It’s all about the cattle square

Source: Farm Progress. The original article is posted here.

It’s all about the cattle square

I wrapped up my first marketing school of the year this week. I learn something from every school I put on. Some people ask challenging questions. Sometimes I must ask a bunch of questions to understand the question. This gives me a different perspective.

Leapfrog trades

In the past I have shown people that leapfrog trades are possible, and what they look like. Everyone, including myself when I saw it for the first time, was satisfied with the realization that there is more weight on the trailer going home than what we came to town with, and we have cash in our pocket. To be clearer the market paid us to take weight home. During the school this week, one of the participants challenged me to carry out the cattle square and prove the value in the leapfrog trade. During my nearly two decades of practicing sell/buy marketing, I have never done this. I was not surprised when the cattle square balanced perfectly. The math way is the pathway.

I begin all my schools discussing paradigms. All this time I have never questioned the cattle square or leapfrog trades. It has never crossed my mind to use a square to prove a leapfrog. A square tells us if the ratio of dollars to pounds is in our favor or not, and leapfrog tells us we got paid to take weight home. My existing paradigm has been that a good trade is a good trade, so just pocket the money and move on.

High cost of gain vs. return of the gain

There are people that teach faux sell/buy, and they say the square doesn’t work. They wasted 45 minutes one morning during their annual meeting trying to prove it wouldn’t work on quick trades, where the cattle didn’t gain much weight because the trade is front loaded with costs. In a few seconds, I did a cattle square in my head and proved that it does work on quick trades front loaded with costs. We may have a high Cost of Gain (COG) in this situation, but yet again, as long as the Return on the Gain (ROG), which is the ratio of dollars to pounds on a trade, is higher than the COG, we just executed a good trade. This week, we proved that the cattle square works on leapfrogs, as well.

When determining the value of breeding stock, we calculate their Intrinsic Value (IV). If their actual value (AV), that is their selling price, is higher they are considered over-valued. One participant struggled with the thought that we could sell an over-valued female and replace it with another over-valued female and consider this to be a good trade.

Intrinsic value

With the aid of the cattle square, we can now accurately compare value differences between the two females. In this case, the square will tell us how much value we sold into the market and if we got paid more for that value than it was worth. That is how we can sell one female that is selling over her IV and replace her with another animal that is selling over her IV. The cattle square proves the relationships to us.

It is lost on me how people think they have a chance of making money in the cattle business without knowing how to run a cattle square. I have never run a break-even since learning how to execute cattle squares. We can go broke breaking even. This point has been proven. If we have no clue what our ratio of dollars to pounds is on a trade between stockers to stockers, or fats to stockers, then we are just guessing. Again, with females the square will tell us how much value we are selling into the market and what are we getting paid for that value. The use of the square eliminates guessing. It puts us in a position where we can exercise control over our business by eliminating guessing and preventing us from buying over-valued cattle.

Dollars to pounds

Sell/buy marketing is a real time cashflow reckoning. The cattle square exists in the present. It will not tell us the future, it only tells us what we can do, or just as importantly cannot do, right now to prosper ourselves. Some of you may follow these online profit trackers. In real time they are always wrong. They are based off of break-evens or can we sell the animals for more than we have in them. If the market goes up half the time and down half the time, then we only are profitable half the time. Again, they are not taking into account the ratio of dollars to pounds on the trade. So, when they say feed yards have these super fantastic closeouts, I’m laughing because feed yards are over spending on their replacement buys, or buying a loss. Then a few months later the profit trackers come out saying closeouts are all red ink.

Some people have noticed that other authors are writing the same thing today that I wrote back in November. I had the advantage of using the cattle square. These other authors will point out that bred heifers are up 20% from a year ago. They fail to point out that most people have more invested in them that what they are selling for. So, what does it matter if they are selling 20% higher. They also failed to point out that open replacement heifers are selling for 37% more than they were a year ago. With the use of the cattle square, we can easily tell that it is not a good trade to sell bred heifers and replace them with open heifers. Now we have valuable information, and we know we should look for a different replacement to buy or just keep the bred heifers.

Some feedback I got already from this week’s school was that I “gave people the answers to the test.” The cattle square truly is a glorious tool when implemented correctly. If you would like to know how to implement it on your operation, I have a school coming up in April. I’ll give you the answers to the test, which your neighbor won’t have.

The opinions of Doug Ferguson are not necessarily those of, or Farm Progress.

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