A true accounting of costs matters

What are you charging yourself for hay, pasture to raise cattle? That should be factored into your business.

Doug Ferguson

November 25, 2022

7 Min Read
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“You are extra blessed if you are in the North American cattle industry. Praise the Lord.” Those words are from Ann Barnhardt, the person who taught me Sell/Buy marketing. I would add to that if you have a supportive spouse and kids. Happy Thanksgiving

On Saturday, December 3 I will be speaking at the Missouri Livestock Symposium. My topic is the Fundamentals of Marketing to Prosper. Today I am going to share a fundamental that would seem like a no brainer, yet is overlooked and misunderstood.

Cost and how it affects relationships between classes of cattle is something I have witnessed firsthand trip up some so-called marketing experts. I even recently heard one talk about manipulating the numbers, and that he did. When it comes to being profitable in the cattle business, we must understand the fundamental reasons for keeping our costs manageable and be honest with ourselves.

I want to put this up front. I realize we cannot starve a profit into a business. I also have no problem spending money if we recapture it along with a return. Money has no value unless it is being circulated. Therefore, we must be intentional with it and invest it on appreciating assets or assets that produce value, which could be a cow that replicates herself giving us a calf to sell.

Most cow-calf people think that sell/buy marketing is not for them. They made the wrong assumption. Just because they are not going to a sale barn and buying another animal to take home, they are in fact buying an animal. The animal they are buying is the one the cow has not given birth to just yet.

Here is where people get tripped up and I can make the sell/buy simple. Most people think that they produce a calf and then need to sell it for more than it cost them to produce it. Some confidently think they accomplish this year after year, but that is only because they do not account for everything.

If you own your pasture, you must charge yourself the going rental rate in your area. If you produce your own hay, you must charge yourself what the hay is worth. If you do not do this, you are subsidizing your cow herd and any cow herd can look profitable then. If we do not account for these costs, we end up giving away the value of our feed.

A cattle cost case history

To keep this very simple, when a cow-calf operation sells a calf simply back out some profit from the sale price. So, for easy math we sell a 500-pound calf for $2/pound. We just got $1,000. Subtract $100 from that. That $100 is our profit. (I personally think we need more than that but 100 is what most cow calf people hope for) This gives us a budget of $900 to replace the calf we just sold. We need to run that factory for $900 for the next year.

Recently there was an article on BEEF that showed a cow-calf budget for the year 2022 in the state of Nebraska. It concluded that the cost for running a cow here was $1,100, or roughly $90 per month on average. We are not selling very many calves right off the cow for $1,100 here, they are selling for less than that. The status quo producers need to cheapen up their cow costs.

I just pointed out that it costs more to raise a calf in a status quo production model than the calf is worth. I therefore just effectively destroyed the paradigm of the 10-year calculator. If we think she has 10 years to pay for herself and we do not routinely reassess her value, to be sure she is keeping her place in the herd, we just gave her free reign to lose as much of our money as she wants. Trust me she is up for that challenge.

Think for a moment of a lever. Depending on where the fulcrum, or pivot point, is on that lever will determine how much work is required to move a load. If the fulcrum is in the wrong place and we are not strong enough, we cannot move the load. If the fulcrum is in a better place we can move a huge load with ease.

Cost is the fulcrum on our marketing lever. It is what determines the price relationships between cattle, and as our cost structure changes so do the relationships. That is the beauty of Sell/Buy marketing, it tells us what we can, and just as importantly can’t do, to prosper ourselves.

What size females to buy?

This week I took in some female specials. What I witnessed didn’t surprise me much as the market routinely caused me to write things like "fat is a pretty color”. Cows in a body condition of 5 or fatter sold better. In fact, condition has had more influence on price than age or period of gestation lately.

For those of you familiar with the cow bell curve concept you may be confused that cows aren’t depreciating much if we look at the market topping fat cows. There is also a $400-plus gap between cows of the same age and that is all based on condition right now

There are a couple things in motion here to bring this full loop. I stated earlier that we need to cut costs. One way to do that is to run smaller cows. At the sales I watched the last two weeks big females sell better, especially big heifers.

A handy rule of thumb is that a cow eats her body weight every month. To make this calculation easy I am going to use the price of hay because we all know what that is. The value of grass opens too many “yeah but” thoughts, even though I believe a cow should be eating what is attached to the ground and not harvested feed if we are to do this right.

At a local hay auction 1,600-pound round bales of grass hay brought $140 a bale. This is just under 9 cents per pound. If we are looking at a 1,600-pound cow and a 1,200-pound cow we can now easily assume the bigger cow will eat 400 pounds more feed per month. Four-hundred pounds at 9 cents is $35 rounded.

Here’s where the lever comes in. When we compare cows, we must boil them down to their core intrinsic value (IV) to make fair accurate comparisons. Our monthly cost to keep will greatly affect this value.

As I watched these sales fat cows had an actual value (AV) that was over-valued to their IV. Cows that were in their work clothes had an AV that was below their IV.

I then did the math and compared cows of similar condition. When I used the $90/month figure there were no possible trades across periods of gestation, age, or pairs to breds. But when I used $70 per month cost it opened up some opportunities to do some profitable trades between cows of the same body condition. The fulcrum on the lever was in a better spot.

Getting past cattle hype

I feel I must point out certain things on this column. I realize there is a ton of hype around the female markets and that when it rains it is going to take off like a rocket. Some folks are trying to cash in on this topic right now by selling the hype. With marketing fundamentals none of this hype will matter, the relationships in the market will tell us what we should be doing, but only if we have the market literacy to understand the signals.

Here is something else that these people may not know. As I drive across the countryside there are places that always have cows and the cows are not there right now. The fences are no longer there. There are places the cows are never going to come back to. While I agree we are going to see a spike in female prices when it rains because of two things. One is when enough people start saying these things it becomes a self-fulfilling prophecy. The other is plain ol’ greed. I am doubtful the bull market will live up to the hype.

The cost fulcrum has the same effect on relationships between stocker cattle and fats as well. This week the Value of Gain (VOG) was higher than the Cost of Gain (COG). The market signal is clear, this is a weight gain business right now. This week unweaned calves were up to 12 back and feeder bulls were up to 25 back.

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

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