upgrade in inventory as well.

I have testimonials from people who went to college and didn’t learn how to make money. They then spent $750 to come to my marketing school and were overcome with excitement they now know how to make steady money with cattle. Value relationships exist between everything, even education.

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

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