Grasshoppers and Ants

In a recent edition of Ranchonomics, Dr. David Kohl expressed concern about the cattle business right now. While crop farmers and sheepmen are suffering from low prices, cattlemen are currently seeing record prices. Of all times, why would Dr. Kohl be concerned about the cattle business right now?

Markets are high, and in some sectors and regions, profitability is very high. While there is fear of a market downturn, there is a lot of enthusiasm about current prices. The market has been on a tear, continuing to rise. August and September feeder contracts are up about $120/cwt since they started trading 12 months ago. On an 800# calf, that’s an increase of $960. If you remember, we were talking about high prices BEFORE that run began.

At this point in the market, we see two camps of opinions emerging. On one hand, there is a group of people who claim we should sell everything and lie low until after the market crashes (market timers). On the other hand, there is a group of people who are convinced that today’s prices are a new normal and that good times are here to stay (naïve optimists). Neither of these lines of thinking is helpful. And neither camp tends to be very profitable.

Even if you’re able to escape the trap of thinking like a market timer or a naïve optimist, there is a much more universal and corrosive impact that happens when markets are high: we get sloppy. Even the fear mongers who think there is a downturn around every corner let their lifestyle creep. They spend more freely. They borrow more money. They buy bigger trucks, tractors, and snowmobiles. This is known in psychology as the perceived wealth effect: more money in your account changes the way you spend. The hardest thing about increased spending is that it can be painful to reverse and, in some cases, isn’t reversible without severe long-term damage. Taking on additional payments is a perfect example. In many cases, people commit now to making payments in the future when their income will likely be lower.

If you are experiencing higher than average profitability right now, please use this time to make your business better for the next downturn. While I hate the constant chatter about an impending market crash, I am positive the market will go down. The problem is we NEVER know when. But, unlike the stock market or real estate, the long-term expectation for commodity markets isn’t that prices increase with time. They go up and they go down. That certain future means that my business needs to be profitable when we return to selling $600 heifer calves. The fact that the market could go up for three more years also means that I’m not going to be waiting on the sidelines for that drop to happen.

There isn’t a universal answer for how to market-proof a ranch business. You need to look carefully at your operation to find the best place to streamline, invest, improve, and unburden your business. You might run some stress tests. For some, it may be paying down or refinancing debt to free up future cash flow. For others, it may mean cutting some enterprises and increasing others. Most importantly, you need a business model that works in both up and down markets and high and low markets.  Whatever it is in your business, keep in mind that you have to fight complacency. Letting things slide right now is easy. But we all know that easy roads lead to hard places.

I share Dr. Kohl’s concern. We see the heartbreak and pain of temporarily profitable people who didn’t recognize the role of external forces in their success. Wisdom has taught this lesson over and over again. From the fable of the ant and the grasshopper to the biblical parable of the twelve virgins, we are warned to prepare for the future. We need not fear, but we should prepare. We see businesses that are successful in the long-term maintain their discipline and focus in up and down markets.