The secret of ranching for maximum cash flow

by Allan Nation

I can count the number of certified geniuses I have met in my life on one hand. Among that tiny number is animal behaviorist Bud Williams.

Williams is a largely self-educated man. What he knows he has learned from first-hand observation, trial and error. While many of us know of his international reputation in livestock handling, far fewer know of his equal or greater prowess in commodity marketing in general and beef cattle in particular.

While his livestock handling schools have been very successful, he makes a good six figure annual income trading for his own account.

Often when I have visited him at his home or office, he would be hunched over his computer watching the numbers.

“How’s the market?” I would ask. “Up or down?”

“It don’t really matter,” he would always reply.

And to Bud it doesn’t. He doesn’t bet on a guessed future price direction. He trades only on reality - not guesses.

He said on any given market day there are always cattle that are mis-priced. He said the secret to making money is to have the discipline to sell those that are priced too high and to buy those that are priced too low. All it takes is a little knowledge about cattle classes and a pocket calculator to figure what class or sex is the best buy and what is the best sale.

For example, a cow with a calf at her side traditionally sells for less than a pregnant heifer.

Why? The calf on the ground is a sure thing and the one in the cow is uncertain. He said, this is a no-brainer and yet most people won’t buy the sure thing.

“The first thing you have to realize is that you can’t think like your neighbor and make any money in the cattle business,” he said.

In the fall of the year in the South, 500-pound calves will often sell for the exact same dollars per head as 400-pound calves. In other words, you can buy a hundred pounds of calf for nothing.

Duh!

Conversely, in the North heavy calves in the fall will frequently bring a higher price per pound than lighter calves even though the lighter calves are more efficient and will gain cheaper.

Heavy heifers during the herd building phase of the market will sell for the same price per pound as light weight heifers and bred heifers for a hundred dollars more than open ones.

During the contracting phases of the cycle, these female price relationships reverse.

What is mis-priced changes every day but every day something is mis-priced and therein lies the opportunity to create cash flow. He said ranchers with management intensive programs that involved frequent periodic weighing and sorting of cattle were those who could best take advantage of the market’s opportunities.

While Williams said he knows most ranchers hate buying and selling cattle, this is the only way to create cash flow. He said the more buying and selling opportunities a ranch avails itself of the more viable and financially stable it becomes.

He said it might help if you realized that you were a part of the buying and selling game whether you participated or not.

“Every day that you don’t sell your cattle you have, in effect, bought them. If you think cattle are too high to buy, why aren’t you selling? If you don’t sell overpriced cattle, you are just as reckless as the man who bought them.”

A MONEY RESERVE IS ABSOLUTELY NECESSARY

He said every ranch needed four things to be a viable business. These were:

1. Space to put cattle.

2. Grass and cattle to eat it.

3. Cash flow.

4. A reserve of money.

He said it was the last item that was most overlooked by ranchers.

He said your reserve of money held outside the cattle business should increase as cattle prices rise. He said the riskiest thing was to be fully invested in cattle at the top of the market.

“There are very few good things that can happen to the price of cattle at the top of the market and a whole lot of bad things,” he said.

“Conversely, when calves are 60 cents a pound there are many more good things that can happen to their price than bad things. This is why the risk in buying cattle is much, much lower when cattle are cheap than when cattle are high.”

He said that while creating cash flow through the sale of animals, it was desirable to maintain your inventory as well. He said that cash flow was created by the sale of animals but free cash flow was not created until the animal sold has been replaced.

In an on-going ranching situation all profits are created when animals are bought and not when they are sold. He said ranchers who think they can guess the direction of the market should just buy the cattle on paper (futures market) and forget about owning real cattle.

For real ranchers, he said the futures market could be used but that it worked better as a way to hedge future purchases than as a way to hedge future sales. Buying cattle on paper when you sell the real ones allows ranchers in seasonal environments to, in effect, sell and buy on the same market.

It was his observation that few ranchers went broke by having too much grass or too much money. They went broke because they had too many cattle and too little grass, or too many cattle and too little money.

He said seeing your grass and outside money as an inventory that need to be maintained would help you miss most major cattle wrecks.

He said grass farmers needed to understand the working of large scale feedlots whether they ever chose to have their cattle fed or not. The huge variable in feeder cattle pricing in North America is the cost of grain.

“It is absolutely necessary that a grazier know the feedlot’s cost of production. This is the only way to determine the difference between what cattle are priced at and what they’re worth.”

© by The Stockman Grass Farmer