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Why do some cattle producers fail when prices are high? Thinking habits can guide us in the wrong direction.
December 8, 2023
Tuesday and Wednesday of this week I taught a marketing school. As I was driving to the conference center I got caught at a red light at 6th and Industrial Row. I looked over at the people in the left turn lane that were headed to their factory jobs, and they had this look on their face that was a mixture of disgust and defeat. It got me a bit more fired up to do a school than usual.
In the beginning, the reason I got as interested in marketing as I did was simply because I had to make money in order to own cattle, and raising cattle was the vision. Simply put, if I could make some money with cattle and grow the operation, I could quit working my off-farm job. Sell/buy marketing has changed my life, more than once. Something I hear frequently from people that have attended one of my classes is that it changed their life also.
The goal for most of us has been to be able to quit the W2 job and farm full time. I cannot help but notice that young cattle producers around my local area are liquidating the cattle and going back to jobs in town. I have called some bankers I know around the region, and they did not verify that it is a trend, so at least we have that going in our favor for now.
I have spoken with some of these young people that quit, and they all say the reason they packed it in was that they were not making any money. The root cause was different between them all, but it all led to the same place, more money going out than coming in.
Some people still believe that having high prices means we will be profitable. I saw the video of the finance person who said cattle people will be in huge trouble when the market crashes. Many are in big trouble now and prices are a lot higher than a year ago when they weren’t in trouble.
The issue is our costs are rising. I spent more time talking about that in this week’s school than any other I have done in the past because of the current situation we find ourselves in. High cattle prices seem to put a target on our backs. The people who we rely on for our inputs become aware of high cattle prices and they raise their prices. Isn’t it funny how they have a way of trying to fix our margins. And it’s not always just greed on their end, their input costs are rising too.
If rising costs weren’t bad enough, we can add in a compounding effect of interest rates going up as well. I tell every class this story, I was sitting next to an old cattle feeder one afternoon years ago and he told me if the cattle business were a battlefield I would have stripes from my wrist to my shoulder. I had been in the cattle business long enough at that point to have gone through some things. I made a smart remark back that he wasn’t pinning any stars or bars on me, like good grief what does a guy have to do? He replied that I have not seen high interest rates yet. That warning has stuck with me.
Everybody we do business with is going to get their share. The feed guy gets his, the pharmaceutical company gets theirs, and so on. We have to market these cattle in a way that we are certain we are getting our share too. After all, all these other people are relying on us to earn their living and we are the ones doing the work and taking the risk. The thing is it is up to us to capture our reward, no one is going to just hand it to us.
I begin each school talking about paradigms and where we got them, why they are hard to change and how to change them. These thinking habits are handed to us when we are young, they are not ours. The problem is since they control our behavior it is these thinking patterns that get us our results, not our superior knowledge. This is why we have college educated people corkscrewing multigenerational operations into the ground.
We have been conditioned to think that all we need to do is cut costs and sell for a higher price and we will become wealthy. We all know how this is working out, yet we still cling to the theory. This is a systemic thinking problem if there ever was one. Over time trying to implement this theory into practice beats us down and deflates us until we look just as bad or worse than the people I saw at that intersection going to the factory jobs, because all of the sudden that starts to look good to us.
I have recently written about the price of fats being well below projected break evens. People are beginning to panic about that. They fear the trickle down is coming. If feed yards start losing big money all the sudden they won’t be as willing to pay big prices for replacement feeders. And everyone’s expenses have gone up and we are in this high cost, low sale price situation, which we are conditioned to believe is not good.
I looked at market reports every day this week, just like I always do, and I went to a sale yesterday. There were feeder cattle that were under-valued to fats. Even though the market is pulling back right now there are still trades to be made that will generate positive cash flow. Yet no one is excited about that. That is because they are conditioned to think a certain way and they can not see the opportunity to prosper that is right in front of them. That is the power of the paradigm and how it gets us our results.
This week when examining the Value of Gain (VOG) in the plains region we have the classic trough effect happening right now. VOG gets squished right in the middle of the weight spectrum, falling well below Cost of Gain (COG). In the south VOG is signaling that it is a weight gain business all the way through. It is possible to have a much lower sales price and still be paid for putting weight on. That leads to the next point, geographical spreads are well worth taking a look at right now.
This week unweaned calves could be up to 20 back and feeder bulls up to 55 back. People in real estate call that forced equity.
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