by Troy Smith, field editor

The cattle industry moves in cycles. It’s been that way at least as long as analysts have been charting cattle numbers and prices. They have collected plenty of data showing how low total cattle inventory translates to an increase in cattle prices, and how lower prices follow inventory expansion. It’s a matter of supply and demand.

Cyclical swings in price result in greater risk and increased financial uncertainty for cattle folk. Uncertainty about the future creates a cyclical marketing and production dilemma, because so many producers base their own herd expansion and contraction decisions on short-term price information. Add in the lag in actual production response due to bovine biology, and financial burdens may be greatest when market conditions are least favorable.

Control overhead

However, a good many cattle producers have survived multiple cattle cycles, navigating their way through just as many price swings. Lex Madden has watched it happen. In addition to the eastern Wyoming ranching and real-estate businesses operated with his brother, Madden is a 35-year veteran of the cattle auction business. The co-owner of Torrington Livestock Markets and Cattle Country Video believes the most successful producers are those who are adaptable and adept at handling financial matters.

“Right now, cow numbers are the lowest they’ve been in 75 years and cattle prices are high — the highest I’ve seen — but production costs are extremely high, too,” says Madden. “I’d say the most successful ranchers are good at managing costs, especially overhead costs.”

Overhead costs are expenditures related to land and the improvements attached to it, plus people and equipment used to accomplish their work. Some people consider overhead expense to be a cost of doing business that can’t be changed.

Madden, however, knows ranchers who have reduced overhead costs. One way is managing an operation to reduce dependence on expensive equipment and diesel fuel.

Buying land when interest rates were low, he adds, has also helped savvy managers hold down overhead.

“Good managers know how to control costs and still be good stewards.”
— Lex Madden

“Good managers know how to control costs and still be good stewards,” Madden adds. “I think they also look for opportunities to improve profitability by adding value to their product. More and more program cattle are coming through our market, whether it’s a process-verified program such as [age and source], G.A.P. (Global Animal Partnership)-certified (no antibiotics, growth hormones or animal byproducts in feed), certified organic or some other niche. A lot more ranchers recognize that added value consistently pays more.”

Manage risk

According to Madden, another example of how cattle producers have adapted to change is the increased use of risk management tools. Among the veterans of multiple cattle cycles who are acquaintances and customers, many were early adopters of risk management, ranging from forward contracting to hedging with futures or options contracts. Madden says Livestock Risk Protection (LRP) insurance, administered by USDA, has gained traction among producers seeking protection against unexpected price declines.

Ross Nielsen calls risk protection particularly important for the calves he backgrounds and grazes. Near Draper, S.D., Nielsen and his wife grow purchased calves as well as the calves produced by their commercial Angus cow herd. Diversity lends flexibility needed to deal with challenges, including drought and cyclical cattle prices.

“If it gets droughty and grass is in short supply, we can cut back on the numbers of yearlings we graze without culling the cow herd too heavily,” says Nielsen, explaining how emphasis can also shift the other way when prices are low. Nielsen says this allows him to exercise the old axiom of “buy low and sell high.”

“We run enterprise analysis on everything, so we know what it cost to get those females into production — about $1,800 a head. Now we’re getting that for their calves, and those cows are worth $3,000.”
— Ross Nielsen

“After prices fell from the last cycle peak in (2014-2015), we expanded our breeding herd, buying bred 2-year-olds and heifers to breed,” says Nielsen. “We run enterprise analysis on everything, so we know what it cost to get those females into production — about $1,800 a head. Now we’re getting that for their calves, and those cows are worth $3,000.”

The safety in diversity

With prices as high as they are now, selling some cows looks like a pretty favorable option. Then, over the next few years, Nielsen could buy more calves to grow and graze, or he could custom-graze cattle for someone else.

“We’ve got a daughter involved in the operation and a son that’s interested in joining. But, I don’t think kids should try to buy into the cow business at the current high prices,” warns Nielsen, noting that young, high-dollar females will be producing calves during the coming period of declining prices. That makes it tough for those females to pay for themselves.

“I think we’re going to run more yearlings for a while, and wait for the next better opportunity to expand cow numbers. I’m thinking maybe in ’28 or ’29,” he adds.

For some of the same reasons cited by Nielsen, the Wickens family operation near Winifred, Mont., features multiple enterprises. Numbers of yearlings grazed can be increased or decreased as forage availability allows, without putting so much pressure on the cow herd. Eric Wickens says diversity of enterprises and marketing also helps soften the effects of price fluctuations.

“Any of our cattle are for sale at any time ... for a price.”
— Eric Wickens

“Any of our cattle are for sale at any time ... for a price,” Wickens says. That noted, numbers in the breeding herd seldom change much. It’s a reputation commercial Angus herd, noted for selling bred heifers through the Arntzen Angus female sale each fall. Other homegrown cattle and purchased calves are marketed at various times each year. It makes for multiple paydays and improved cash flow.

The undervalued

“We also use sell-buy marketing for feeder cattle, which helps us be more profitable in a down market,” says Wickens, referring to the marketing concept taught by the late Bud Williams, his daughter Tina, and others, including Wickens’ marketing mentor Ann Barnhardt.

The objective is to buy more cattle soon after selling cattle, Wickens explains, but you buy back undervalued animals to which you can add value and sell relatively soon. Then you do it again and again, generating multiple sales each year.

“For us, there is a seasonality to it,” Wickens says, sharing an example. “We typically sell yearlings off grass in August and September, and wait for a buy opportunity in October.”

Wickens says mid- to late-October typically affords the best opportunity to buy calves, because that’s when a majority of spring-born calves come to town. When sale barns see big fall runs of weanling calves, prices typically decline to seasonal lows.

“We’ll buy 500- to 550-weight steers and put them in our backgrounding lot. We can put 2 pounds (lb.) per day gain on them for 60 days and sell them weighing around 675 pounds in December,” Wickens explains. “Right away, we’ll buy back 450-pound calves to grow and sell as 650-pound grass cattle on the spring market. Then we’ll buy heifer calves that we spay and graze in the summer.”

Wickens says profit is made “on the buy” by purchasing undervalued animals, but the cattle are not lacking in quality. He believes the strategy works well because the local area has an abundance of high-quality cattle. It works best when prices are at cyclical lows.

“In a really high market, those cattle are harder to find. In a low market, it’s usually not hard to find severely undervalued animals. There can be heavy discounts for small bunches, non-program cattle or other little things that set them apart,” says Wickens, noting that a buyer must be sure that he or she can add value.

“You have to know what that will cost. You have to track your costs continually. If you can keep costs down, it opens up more opportunity,” Wickens adds.

Focusing on quality

“Cost-conscious” and “quality-focused” are apt descriptors for Arkansas cattleman Jim Moore. Located in the northwest part of the state, near Charleston, Moore Cattle Co. is a commercial Angus cow-calf operation that retains ownership of cattle through the finishing phase of production.

Moore says he’s been placing cattle on feed in Kansas since 1993. He learned early on that cattle had to perform in the feedlot to make money. He also learned that more money could be made when cattle of high carcass merit were marketed through a value-based grid-pricing system.

“We’ve tried to invest in genetics and technology that will help us produce consistently high-value carcasses. To take advantage of that investment, we want to own the cattle all the way to harvest.”
— Jim Moore

“We’ve tried to invest in genetics and technology that will help us produce consistently high-value carcasses. To take advantage of that investment, we want to own the cattle all the way to harvest,” Moore says. “With artificial insemination we breed our best cows to top sires with a goal of producing the best possible replacement females.

“We collect data on our fed cattle, and we’ve DNA-tested since 2010,” he continues. “Genomic testing helps us evaluate early the genetic potential for carcass traits. We use the information to make genetic selection and cow culling decisions, and we think it has paid us well.”

Moore says a lion’s share of the cattle qualify for the Certified Angus Beef^® (CAB^®) brand, with 55%-65% reaching USDA Prime. It happens consistently, and that kind of quality consistently delivers premiums over market price. Capturing premiums has helped Moore weather cyclical cattle prices, but there are other contributing factors.

Reproductive efficiency

“I’m a firm believer that the Number 1 driver of profitability is reproductive efficiency,” declares Moore, adding that it requires a cow that will breed the first time, every time and on time. “We want her to hold her flesh, breed back and not eat us out of house and home.”

Moore thinks cow size, on average, increased too much when feed and fuel were still relatively cheap. They aren’t cheap anymore, and cows weighing 1,400 lb. or more require too many inputs. Moore’s target is a cow that weighs 1,200 to 1,250 lb. at maturity and produces a steer calf weighing 1,500 lb. at harvest.

“Cow type affects costs, and controlling costs is very important during any point in the cattle cycle,” states Moore.

Andrew Griffith believes a dedication to controlling production costs is an attribute shared by producers who have survived previous cattle cycles. The University of Tennessee ag economist thinks that’s especially so for producers who have managed to thrive, in spite of price ebb and flow. It’s easy to be more relaxed about it when prices are high, but paying close attention to costs during the good years can make it easier to get through the lean years.

Griffith also notes other considerations for cow-calf producers contemplating expansion of their herds. Periods of high prices spur producers to increase herd size and capitalize on those high prices. They need to remember that heifers retained or purchased during periods of higher prices are more expensive than heifers added during periods of lower prices. They must generate greater returns over their productive lifetimes to recoup that cost.

“When prices are high, many producers also keep older cows longer,” adds Griffith. “But think about whether it is worth trying to get another calf from an old cow that’s probably worth a lot of money because of high salvage value. Generally speaking, most producers need to maintain normal culling practices throughout the cattle cycle.”

In summary

Griffith says a contrarian approach can work for some producers who choose to cash in by culling deeply and significantly reducing herd size when prices peak, and then expanding when prices decline again. That probably won’t work for everyone.

“Most producers still have a need for cash flow, which may be challenged by a contrarian approach,” offers Griffith. “You have to think about alternative ways to market your forage like grazing stockers, custom-grazing or selling more hay.”

Griffith’s last comment returns to the subject of managing expenditures, particularly those producers make in order to reduce their tax burden. When the accountant suggests that a deductible expense could reduce their income tax obligation, producers often buy a new truck, tractor or other piece of equipment. Griffith believes there is even more unnecessary spending when cattle prices are high.