“No rock has ever gone so high that it hasn’t come down.”
“No rock has ever gone so high that it hasn't come down.”
This statement was told to me by Gordon Hazard many years ago. We were in a stocker-cattle meeting in Columbus, Mississippi put on by Alan Nations of the Stockman Grass Farmer. However, we were not talking about throwing rocks. We were talking about cattle markets.
It leads directly to the question of what we should do to prepare us for when the rock comes down, an event likely to make or break us. I am 63 years old as I write this, and I think it’s time to cash my chips in. That’s because I’m out of time, and time is one of the most important things to understand in the cattle business.
So what do you do if you’re not old enough to cash chips in? At this point we need to be thankful that Bud Williams taught us what we need to do. What you are about to read is Wallace Olson’s interpretation of what Bud Williams taught me.
As a market breaks, our inventory value is going to go down. There are only two times in the business that you need to worry about inventory value. One is when you start. The other is when you quit. Everything in the middle is just the relationship of what you sell and what you buy.
The most important thing that I learned from Bud is you deal in today. What you paid for what you own doesn’t matter. It is only what their value is today and what you can either buy, or, if what you own is undervalued, then it’s also about what you keep. So starting out you need to get in with the least amount of capital in an animal. And over the recent few years that has been a heifer calf which is a small as you can handle. The reason for the smallest capital investment is it takes the least amount of turns to get your investment paid for.
Here’s an example from the Joplin Regional Stockyards on May 4, 2015. You could buy a 200-pound heifer calf for $640. On the same day a 500-heifer pound calf was $1,235. So the market was willing to give you $1.98 pound per pound of gain. At the same time a 400-pound heifer calf was $1,060 and putting on the same 300 pounds that we put on the 200-pound heifer to 500 pounds that paid $1.36 value gain. So you see with this example, by using an average cost of one dollar per pound to put on that gain they would both make some money. But the 200-pound heifer, if you could handle it, made 62 cents per pound more. Also, when you look at the capital invested in the feed needed to run the smaller heifer, she is a much better deal. The big question here is whether you can handle small calves.
Hopefully someday when you quit, you will have the most overvalued animal in your inventory. Today that is a $3,500 cow with calf. Or it may be a 950-pound steer. But when you exit you should be planning to sell out the most overvalued animal there is. One added advantage about the cow is some of the income she produces can be capital gains. At this high point in cattle pricing, many people might be saying we need to just sell out, cash in our chips. The problem with this idea is you do not know what the markets going to do. You can only react to what is happening today.
So as stated above, if you’re not ready to quit, your inventory value is irrelevant. What you need to be focused on is cash flow. The number one biggest problem is when the market breaks, people lock up and won’t sell. I do not know how many times I’ve heard people when they get ready to ship their grass cattle say, “By god I won’t take that price. I’m going to feed them.” So now they’re fixing to do two stupid things. They are going to keep some animals that are going down in value and make them bigger so then they have even more pounds going down in value. They are going to tie up an immense amount of capital on something that will keep going down as the markets drop. This is why letting go of what we paid for something is so important.
Instead we need to be looking at the trade that can be made. It’s the margin of what we can sell to what we can buy back. This is very important.
Here’s an example: In the spring of 2012 I had some 500-pound steers and I was going to sell my first $1,000 steers. So when trading them I couldn’t get $2/pound for the 500-pound steers. The price was a $1.96 per pound. But when we weighed them up they weighed 515 pounds. I ended up with $1,011. Now we move this story forward to July at Joplin regional stockyards and the man who bought the steers and sold them on video auction. They weighed 750 pounds and brought a $1.35/pound. That is a total value of $1,012. So if you’re doing buy-sell marketing calculations, the gentleman who bought those steers made $1. So as I figured it, he had a $195 cost carry in them at a fairly typical daily grazing cost. So looking at it as a buy-sell transaction, the man lost $194.
The alternative is to do this as a sell-buy transaction: Suppose we are going to buy the same 515-pound steer for $1011. To use this is just a capital investment. So we sell 750-pound steers for $1012. We need to see what we can buyback. At that time you could find525-pound cutting bulls for $1.25 per cwt. or about $656.
Sell 750-pound steer $1012 Buy 525-pound bull $656 Gross margin $356 Minus costs $195 Profit $161
How can this be? On the same steer, looking at the business one way it lost $194. Changing our viewpoint to a different structure gives us a $161 profit.
This points out the importance of Sell-Buy marketing. It gives us the ability to stay in the market when the market goes down because you’re now able to buyback cheaper and still make a profit. This is the importance of cash flow. This positive cash flow over time will make up the loss of inventory value.
The importance of marketing was something Bud was always pointing out to me. You can increase your production, but until you sell at a profit it’s just something to do. Further, here’s an example how higher production can work against you: If you increase your carrying capacity by 50% and if the market breaks, now you have 150% the number of animals going down in value. Manage your inventory well and market well and you overcome this.
Managing your inventory not only works in a down market, but it also works in a drought. Bud always said you need to have enough money and grass. If you have managed your grass to have forage even in a drought, then you can balance your inventory to match that grass by wise destocking instead of panic selling. You may be long on money for a time, but you’ll not be getting poorer from too much cattle inventory and poor marketing of cattle at the height of the drought. Neither will you be trying to feed your way out of that drought. These are things I was able to do in the drought years of 2011 and 2012.
If you are always on top of your inventory you will have the money and the grass you need when the animals can be bought at a profit. Then you can allocate your time to what is most profitable.