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The danger in strong cattle prices

Plan for a profit, but always keep a watchful eye on your cost of production

It may sound odd to suggest that there is a hidden danger in strong cattle prices. Perhaps there is a danger precisely because most producers don’t recognize that there is such a thing. I believe that there is a hidden danger. As responsible producers we need to recognize the danger and take steps to avoid it.

What is this hidden danger? It is that we will let our cost of production rise to match the higher prices. If we allow costs to rise, the potential profit and the benefits of higher prices will flow to someone else. It isn’t difficult to structure our businesses so that we have no more profit at the new higher price than we did at the old lower price. I think this is largely the history of the cattle business.

Let me suggest some safeguards that might help us as we move ahead. The first one is: the anticipated price for our products must not determine the cost of production. The past 10 years have been one of the most difficult times for the cow-calf producer in the last 50 or 60 years. If you are still in the business I congratulate you. You must have done something right. In fact you have likely done many things right. You have learned some important cost-cutting ideas that have allowed you to stay in business. This is not the time to abandon these ideas. If they worked in the difficult times you can be confident that they will work even better in the good times. This is not the time to slack off in our management. The exact opposite is true. This is the time to bear down. Continue to be a low-cost producer. Use the good times to generate a profit and to create a low-cost, sustainable business. We are all being presented with a wonderful opportunity. By using it wisely we may be able to build a solid business that will last for generations.

In HM we define profit as an increase in net worth. This increase is measured while we hold our long-term assets (land and cows) at a relatively low constant value. By measuring profit in this manner we can be sure that when our net worth increases we have more assets, less debt or cash. We are not just measuring the inflation of our cows and land. Profit is defined as a return on your investment (the value of your business) and a return to your management skills. Profit is calculated after your living expenses have been paid.

income chart for cattle pricesProfit must be planned for. It will not happen automatically. Let’s look at some real numbers and see what has happened to income for the cow-calf sector in the last year. For this example I will use 200 cows, a 90 per cent weaning rate and a calf weight of 500 pounds. We will retain 40 heifers and sell 40 cull cows with a weight of 1,300 pounds. I have used Canfax prices for calves in October for 2013 and cow prices for midsummer in 2013 and 2014. I have used current prices for the 2014 calves. This is just an example. It is realistic but not detailed. To get the real benefit from these ideas use your own numbers.

No matter how you measure things we have experienced a significant increase in income. For most of us the present increase in prices will be a once-in-a-lifetime opportunity. It deserves to be managed carefully. If we squander this opportunity we are not likely to have another chance.

One of the tools we use to help us be profitable in HM is to pay ourselves first. Basically this means that we set the profit we desire at the beginning of the year. We then use our creativity and planning ability to make it happen. Let’s look a little closer at our example ranch. Last year’s income was $153,380. Times have been challenging. Let’s say we tried our best last year but only generated a profit of $5,000. Now as we look ahead we realize that our income this year will increase by $103,670. If we are disciplined and hold our expenses to the same level as last year we will generate a profit of $108,670. Our reaction may be: “Wow, I’ve never made this kind of money. Is this really possible?” The answer is a resounding “Yes”; all it requires is discipline and planning. You can achieve this.

If you are serious about profit now is the time to plan for one. Since profit is an increase in net worth you will be able to hold your profit as an increase in assets, a decrease in liabilities or cash. The best way to hold your profit will vary from farm to farm. A close look at your goals will aid you in this decision.

We are all being presented with a golden opportunity. I urge you to seize it. Make profit a way of life. Plan for a profit every year. I wish you success. Happy trails.

Don Campbell ranches with his family at Meadow Lake, Sask., and teaches Holistic Management courses. He can be reached at 306-236-6088 or by email.

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Don Campbell ranches with his family at Meadow Lake, Sask., 
and teaches Holistic Management courses.

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