This morning when I woke up I recalled a conversation I had with a retired cattleman. He mentioned that it was another odd year. My response was that we won’t know what normal means for quite some time to come. This year has not made a liar of me yet. 

Adapting in the markets

The old cattlemen I visit with once in a while all tell me that I am going to see things this year I have never seen due to the persisting drought. Again, they are correct, because we have already seen things we’ve never seen before. When Mother Nature does something like this we have to adapt. Yet, it is shocking to me how many people are not changing a thing.

This is one of those times when the investor’s quote of “now we can tell who was swimming naked” rings true. Locally, with our soils and annual rainfall, poor management can be erased. Right now, it is easy to spot the difference between tilled farm ground and no-till. It is easy to spot the difference between rotational grazing and continuous grazing. There are people out of grass already. Our local sale barns did not switch to a summer schedule this year because of the culling that is taking place. 

This is when we get to see the different strategies play out. Some people are stripping and shipping their calves to stretch pasture. Others are deciding to disperse either their fall or spring calving herd. Some are just selling a few cows and hoping things improve.

Related:USDA announces major conservation investment

Some local registered cattle breeders are already talking about cancelling their upcoming bull sales. They are thinking of weaning and steering out most of the bull calves. With the current market conditions, they can capture their margin and this will help them stretch their winter feed supply. Which, by the way, we are not counting bales per acre this year, we are counting acres per bale. 

Because of this column and my marketing schools, I find myself in a position I never imagined I would be in, and that is that I get to talk to cattle producers from all over. This experience, like any other, has lead me to pick up on some things. What I am seeing/hearing from people is that they are reacting and not responding. When we react, outside forces, such as conditions, circumstances, and even other people, are in control of us. When we respond, we remain in control. This is mostly due to not having a detailed drought plan.

Detailed drought plan

I am going to share how I see things. The people that are selling some animals now, hoping things will improve. If things don’t improve soon, they will sell some more, stretching out the crisis and making a bad situation worse for themselves. They are depleting their pasture, which is the base of their business or hobby. Plus, the way they sell off stock means they are at the mercy of the market. 

Related:SDSU Extension encourages attending SD Cattlemen’s feedlot tours

Normally I write on here that the market will come around and help us. It also has a way of sensing desperate sellers, and it will smack them hard. Two examples are that breeding stock won’t sell good right now, and if you strip and ship calves, no one wants to wean them in the dry hot conditions we are experiencing.

There are some people that look at their pasture situation and take inventory. These people implement the strategy of grass production being down a certain percentage, so they must cull a certain percentage of the cows to match forage production. The grazing enthusiasts know there is an extra step, but this is where most people will stop. We must first subtract out how much residual we will leave, then determine the percentage of decline in production. I have mentioned this before on this blog. Some locals give my family a hard time about the residual I leave behind. It takes grass to grow grass so we must make that investment in biological capital.

Destocking and restocking

Ranch consultants talk at length about how to destock, and most of what they say makes sense. But that is also where they stop talking. We never hear them discuss the issue of taxes from the income that was generated from the liquidation. I would suggest visiting with a good accountant and figure this out. Some people have gotten strapped with a large tax bill that took a big portion of the money out of their inventory and made it difficult to buy cattle to restock again.

Restocking is the other thing we never hear ranch consultants discuss. I feel there is more to it than just buying some cattle and reducing overheads and focusing on increasing gross margin.

The best mentor I ever had said that making money is a game. Learn how to play the game, learn the seven universal laws and you can win at the game. To me, what has been mentioned above is the rookie and intermediate level of play. What about being elite?

Selling and buying cattle

The definition of Sell/Buy marketing is that it is a continuum of inventory liquidation and replenishment, generating cash flow and profit. 

If we liquidate cattle and do not replace, we effectively went out of business. We ignored the word continuum. If we are elite managers and really wanting to do this for a profit, we shouldn’t ignore the third pillar of making a profit and that is turnover. Sell the animals we have and buy back other animals. The thing to keep in mind is that we have to be trading the right kinds of animals.

If we have to destock to match our available forage, to me, it would make sense to sell off the animals that eat the most. Sell/buy trades are done on head for head basis. Why not sell the cow and buy a flyweight heifer? If forage production is down 75% and we sell a 1,250 pound cow and buy back a 350 pound heifer, we just destocked 75% as a rule of thumb. The rule of thumb being the animals will consume their body weight every 30 days. We just destocked 75% and still have the same number of animals. 

Fly-weight cattle

I am suggesting the fly weight heifer for a reason. Due to the ongoing culling locally, breeding stock won’t bring much here. Breeding stock continues to sell well below their Intrinsic Value. I am not interested in just destocking 75 percent, I want it to be a good trade as well. This is part of being elite.  Like I mentioned recently on here, to do a good job marketing we must capture more for the value than we sold into the market. So that makes this the trade to do.

Destocking to match available forage allows us to stretch our feed supply. This is resource management. We still have the same number of head on the place. We generated some cash flow, and pulled some cash into our inventory. And fly weights have a really high Value of Gain (VOG) right now. We got rid of an animal who’s value was stagnant and replaced it with one that will capture some value for us.

If we are in the livestock business, we are also in the money business and feed business. This trade I suggested pulled cash into our inventory. The whole point of an animal eating is to increase in value and add value to the feed itself. The cow isn’t going to do that here right now but the fly-weight will.

Most people talk about selling off the stockers during a drought to make room for keeping the cows. I got rid of my cows during the drought of 2012 and I got rid of all the cows I had earlier this year and half my current inventory is fly-weights.

Value of animals

Here is my disclaimer. To do a trade like I mentioned, we must know how to compare the values of the animal we are selling and the animal we are buying. If we do not know how to do this, we can end up doing a bad trade. We must also have the skill to take care of the fly-weigh that we are buying. One major reason they are so under-valued is that they are hard to start in these conditions. We must be able to check these two requirements before we attempt to do this.