June 23, 2023
Are we in good times or are we in terrible times? Some sell/buy cozeners are promoting the good times. Yet some auctioneers tell me they haven’t had much fun selling cattle for a couple months. Despite the higher prices some of their customers are selling off due to the lingering drought. Sale barn staff are having to deal with an out-pouring of emotions when checking in cattle. Some people are excited to be selling cattle due to the big check they will receive, while others stand beside their trailer and cry because they are forced to sell out due to no feed and no water.
People tell me all kinds of silly things that the talking heads discuss on YouTube. From what they tell me one talking head is upset that there is some collusion going on to crash the board to collapse fat prices. That’s not a new topic by any means. Drought is not a new topic either.
Success = Market navigation
So, my question is why haven’t people learned how to manage and market for these kinds of revolving issues so they can navigate through them and be successful? You are only helpless if you refuse not to learn how to deal with these things.
Sell/buy marketing is a continuum of inventory liquidation and replenishment, generating cash flow and profit. The only thing that has been around longer than sell/buy marketing is cyclical drought. Sell/buy is a time tested, proven method to market anything. Sell/buy doesn’t recognize weather conditions, or the board. It doesn’t recognize if prices are high either. It only recognizes the price relationship between things in real time. So, all these trendy things the sell/buy cozeners and YouTube sensations want to talk about just flew the coop.
There are all kinds of things going on in the world that affect the market. I can’t deny that fact. I also do not need a lesson on any of it either because all that info is filtered down to the perfect distillation and that is the bid. With the bid we can do algebraic equations and figure out what we can and can’t do right now in order to generate positive cash flow and prosper ourselves.
Cattle auction review
When we look at sale results from auctions across the country we can easily see the feeder markets were mixed. Some weights were higher this week while others were lower. This caused the Value of Gain to fluctuate throughout the spectrum. Some may call this turbulent. Turbulence is our friend when it comes to marketing, if we utilize it in a certain way, because that is what creates attractive relationships between varying weight classes of cattle.
All the VOG tells us is if it will pay to put weight on cattle. This week some classes saw the highest VOG of the year so far. The turbulence also caused some leap frogs. A leapfrog is when the market will pay us to take heavier animals home.
Here’s the bottom line, if we sold fats this week we could’ve bought back replacement feeders at a profit. We could only do this with certain weight classes, so we must take what the market is willing to provide for us. With sell/buy we capture our profit on the buy, not on the sell. This gives us our control on the buy back. All we have to do is calculate the efficient market value, which is the maximum amount we can pay for replacement cattle and still hit our profit target. Once we have those numbers all we have to do is remain disciplined when we bid.
To wrap up the feeder portion this week I want to remind all of you that if we are in the cattle business we are also in the feed business. The whole point of these animals eating is to not only add value to the cattle but the cattle must be adding value to the feed by the weight gained, otherwise why feed it? This is why we need to calculate the VOG. With leap frogs in place and some weight classes seeing VOG over $3 we really need to know what our animals weigh and what our cost of gain is. Guessing games are for kids.
This week feeder bulls were up to $40 back and unweaned calves were up to $30 back. There are some great buys to be had when pairs are freshly split. A word of caution, be sure you can handle these animals before you rush out and buy some.
Female cattle markets
Last week I mentioned the value that rainfall added to the female market in places that are fortunate enough to receive rain. This week astronomical prices were paid, even for broken mouth cows, in those areas. Even though those people had to endure blizzards and floods they have an abundance of grass. This has created high demand for grazing animals in those areas and that demand shot prices for stock through the roof.
In these areas that have received moisture we are seeing price relationships develop. In areas that are in lingering drought prices are flat. One thing that is consistent no matter where you live is that there is no market signal, nor has there been one since November, to breed heifers. There is much detail I discuss about this in my marketing schools. Right now, though it is very simple, a seven-weight feeder heifer brings more dollars per head than most bred females. A five-weight heifer brings more than half of the bred females, including bred heifers.
The people that have tried the 5-year-old and out program are getting clobbered right now. The 5-year-old and out program means we sell cows when they are around age 5 and keep all the heifer calves to breed. This is to capture appreciation value of the heifers and deflect depreciation of the cows as they age. While this is supposed to increase gross margin and raise inventory valuation it is failing to do so.
This is why we need to look at the market on a regular basis and evaluate our situation. Here is the thing, when we sell something all we do is generate cash flow. We capture our profit when we replace. When we sell an animal we are selling some value in to the market. When we replace the animal we sold, the replacement animal also has a value. We must learn to evaluate these value relationships so that we are sure we are getting paid more for the value we sold into the market than it is worth. This is positive cash flow. Learning to boil these animals down to their core value and making comparisons is how we do this. The five-year-old and out program has people giving away value and it has dried up cash flow.
Paying the bills
All the great investors agree on one thing: the best investments on earth are assets that generate positive cash flow. Here is an example, there was an abundance of trades that could have been made by selling a spring pair and buying back fall calving cows. These were just plain large and medium framed number one females. By doing this trade an operation could have gotten paid $200 more for the value they sold into the market than the value was worth and generated over $500 cash flow.
Some people have been pushing deflecting depreciation way too hard and it is causing people to forget to pay attention to cash flow. It is positive cash flow that will pay the bills.
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