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How do think of profit in your cattle operation?

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Watch each Friday for Doug Ferguson's Market Intel blog on Beef Producer and BEEF magazine.
Understanding the relationship of cost to profit can put more cash in your bank account.

I am sure my cow/calf followers have already seen the piece on the cost to keep a cow being higher in 2022. If not, you can read it here. Now most of you don’t need an article to tell you that your costs have gone up. What I thought was really great about the article was the link to the one page budget.

It has been my experience teaching marketing schools that some people are shocked at the high monthly cost to run a cow in my examples. When they go home and really dig into their own numbers, including the opportunity costs some have been shocked theirs was as high as it is.

Here’s the rub on those high costs. If we look at sale results of the top selling auction barns in Nebraska and look at what 5-weight calves are selling for, and average the price for steers and heifers (half our calf crop will be either sex) we can see that those calves are only worth what it’s costing us to keep the factory around.

The way I read the one-page budget there seems to be a line missing, profit. With sell/buy marketing we include profit as an expense this way we are sure to capture all the value of our inputs and also the life sustaining profit.

I have written here before that our costs are like a fulcrum on a lever. If we can slide those costs down, we get more leverage and can take a better bite. I am going to show you all what that looks like

Exploring some cattle numbers

This week I watched a female sale in Missouri. A least-cost producer that lives in the area near the auction told me he could run cows there for $65 a month and still pay himself a little.

On that sale we could have sold 4- to 6-year-old bred cows that had a core intrinsic value (IV-value to us) of $1,119 and a actual value(AV) of $1,400, that were due to calve right after the first of the year. We could have replaced those cows with other 4- to 6-year-old cows due to calve April/May that had an IV of $827 and an AV of $1,075

Here’s why I like this trade. We sold $292 dollars of value into the market by selling a cow that has more value to us and buying one with lesser value to us, yet we got paid $325 for that value. We got paid more than it is worth to us. We also still have a bred cow in inventory the same age and same type and condition, only the new cow will calve when the days are longer and the weather is warmer.

It’s been difficult to capture a $300 margin just selling calves. There are cow trades that can do better and granted there are some that could do worse. The thing is if there are better margins and more turnover marketing of breeding stock it would seem to me the cow/calf producer would be making the bulk of his money doing just that.

Using the least-cost production model I calculated the expense of keeping and breeding a heifer calf. The market that day paid exactly what we would have in her if she was due to calve after the first of the year

Here’s one more example. We sell a 6-year-old cow/calf pair with an IV of $1,320 and an AV of $1,800. We have done a good job managing our grass and have not been running the ranch at capacity. It is getting dry, and we realize we need to stretch our feed budget (available grass). We decide to buy some thin 5-year-old cows due to calve in April. We have time to graze some flesh onto them. These thin cows sold at a discount, and we all know fat cows sell better so we have a real opportunity to capture the value of the grass we have. These thin cows have and IV of $775 and an AV of $1,000. We sold a whopping $545 value into the market and got paid $800 for it.

Now let’s change the monthly cost to keep and bump it up $20 a month, to $85. The first trade is out, it no longer works for us. We’d have much more in developing and breeding a heifer calf than she is worth and the last trade just barely works for us.

A cattle backgrounding scenario

Let’s do one more example with a backgrounding scenario. We sold 885-pound pound steers and replaced them with 665-pound steers. On this swap we have a Return on the Gain (ROG) of 99 cents. Let’s say we priced the corn at what it cost us to raise it giving us a Cost of Gain (COG) of 98 cents. As long as the ROG is higher than the COG we are to the good.

But we could have sold that corn for more than it cost us to raise it. If we charged market value for that corn our COG is $1.32, which is much higher than the 99 cent ROG. We lost $75 of feed value on this trade. This is the old worn-out joke of “the cattle did well, I just didn’t do a good job marketing my corn.”

This is just a glimpse of what is possible by managing your costs and keeping them down. I realize we cannot starve a profit into a business. I also have no problem spending money if we recapture the value of what was spent and then some. The point is by managing costs and keeping them down can open opportunities to prosper.

Some people out there are trying to spin this idea of a great wave of prosperity coming to the cattle industry due to the need to rebuild the nation’s herd. Guys, the good times are here right now. They’ve been here and will continue but only if you know how to manage inventory, market cattle and control costs. I had a very wealthy mentor tell me that one of the keys to earning a high income is to create your own economy. These markets will help you do that if you go about it in the right manner.

Quick cattle market view

This week feeder markets got shook up a bit and the Value of Gain (VOG) goes up and down from one weight class to the next. Harvest is over and farmers are buying some chores now and that has a huge effect. Fly-weight cattle have the highest VOG as they are just too risky for the farmers.

This week unweaned calves were up to 10 back, mostly on the bigger bawlers. Feeder bulls were up to 40 back.

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

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