The key point in this five-article series has been that once a rancher believes in cattle cycles, he can make the cycle work for him. The net result is his beef cow profits over the complete cycle go up. For some reason, profits tend to make ranching more fun!
In examining the profit potential for the beef cow herd over the rest of this decade, two general areas of increased beef cow profit appear. One is increasing the economic efficiency of the herd. The other is in adopting a counter-cyclical marketing strategy.
Let's look at three strategies for taking advantage of counter-cyclical marketing.
Strategy 1 — Build a financial reserve. The known is that cattle cycles will cycle. While we likely will face tough times by the end of this decade (Figure 1), building a financial reserve in the cycle's good times — such as today — can see you through the coming tough times.
One way to build a financial reserve is to pay down debt. Going through the next tough times with little or no debt can greatly ease the financial burden of lower calf prices.
Strategy 2 — Sell bred heifers at the peak of the price cycle. During my Integrated Resource Management (IRM) work of the 1990s, a key strategy for determining a high-profit herd was the management of its females.
Ranchers tend to devote most of their management energy on the herd's males. But there are only two things you can do with males — keep them or sell them. And, quite often, the profit difference in alternative marketings for the males is quite small.
Females, however, can be marketed in several different programs. One is to sell them as preg-checked heifers. There are current reports of $1,500 prices for preg-checked heifers in today's market.
Developing and selling preg-checked heifers in the cycle's high-priced years is one way to make the cattle cycle work for you. Remember, bred-female prices tend to parallel calf prices. Thus, Figure 1 suggests selling bred heifers in 2003 to 2006 could well yield considerable profit.
Year 2007 is more questionable. And, no one likely will want bred heifers in 2008-2012. That is when you should keep them anyway (See February “Market Advisor,” page 8).
Strategy 3 — Cull deep on the downward side, hold back all heifers, build a young cow herd, and sell all calves born during high-price years.
Some ranchers take full advantage of the cattle cycle by timing their herd culling and herd rebuilding, and using the age of their cow herd to their economic advantage. The key here is “timing.”
During the downward side of the price cycle, these operators cull deep, using cull cow sales to meet cash flow requirements. Simultaneously they hold back all heifer calves and develop them into bred females — even more than are needed to rebuild the cow herd back to full stocking rate. The result is a young, overstocked herd going into the peak price years that can be sold down in the high-price years.
In fact, these ranchers have a large number of 4- to 6-year-old, peak-performing females going into the peak-price times. During the two or three years of high prices, they sell all calves born and hold no heifers back.
Remember, your 4- to 6-year-old cows tend to be your best cows, and at a time when calf prices are at the cycle high. Record-performing, optimum-aged cows that sell record-priced calves is a sure recipe for high profits.
Strategy 4 — Sell commercial breeding females at the peak of the price cycle.
I know a rancher who sold his entire commercial cow herd at the peak of the last two price cycles. He waited a couple of years for price breaks, then bought back heifers and rebuilt his next cow herd. Today's capital gains tax rules makes this strategy feasible and profitable.
Yes, you must figure “net after tax” but the key is “net” after tax. In the last cycle, this rancher netted $900 after tax/cow on 500 cows in 1993. He banked that money as his retirement program.
Beef prices broke in 2004, and by the end of 2006, he had re-populated his herd back up to 500 head with relatively low-priced heifers.
Another rancher sold his cows, paid off his banker debt, and leased the same cows back from the investor who bought them. Today, many investors — even non-agricultural investors — are interested in owning beef cows. With today's high prices, these investors are interested in the offsetting tax benefits of owning high-priced cows. They like the depreciation and capital gains from the cull-cow income.
These investors lease the cows back to a rancher for a percentage of the calf crop. It's not uncommon for the tax advantages and the investor's share of calf income to easily generate a 10+% return on their investment.
The rancher selling the cows typically gets first right to buy back the herd in five years when cow prices easily could be half what they were at sale time. The investor wins and the rancher wins.
These four strategies and others are available in my new CD. Send $25 to Harlan Hughes, 30 Ramble A Road, Laramie, WY 82070.
Looking out to 2012
In order to stimulate my clients' thinking, I prepare a chart similar to Figure 2 for each client's herd, using that client's cost structure and my long-run planning prices. Figure 2 is based on 200 Northern Plains Farm Business Management herds' average annual cost structure.
The bar is the historical $110 average annual profit/cow for the 1999-2003 period. The dashed line represents actual 2004 profits, and projected profits for 2005-2012. It's assumed costs will inflate $14/cow/year out to the end of this decade.
I tell clients this chart doesn't have to happen on their ranch. Changes in economic efficiency begun in today's good years can ensure herd profits don't zero by the end of this decade.
Harlan Hughes is a North Dakota State University professor emeritus. Reach him at 701/238-9607 or firstname.lastname@example.org.
Click below to dowload figures 1 and 2.