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Learning lessons in cattle marketing

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Watch each Friday for Doug Ferguson's Market Intel blog on Beef Producer and BEEF magazine.
Knowing your Cost of Gain and Return on the Gain are two key factors that can bring profit to your operation.

This week I watched my daughter and the markets, and I realized some people just don’t learn. This week my daughter’s basketball team ran up against some high school teams (our girls are 11). My daughter has also been helping me in the hayfields this week. Mistakes were made, lessons were learned, and I could see her make the necessary adjustments, both on the court and in the field. She had a rough week but she problem solved and grew. Gaining experience is usually a rough lesson.

If a lesson is not painful enough, or if for some reason it doesn’t sink in it is bound to be repeated. Last year was a painful year to be finishing cattle. This year has been the opposite. Even though fats have been good property this year mistakes can, and are being made.

Let’s say our neighbor sold fats in Nebraska for $145 this week. He then went to the auction in Bassett Neb., which had an abundance of cattle to bid on. He bought 10 weight steers for $171 (weighted average). This trade gives him a Return on the Gain (ROG) of $.86. His Cost of Gain (COG) was much higher than that. This trade loses over $200 per head.

We learn a little quicker than our neighbor and we adjust. We called our buddy in Oklahoma to get us some 10 weight heifers. Those heifers laid in (includes cost of delivery and commission) cost us $126.40. This trade has a ROG of $1.86 which is higher than our COG. We not only hit our profit target (remember profit is figured in as an expense), we exceeded it! Assume the fats we sold were steers. I get that people don’t want to replace steers with heifers. This is why we pad our COG when making a steer to heifer trade (I cover this in my schools). Even in doing so we still make excess profit.

Now look at what just happened. We both sold fats in Nebraska for $145. We made money and our neighbor didn’t. It’s not really the packer’s fault now, is it? Our neighbor spends his free time every week on the phone with Sen. Deb Fischer’s , R-Neb. - to get her market reform bill passed. He is elated the packers are being investigated and sued by retailers. Wanting bad things to happen to the person who pays you, serves you in what way? But he feels he has to do this nonsense if his business is going to survive to pass on to the next generation, who at this point probably doesn’t want it.

While our neighbor is busy horsing around, we can go to our kid’s ball games. It’s funny how you have more free time when you are making money.

Understanding true cost of gain

I want to address one thing I hear a lot. The COG is attached to the animal we sold. I do Sell/Buy marketing, so I am only using what we know at the current time. There is no forecasting or calculating break evens. We know what are sell weight is because we weighed them when we sold them. We know what our sell price is. We know what our beginning weight was. We know what our cost to feed those animals was. All we need to do now is a little math to calculate our COG.

Once we have that we can use the cattle square to calculate the Efficient Market Value (EMV) of replacement animals. The EMV is the maximum amount we can pay for those replacement animals and still hit our profit target.

Information gets passed along so quickly now by email or text which we all have on our phones. There is also a calculator on our phones. Since Sell/Buy marketing is a real-time cash flow reckoning there is no excuse for losing money with this kind of technology in our pocket.

Last point this week. I often hear cattle feeders rattle off their COG, what the feed efficiency was, and the average daily gain. The only useful information there was the COG. None of the cattle feeders know what ROG is, or how to calculate it. ROG is the ratio of dollars to pounds. How do you know if you’re making money or not if you can’t calculate a ROG? Answer is you don’t, you just gamble. Which leads to the worn out line “Who needs to go to Vegas? I gamble every day”

A look at the markets

This week we saw some big feeder runs at some sales. Fly weight cattle had the highest Value of Gain (VOG). I saw something this week that did surprise me, at some auctions (not many) the VOG got higher as the cattle got heavier. The VOG this week was certainly enough to cover COG. Feeder to feeder trades are really awesome right now. There is a price cliff as far as VOG and it is hanging around eight and nine weight cattle again.

Once again load lots caught a premium. In the south the premium is enough that it makes them over-valued once we figure in delivery cost. As you probably figured out from above geographical spreads are a factor this week and feeder steers are mostly over-valued to fats now.

With the larger runs of cattle and the heat we saw a wider discount for feeder bulls, 25-35 back, and unweaned cattle which were 12-25 back.

Heading to Husker Harvest Days? You can catch Doug Ferguson live each day at 12:15 has he offers ways to put more money in your wallet with sell/buy marketing. And it’s your chance to talk with him each day. Husker Harvest Days runs Sept. 13 – 15 near Grand Island, Neb. Make plans to attend.

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

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