My Sustainable Competitive Advantage

Six or seven years ago I was asked to be part of an interview that included several other producers from around the country. The topic was focused on young producers and what our competitive advantage was due the region we each lived in.

It was mostly they typical stuff you’d expect. One guy mentioned he had a longer growing season and could easily double crop. The gal from the Flint Hills had access to some of the best grass on the planet. Pasture rent is cheap in Kentucky. One lived where urban sprawl was taking over but she was using that to sell direct to the consumer, giving her a huge profit margin.

When it came my turn I think the interviewer expected me to mention things like, Nebraska having a lot of crop ground and raising mountains of corn for feed. The ethanol industry was really gaining momentum here, and at the time they had some difficulty getting rid of distillers grain, making it a bargain. We have strong cash markets here, and we have packers.

I skipped over all of these and said my competitive advantage is my ability to learn faster and adapt faster than my neighbor. She did not like this response. I guess it didn’t fit her theme. She tried pointing out to me all the things mentioned in the previous paragraph. I dismissed them, and stuck with what I had said.

The interview was in both print media and online. My part was left out.

Today I was sorting some cattle and for some strange reason I recalled a quote I read in the Pharo Cattle Co. weekly newsletter. “It is not necessary to change. Survival is not mandatory.” ~ W. Edwards Deming. While I was thinking of that, for some reason I remembered the interview from years ago.

While I continued sorting cattle these things were rolling around in the back of my mind. All the reasons she listed off are definitely advantageous to those of us in Nebraska. While these things have certainly helped grow the cattle biz here, they do not make us immune from failure though. Some people still go broke. Change is not necessary, survival is not mandatory

I spoke wrong during that interview. Most people that I know that went broke have 4 year degrees. Some got good really good grades. I did not. I have enjoyed success in the cattle biz. They did not. It’s going to be difficult to argue who is smarter. What I should have said my sustainable competitive advantage is, is my willingness to learn and adapt faster than my neighbor. We all have the ability, few have the willingness.

Light the Furnace

The weather has been very challenging here to say the least. 2015 was the fourth wettest on record. Between Thanksgiving and New Years we’ve had close to a foot of rain. That just is not good since it doesn’t dry out that time of year. When that is coupled with temps that are 50 degrees on Thursday and 20 below on Monday it can create a lot of stress on cattle, and the care giver.

So what is a guy to do? The main focus is to take the stress off the cattle.

When it gets just terrible cold I typically will not rush out to feed. In 17 years of experience I have learned it’s not necessary. On a typical nice January day I may head out around 7 a.m. When it gets 0 degrees or colder I may wait until 8 or a bit later. The reason is I have noticed that the cattle don’t care to get up and move much at that time. Sunrise is usually the coldest part of the day, so it seems to be to their liking to wait a little while and let it start to warm up a bit.

I will start the tractors and let them warm up. While they are doing that I will walk all the pens. This walk will be over a mile in distance. It is not the most fun you will have when bundled up in all that heavy winter clothing. I will not move to fast so that I won’t begin to sweat. If that happens I will begin to get cold rather quickly.

I will go in every pen, and chip ice off the water tanks if they need it. Water is the first limiting nutrient for cattle, making it the most important. They need water to help with digestion, which in turn helps keep their furnace running. Let me explain that. When a calf ruminates, he is acquiring nutrients from plant-based food by fermenting it in a specialized stomach prior to digestion, through microbial actions. The process typically requires the fermented cud to be regurgitated and chewed again. The process of rechewing the cud to further break down plant matter and stimulate digestion is called rumination. Rumination helps them generate body heat. This process can cause them to elevate their body temperature above normal by a few degrees. Couple that with their winter hair coats and that heavy leather hide and they handle the weather very well.

While I am in the pens I will make sure each and every single calf gets up. This is critical. Each critter may be feeling just fine. They may be ruminating, napping or just chilling. They will have a good spot picked out that is out of the wind and be very comfortable. I get them up because they may just stay there other wise, and not come eat when I feed them. When it gets that darn cold they will consume more feed. If one calf doesn’t get up and go eat his pen mates may eat it all leaving him none. This will cause him to get stressed. First off he is hungry and second he will not have the fuel to ruminate. These two stressors can cause him to not feel well, and this could be a problem. We do not want stressed cattle because they may get sick. Just the simple task of getting them up can prevent a lot of problems.

Breaking the ice off the drinkers

getting everyone up bofore feeding. Note the bales in the background. they are there for wind protection. The dirt pile on the right is from scraping pens to make a nice place for them to lay down

Later on in the day I will take the cattle for a walk. Exercise is good for them. When the ground is frozen solid they will move slowly because it is hard on their feet. I will apply enough pressure to move them around but not so much that they feel like they need to get away from me quickly. A precaution to prevent them from injuring themselves on the rutted ground. Sometimes I just move them around their home pen a bit but usually I get them out in the alley ways. This gives them the chance to walk 3/8 of a mile one way and also they get to see cattle in the other pens. This will stimulate those cattle as well.

Out for a walk

Upon returning to their home pen the cattle will usually eat a little or get a drink. The three most important things a calf can do for optimum health is exercise, rest, and eat and drink. We just did all three of those things. Simple stuff. I have learned that if you want to manage for healthy cattle you must do healthy cattle things.

Keeping the pens maintained is important too. I keep a portion of the pen scraped to keep the mud and manure down to a minimum. When you get as much rain as we did in December this can be difficult to do, just because of all the slop, but the best attempt to do it must be made. As I said rest is critical for the cattle so we must provide a good area for them to lay down.

If the weather gets really bad for a period of time I will bed them. This means I will roll out a bale of some kind of cheap forage that is really not a good feed source. This bedding helps give them a barrier between wet ground, or just an insulation layer between them and frozen ground.

Yesterday morning when I did my normal routine it was 20 below. When I fed again in the evening it was in the teens. My cattle were running around their pens, bucking and sparring with one another (more exercise). This is a behavior of healthy, happy, stress free cattle! Mission accomplished. Thing is we start it all over again the next morning.

Fueling the furnace

529 Plan Updated

My 529 plan was originally posted in March of 2013. In my example here, my daughter would have the original 5 head paid off at age 3.  As an update of how well this can work, my daughter has 8 head fully paid for and a few hundred dollars left over.  The cattle market has been extremely generous this year, making our original investment of just over three thousand dollars in February in 2011 worth over ten thousand dollars today.  I seriously doubt anyone has a college/future investment plan for their kid that has done this well.

In all fairness and objectivity, I am fully aware that this bull market will not last, and the value of her cattle will drop. Even so, she has added three more head than projected, which will generate an income even in the bear market that will come someday.

I also mentioned that the cattle biz will help me teach her life lessons. My buttons pop off my shirt as I swell with pride over how much she knows already.  Most of that knowledge coming from her just being around and observing me.  Seeing as how I have seniors from K-state and UNL calling me now seeking advice on everything and anything to do with the cattle biz, I’d say my little girl is way ahead of the curve in more ways than one.

Her lunch is there on the left. She is following along during the sale with barn card and pen in hand. Still a bit young for a cell phone

cat walks provide the best view. From here she can see all the action in the yard. This can provide entertainment for quite awhile

The original post:

Ever since I was a little kid all I wanted to do was farm and raise cattle. Everything seemed so simple back then.  Just grow up and do what you want to.  We all had that dream.  When you get older, and especially when you have a kid, things get real.

In the last year and a half I have spent way more time in the lawyer’s office and CPA’s office than I care to in a lifetime. I did not get into the cattle biz to learn all about LLCs, Trusts,  payroll taxes and crap like that.  Thing is I do get to do one money/parent thing I love.  Invest in my kid’s future with nothing other than cattle.

A couple years ago I got fed up with the stock market, and pulled all my money out of my Roth IRA, and used the money to buy cattle. I’ve had a 20%, or better, return on my money since 2005 with cattle.  My IRA never did that.

So here is my thinking. As a parent it is always a concern of how to pay for college, even though I would not recommend college, or how to at least give our kids a good start.  After Bernie Madoff ,  John Corzine, and computer generated trades I do not trust the markets.  Thing is I know cattle, so I stick with what I know.

Here is what I’m doing for my kid. The numbers are based off my last trade just last week.  I know the cattle markets will move so for this example I am going to freeze these numbers for the next 18 years.  Thing is even in the last 8 years I’ve still managed to make a 20% return.  Keep that in mind

I market my cattle on a real time cash flow reckoning, so this allows me to always buy back replacement cattle at a profit. You will need to learn how to do this in order for what I am about to outline for you to work.

So when my daughter was born I bought her five head of calves. In this example I am using 480# heifers at $1.43 or $687 head.  So five head would cost a total of $3385.  We are going to back ground these heifers and resell them, and replace at a profit.  So in this example we are selling 730# at $1.33.  My real cost of gain is $.93 with a 2.75# ADG so when I add on a 20% return my cost of gain goes up to $1.15.

The 20% return is a $55/head profit. Buying 480# calves and selling them at 730# with our rate of gain we get to turn 4 times a year.

Now those first five calves I bought for my daughter are financed through the Bank of Dad (BoD). So when we do our first four turns in year one the BoD collects all $1100 of profit and subtracts it from the $3385 that was loaned to the new baby.  At this pace the kid pays off the first 5 head by age three and has $84 left over.  After this point we make the kid reinvest their profits into buying more cattle.  So after four more turns the kid will have enough saved up to buy 6 calves.  I think that would make for a pretty proud four year old.

Now I am going to assume you see the pattern here and I don’t need to do all the math for you and show you the year by year turns.

By age ten in this example the kid will have 37 head. Since there was an income for a minor dad paid the taxes for them.  By now I figure it’s time to secure voter registration, and make the kid a tax payer.  Ouch!  So just figure between Fed and State tax kiss 15% good bye.  Gotta pay for the roads we are using to haul these cattle.  Long before we get to this point, a responsible parent is having/helping the kid pay bills, and balance a check book.  Lots of lessons to be taught here.  I have a buddy doing this with his kids, and it helps them to see there is a purpose in learning math in school.  Also all the lessons that come from helping, do chores.  Some real character building here.

Now by the time the kid is 14 we stop adding more cattle. We stop at 75 head.  That is enough for a pot load.  Also when we stop at 75 head after the first turn we have the rest of the year to do the other 3 trades and save money.  At 14 what kid doesn’t want a car?  So, let them buy one with their own money.  They will have enough.  Also let them pay for some gas, tax, title, insurance and so on.

Now after the car is paid for with cash, we have a decision to make. Do we just hold it here with 75 head, or do we keep buying more?

For my example here I stopped at 75 head and just started saving money.

By 18 the kid will have 75 head of cattle worth $72,000 and saved $39,000, and spent $35,000 on car, gas and so on. So our original investment of $51,500 turned into $146,000 in 18 years.

Now I know the doubting Thomas out there is thinking well you didn’t figure feed and so on. That was in the cost of gain and subtracted from the dollar difference between selling the 7 weight and replacing with the 4 weight.  Leaving us with the $55 retained profit.  And it took 14 years to get up to a load lot.  This is a crockpot not a microwave.

Now what if we took that $51,500 and invested it into a 529 over 14 years, and stopped and then just let the interest compound for four more years until the kid was 18. At a 10% rate of return we would have $169,000.

I really think cattle can compete with a 529, IF you market correctly.

This is what I am doing for my kid. Now according to this example the 529 out performed my cattle plan.  Thing is the 529 didn’t give a sense of accomplishment, or ownership like the cattle do.  The 529 didn’t teach responsibility of paying bills, buying and caring for a car, and cattle, managing cash flow, or understanding where money comes from, and marketing skill.  The 529 didn’t teach the kid how to run a business, and looking at how many animal science and ag business majors corkscrew operations into the ground college didn’t teach that either.

So when my kid is 18 there will be three choices to make. 1) Go to college, keep the cattle and hire dad  to take care of and manage it and use the income for school, or sell them off and go to school, with the goal of graduating debt free.  2) Sell them off and pursue something else.  3) Continue to do the cattle thing.  And I can tell ya with a track record and cash flow like this even at 18 a banker will finance the youngster, with daddy’s supervision of course.

Now suppose I’m half right. And after 18 years you only have a net of $70,000.  Still pretty damn good.   What if I’m half wrong and by 18 you have $300,000?  Wow!

My kid is two and already owns 6 calves all on her own. But she gets to take advantage of my buying power too.

Dave Wright President of Independent Cattlemen of Nebraska (ICON) said something to this effect once “I raise kids, the cattle are there to help me teach them life’s lessons”