A Market Correction?

[cakadu]

We were visiting with family yesterday and we started talking about the future of the cattle industry. One of the questions that came up was whether or not the market price for cull cows was actually a correction and that the prices being paid now were actually what the cows were worth, given that their productive lives had essentially been used up - in other words depreciated.

I was asked why a producer that paid $1,000 for a cow (as an example price) - calve her out for 10 years would then expect to get that same $1,000 at the end of her life.

I told them I didn't really have an answer - not being in the beef business - but I would ask here as I'm sure that the answer lies out there with you.

These are essentially urban folk and I would suspect that their questions reflect what many could be asking.

Thanks.

[rkaiser]

I would start by saying that cows are not machines that wear out and become useless with age.
To really answer this question properly, one should be asking Xcel beef, or possibly Tyson foods. The only reason cows are worth nothing now, is because of over supply. If Tyson and Xcel were not making a profit from cows prior to BSE, why were they paying the price they were for cows?
Cow value has remained strong mainly because of the ground product we all call hamburger. Fast food chains have added sugar and spice and soya and mice to make billions of dollars from a product we call spent. And what about prcessed foods like balony, weiners, and sausages.
It is kind of like the chicken wing, and someday hopefully cakadu, old ewes and rams may find a more prominent place in our human food.
We agricultural kinds all like to find reasons for accepting something like a drop in price.
The bottom line is, there is still a whole lot of value in a cull cow, and once supply meets demand we cannot accept the fact that someone up the ladder has once again found a way to decrease their expenses to find more profit.
For the time being we must accept the cull cow price, as we are caught in a supply/demand situation, but this situation will correct itself as new markets open for a very viable, healthy nutritious product.

[grassfarmer]

I suspect you might wait a while to get an answer from Tyson or XL as to how much a cull cow is worth! Looking at depreciation is one way to make poor prices look better but it is an obscure angle to look at it from. Bottom line a cull beef cow is still a beef animal with lots of value. Don't forget that a certain %(I've heard in the 30-40% range) of beef off D1 and D2 cows (the better quality ones)gets sold by our retailers as prime beef - at the same price as prime steers and heifers. Not that I doubt the quality of this beef - it will be good - just that I resent retailers selling high priced beef off 20c/lb cows and at the same time claiming they are not profiting excessively.

[cowman]

The fact of the matter is only a portion of a cull cow goes to hamburger. Off the front end the rib eye comes off, the plate, the chuck tender and the shoulder plate. The hind end produces almost no ground beef as they take the tenderloin, the strip,the sirloin tip, the sirloin butt, the flank steaks, both hamsets! All that comes off the hind end, that goes in the hamburger bin is the shank and a bit of the belly.
The various steaks go to cheap steakhouses like Mr. Mikes or Bonanza and a lot of the rest goes to outfits like Subway and other food service type outlets that supply restaurants with beef for things like hot beef sandwiches!
When the carcass is stripped of the cuts, a "whizard knife" is used to get
all the meat close to the bones. This is extremely lean meat and sells at a very high premium!
There really is no distinction between good cows or very poor cows...they all go through the same process.
Never believe that those old cows aren't worth any more than hamburger, because I would doubt that 20% of a cow ever makes it into a hamburger.

[rkaiser]

Thanks for reminding us of that cowman, even more reason spent cows still are a valuable commodity.

[bombay_43]

I have not heard of anyone receiving $1000.00 for a culled cow, even in good years. I think that generally, people were really happy to get approximately 1/2 the original cost back.

I think that what many urban people fail to realize, is that buying a cow for $1000.00, is not the only cost involved in having that cow produce. Without feed, water, bedding, shelters, vet costs, interest on borrowed money, etc. you won't receive much out of your $1000.00 investement.

Also remember, that when talking about culls, not all cows that get culled, are old. Some have bad feet, small calves, fence crawlers, unable to get bred, etc. Many are not old cows at all.

A certain percentage, dies during calving, on pasture, etc. This also cuts into any possible profits realized on culls.

When any business, makes a capital purchase, they claim depreciation on that purchase. When in turn, they sell or trade off that capital purchase, it sells for less money, and is claimed as income. No different than cows.

[raymondb]

When you buy the cow, the dollar value that you paid for the cow goes into mandatory inventory on your tax form. when you sell the cow, the dollars you received is taken off the mandatory inventory value-not off income. You as cow earners are always guaranteed your dollars back - if yor accountant is doing this correctly. Sure wish I was guaranteed my dollars back for the machinery I buy.

[Cattleman]

We had sold some cull cows for over $1,000. They were certainly on the fat side though!! I miss those cull cow feeding days, it was the only feeding business we were in where we could feed an animal through the fall and see a positive price slide on heavier animals as the prices were much higher in Jan - Feb versus the fall. Our cull cows were not just a by-product. Once we decided to cull cows we packed some pounds on them hitting the premium market in the new year. Lots of value in those cows.

[bombay_43]

Raymond, are you sure that all cows are put under the mandatory inventory? It was my understanding that only specific animals were put there. Horses and registered cattle. Maybe our taxes have been done wrong for years!

[campbellc]

The value of cows at the retail/HRI level remains high, especially the high D1/D2 butcher cows. An acquaintance from Saskatchewan who is involved in processing/marketing chain informed me that his net on 5 cows averaged $950.00 shortly prior to Christmas. This was after paying the processing and marketing charges.

This points out that the value is there and will likely remain there for the short term future as the North American cow herd is/will be in expansion for at least three to four years. The Canadian cow due in large part to her genetic base and our feeding practices here in Canada produces a carcass whose value goes far beyond being a bone and grind carcass. A significant portion of the carcass is portioned into whole mucsle meat cuts for the retail and HRI trade.

BIC of the CCA in late 2003 was very nervous about the amount of meat that the cull cow population would be generating - market absorption was the issue. By June of 2004, BIC was simply estatic as the demand for cow beef was off the wall. The product quality was beyond everyone's expectations and there appeared to be room for price increases. The dirty little secret within the processing industry was out, the variety in terms of quality of cow beef demonstrated that many cows were under valued!

For some time, talk has been about vertical intregration, retained ownership but only in the context of youthful cattle.....why not cows! Especially with these margins.

The whole issue over the past eighteen to twenty months has been processing capacity. If it could be processed, it had a North American market value. If you had to sell it live it, it had a Canadian market value (over supplied). So now the next question, all you people seem like bright inovative questioning people. Why does a farmer purchase a 250,000 combine to harvest 2000 acres of cereal/oilseed and let it sit and rust for 48 weeks a years and then balk at a $5000 share in a cooperative slaughtering processing venture as a shareholder to process a cow? The $5000 share is not even the options in many of your new one ton dually? What is the difference between processing a standing crop or a standing cow. Would any of you think of phoning up Cargill/ ADM to come and combine your wheat field? But everyone of you have thought nothing of phoning Nilson Bros to purchase your cull cows and expect a fair return!

What do I not understand here?

[raymondb]

Bombay--I have always put the value of the cows I buy under mandatory inventory--in fact, my accountant was most adament that this is the correct legal thing to do. The thing to note that this is for purchased animals and not for the home raised ones--in other words, you can not put an arbitrary value to your raised cows and put that value under mandatory inventory.

Cambellc--when I buy the combine to process my crop, I have total control. I have very little to no control on the $5000.00 I place into a processing facility share. There is a big difference between the two.

[hgb]

Campbellc - Prestigue is the reason many people will put money into iron and not back some packing facilities as no neighbors can see the investment a packing plant. An ag supplier we deal with says nothing burns him more than a customer who says he can't settle his account, but drove up the door in a 2 week old truck.
I've been to several informational meetings put on by the various groups trying to get plants up and running. A decent number of people attending but these meetings should have been standing room only. From these meetings I selected a plant to invest in, that best suited our farm. The next piece of iron that is to be purchased might have to wait for a few extra months.
Not all these packing plant ideas will be successful and I hope I don't loose the money I invested but in the big picture marketing cattle or grain a week to early or a week late in the last 12 months, has cost me alot more than what I have invested into being a shareholder.