This market is the time to make money in cattle
Be prepared to turn inventory and generate cash when the future cattle market crashes.
September 29, 2023
When I concluded last week’s post I mentioned the market is being extra generous right now, and this week was no different. Most of us have smart phones which will allow us to pull up market reports in seconds, or we can watch an auction live. These phones also have a calculator built into them. There is no excuse for not being able to make money right now.
Don’t get cocky
Most people, including the “experts” think that because the market has gone up as high as it has that we are all making windfall profits. This scenario only sets up a false belief that things are great, and people are getting a tad cocky. This week it was easy to spot as some of these people were bidding away the Value of Gain (VOG) faster than the market inflated. This is because they are incompetent when it comes to marketing, meaning they never took the time to educate themselves on how to do it well, or some of them were taught incorrectly.
Future market crash?
Ever since the market began to rally people have been asking me what I am going to do to keep my wealth when the market crashes. The simple answer is the same thing I’ve done in every market crash in the last 20 years, keep turning and generating positive cash flow.
This answer doesn’t sit well with some people, especially those that have been taught to calculate a bogus ratio of how to return to that higher level of net worth. These people will make a comment about keeping the inventory valuation I worked so hard for. I didn’t work for it. None of us did. The market simply inflated and none of us lifted a finger to make that happen. Let’s make sure we got that right.
When people asked me that question earlier this summer that was the best answer I could give them at the time. With sell/buy marketing we only deal with today. For the people that asked me that question a couple months ago, tomorrow has now become today and while I still plan to turn inventory and generate cash flow during the crash when it comes, I am utilizing what the market is giving us right now to prepare for it.
Think of cost as the fulcrum on a lever. If we keep our costs down we have more leverage, or it creates more opportunities in the cattle market. If our cost is high our lever doesn’t get much of a bite and we don’t have as much leverage, meaning we don’t have as many opportunities because the price relationships are not there.
Unearned income
Here is what I am doing with my 12-year-old daughter’s enterprise. She bought calves last spring for $875, and has $185 in them. She sold these cattle for $1,655. As you can see there is a massive amount of inflationary value there. I’m calling this unearned income. What I have done with her deal is to raise the Cost of Gain (COG) high enough to erode this unearned income. By doing this I was really handcuffed on the buyback. If I hadn’t done this any animal that walked into a sale ring that was lighter than what she sold would work as a possible buyback.
By artificially handcuffing myself I was able to cash out this unearned income. By being aware and having market literacy we turned the unearned into earned, instead of bidding it away. This gave us a nice pile of cash that we took out of the market. This pile of cash is big enough for my little girl to buy her own school car. If we decide to go that route her little operation will not expand. Or I can resell her some other cattle I bought and her operation will expand 35% on just this one turn!
Now some will scoff at me and question why we would virgin buy more cattle now. That just means she will have more cattle losing value when the market tanks. Since we know how to market cattle and generate positive cash flow no matter the market direction, it means she will have more head cash flowing.
Inventory valuation
Inventory valuation doesn’t mean much until you decide to get out of the business. If you are like me and a bulk of the net worth is tied directly to cattle just get used to the idea that inventory valuation and net worth will go up and down as the market goes up and down. While we can’t control what the market does to our valuation, we can control what we have in inventory, and how we utilize what’s in our inventory.
With the state the market is in right now the VOG is very forgiving. Ann Barnhardt used to say “All a rising market does is prove how many incompetent fools can make money based on dumb luck.” The time to prepare for things to go downhill is while things are good. I still have some spots available for my marketing school in December.
For those of you who enjoy podcasts I was interviewed on Ranching Reboot a couple weeks ago. That episode has a little bit of everything in it. We discussed marketing, inflation, interest rates, and grazing.
Weight gain business
I already covered that the VOG is strong, signaling this is a weight gain business right now. The cautionary note is that we are seeing some widening spreads on cattle making it quite easy to bid away a lot of the VOG and negatively cash flow. Run the numbers to be sure, no guessing.
This week feeder bulls were up to 35 back. Unweaned calves were up to 10 back to 10 more than weaned cattle. Location will be a factor in the unweaned calves. Fluctuations in the weather and the condition of the calves factor in. Some people have tried to wean at home, and it went off the rails. This will affect the selling price. Just because they are weaned doesn’t mean value was added if they don’t show well.
Think like a buyer
I have to give credit to my wife for the other side of this equation. She used the term “dirt pasture” this week. The lingering dry conditions limited how much pasture we had here. Some people stocked at the same rate and the cattle are still on that pasture and when you drive by you see more dirt than grass. This is affecting both the cows and the calves. The calves look rough. To a buyer, a bawling calf in that condition signals health issues ahead. Try to look at things the way a buyer would.
Female market varies
The female market hasn’t changed much this week. Fall calving females continue to bring more than pairs unless the pairs have big calves at side. The value of spring calving females is affected by location. Where they have received rainfall, these cows are selling well. In the dry areas they are just a bit over the scale. First calf heifers still do not have many friends at this point.
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