When driving past many beef operations, the question often comes to mind: Just how profitable do you suppose that farm is? Granted, when it comes to many small-scale beef operations, profit is not the only motivating factor that prompts the beginning of a small-scale farm. There is nothing wrong with non-monetary motivation, but generating a few extra dollars along the way always makes it more interesting.
The part-time beef producer has an advantage that might not be apparent to some. That advantage, in many cases, is that they do not have to rely on cash flow from the beef operation to support the family. This gives them the freedom to do some things that can contribute to profitability with less concern for steady income.
In order to capitalize on this strategy, some paradigm shifts might be in order. We all like to think that we can recognize a bargain when we see one. In certain circumstances however human nature has a tendency to take over and we do the exact opposite. An example is the stock market. It is human nature to want to be in on “a good thing.” When the stock market is doing great, and prices are high, people want to buy stock. The market runs in cycles. When the market falls people perceive this as a bad thing. They worry about losing money so they sell when prices are low. They just guaranteed themselves a loss.
In some circles livestock are considered securities (like stocks and bonds). Interestingly, many people act in the livestock market just like they do in the securities market. They jump in when it looks good, when prices are high, and they bail out when prices fall for fear of loosing money. The evidence of this lies in the ups and downs of the national cowherd inventory.
Buy Low – Sell High
Warren Buffett, definitely one of the more wealthy people in the world, amassed his fortune in securities using one simple principle, buy low – sell high. That sounds so simple, yet for so many people it is an insurmountable task. It is a difficult task for two reasons: 1) People feel they have to identify when the market is at its very lowest and at its very highest to take full advantage of the difference; and 2) It takes courage to do the opposite of what most other people are doing.
Making it Easier
The buy low – sell high strategy is often thought of when buying feeder calves. Especially part time producers hardly ever consider it in the cow – calf operation. Applying this strategy to the cow – calf operation can prove beneficial.
There are two reasons why the buy low – sell high principle applies well to the cow – calf operation: 1) The cycle is fairly easy to identify, with relatively low volatility; and 2) There is a greater opportunity for growth of value.
The cow – calf cycle allows even a novice who watches the market to make some fairly sound decisions most of the time. The goal in this strategy is to increase income while keeping risk to a minimum.
Entering the market (buying cows) is best accomplished when cow prices are low. That’s a no-brainer. However, even if prices are high the market can be entered successfully when just a few head are purchased as seedstock with which to build up a herd.
Through the low part of the price cycle retain as many heifers as possible to keep building the cowherd. If not all heifers are kept, attempt to keep those that will offer the greatest improvement to the genetic base. Obviously this can put strain on cash flow. Minimizing costs through sound management can definitely help.
Breed to bulls that add value to the cowherd through the heifers retained. While animals that make grade easily and economically are very important, keep in mind that the number one factor in the profitability of a cowherd is the ability of the cow to wean a healthy, growthy calf, year after year.
The remaining source of potential profit lies in the market cycle. Assuming the cattle enterprise was entered at the time in the cycle when prices were low, the producer stands to gain whatever price increases were realized during the cyclical price upswing. The typical cattle cycle runs 10 to 12 years.
Droughts, wars, periods of recession or inflation, and/or government regulation are all factors that can influence the length of this cycle. Take advantage of the cyclical price upswing – sell off the herd when it is riding the high tide of value
After liquidating the herd, take advantage of some opportunities. It is now the opportune time to really "do a job" on those fences, renovate the pastures and hay fields, upgrade the handling facilities, improve the footing and drainage in the dry lots, repair the barns, take a, tax deductible, educational tour for management intensive grazing to Ireland or New Zealand, plus, just take a little more time to enjoy the family.
When buying cattle to ride out the next cycle, the producer should be in a stronger position than he was before.
Taking the Ups and Downs Out of a Stocker Program
Feeder calf investment tends to be short term relative to cow – calf investment. This market has more ups and downs than the brood cow market. While this might appear to offer more opportunities to make money on market fluctuations, there are just as many opportunities to lose on those fluctuations. Predicting when the opportune time strikes has been the cause of speculation in the cattle industry for years. It is not the best place for the novice or the faint of heart.
Sell – Buy Economics
Sell – buy economics requires another paradigm shift. It is in our nature to associate the selling price of an item with what that item cost when it was bought. In the sell- buy paradigm the cost of the next group of calves is applied as a cost toward the cattle just sold. This is known as replacement inventory accounting.
The money spent on the initial group of calves purchased, using sell – buy economics, is considered a long-term capitalized start up cost. When that group of cattle is sold, the cost of the next set of calves is applied toward the production cost of the cattle just sold. When cattle are sold and a new group of cattle are bought within a very close time frame they are considered to be sold and bought on the same market. That market, in most cases, will either be high or low (or comparable) for both sets of cattle. This goes a long way toward reducing the effects of market risk. Your profit now more accurately reflects the value of your production efforts.
One scenario for sell – buy economics would involve purchasing weaned calves in the fall. At this time, many cow – calf producers are selling their spring born calves. There is a good supply on the market. The winter feeding period is starting so demand is not what it would be at the start of the grazing period.
Over – wintering the calves on top quality hay, the target would be about a pound to a pound and a half of gain per day. When these yearlings are turned out in the spring onto high quality pastures many producers have experienced compensatory gain.
In the fall these cattle can then be sold into feedlots and a new group of weaned calves are purchased. These two transactions were conducted in the same market. The cost of the weanlings just purchased is applied against the cattle just sold.
As for Farm Appearance
Trying to predict profitability from farmstead appearance is, at best, entertaining. Those beautiful farmsteads with manicured lawns, paved drives, and white fences often indicate farming with money rather than for money. The well kept but Spartan appearing farmstead is often an indication of a superior manager farming for money. However, another lesson can be learned from the securities business – appearances are often deceiving.
Bill Henning is Small Farms Specialist with Cornell Cooperative Extension Service. He can be reached at 315-536-5123. For more information about opportunities for small farms, visit the Cornell Small Farms Program web site at: www.smallfarms.cornell.edu.