Revenue feels good, but profit is what countsRevenue feels good, but profit is what counts
Doug's Market Intel: Getting a sudden influx of cash fuels the ego, but if you aren't watching your bottom line, you will miss the boat.
August 18, 2023
Yesterday, my daughter skipped school to ride along to a cattle auction with me. We were selling some cattle coming off grass and half a load of them were hers. These cattle increased in value by $800 per head since we purchased them, mostly due to the market going up. This was going to be the biggest check my daughter has ever received, and I wanted her to be there.
Here’s the thing to remember about these big checks. Revenue feeds the ego, but it is profit that feeds the family.
Despite these higher prices some people are losing money. For years, and even still today, people cry that we don’t get paid enough for our cattle. The price needs to go higher. My guess is if we get it high enough to satisfy these people the rest of the population will quit buying.
There is another group of people that are making money, and some of them were making money even when the prices bottomed out in 2015 and through the Covid situation. These are the people that know how to market cattle and run a business. It isn’t absolute price that matters, it is the margin that matters most.
Since I started writing this blog, I also started paying attention to what other authors write and what some people say on podcasts and webinars. Based off some of the material this exposes me to I am not at all surprised that some people just can’t figure out how to generate positive cash flow. They need to learn a lesson I have been pounding in my daughter’s head since she was four years old; Pay attention to what it is that you are looking at.
Some of these experts and educators can’t even notice the date on the report they are looking at. Some don’t even notice that when quoting prices of cattle that they got the price per hundred off a weight class. Others can’t even read a P & L statement correctly. When they do get called out on it, they shrug it off. They do not care if producers were mislead by their content, as long as money flows into their pocket. This is the siphon hose I write about sometimes.
Yesterday I was pleased that my daughter started showing a bit more interest in the sale. We both were punching numbers into our calculators, and she was asking questions about things that were going on. She started to figure out that a buyer’s first job is to be an appraiser. She was starting to see the price relationships between different sets of cattle, and the value that could be captured. Trucking was an issue yesterday, and as a result she got to learn about logistics and the value of networking. I may be a lousy parent for letting her skip school this early into the year, but I won’t let schooling get in the way of a good education either.
On the drive home I told my daughter to pull up the local car dealer’s website. I wanted her to get a feel for what she could buy there with her cattle check. Of course she knows she has to reinvest it back into cattle since sell/buy marketing is a continuous process, and we are not retiring yet. This is where I realized I messed up. I had her do this because we always hear the story of 60 years ago great grandpa sold 12 calves and then went to a dealership and bought a new pickup truck. I told her this story and she quickly thought things were wrong because she sold way more than 12 head and could only afford to purchase half of the pickups the dealer had in inventory.
I was pleased at this moment that she was starting to see and question the value between things, this is resource management. I explained to her the flaw in this kind of thinking today. One of her grandpas collects old cars, so she is familiar with them. These machines had a timing chain, hand crank windows, they were lighter duty with a regular cab without AC, and a poor-quality AM radio. The trucks today look like the Starship Enterprise with all the technology in them. It is not a fair comparison between what great grandpa could do compared to the situation we are in today. We are still selling an animal that is basically similar to what he sold, but now we are comparing the value of these animals to technology, and the government intervention requiring sensors for emission control, and safety standards.
Early last year when the price of inputs skyrocketed and the price of cattle did nothing, people knew what their costs were. This year the price of cattle has gone up and now I notice people are guessing at their costs. These higher prices have given people a false sense of security, so it comes as no surprise to me that people are losing money right now.
That brings up the question of what to do about rising input costs. First, we know our costs so that we can compare value relationships between animals. Without knowing our costs, we are guessing. If we know our costs, we have it broken down to tally where the costs are coming from. This gives us a clear idea of if and where we can begin to cut our costs.
We can only cut so much though. This is why people should learn sell/buy marketing. I heard on a podcast this week about the extremely high costs to keep a cow for a year. I have used a Cost to Keep (CTK) that is even higher than the made-up number they threw out. In fairness their made up number would be close to reality for Nebraska if the producer liquidated part of his herd, driving up his overheads, and he is trying to feed his way through the drought here. This cost is equal to the value of the calf the cow will wean. If we implement conventional marketing this scenario ends in financial disaster.
If we implement legit sell/buy and compare relationships, we can still generate positive cash flow. There were a bunch of female sales this week across the country, many had complete dispersals. It was possible to trade similar females and realize a value capture of $700 per head and still have an animals that was close in age to the one we sold.
Increasing turnover is one of the three pillars Ranching for Profit teaches to be profitable. Sell/buy is how to realize it. Yet the cow/calf segment turns a blind eye to it, even when they are exposed to it. That is the power of a paradigm. It is the paradigm that controls our behavior and gets us our results.
If raising cattle seems like a struggle right now and you are not making money the last thing you need to do right now is spend thousands of dollars on bulls or upgrade equipment. I would suggest taking a small amount of cash and enrolling in my marketing school or attending a Ranching for Profit school. Successful people invest heavily in themselves so they can improve their results.
Raising cattle will never be easy. It should be simple, but we over complicate it. If we learn to pay attention to what it is we are looking at and cut out the crap it will get much simpler, and maybe even a tad bit easier.
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