March 31, 2023
Auctions are fascinating to watch. When the sale ends it is entertaining to hear other people’s perceptions of it. Those of us there watched the same cattle sell and yet we all walk away seeing something completely different. Each sale its own story.
75 to 95% of our behavior is habitual. It is controlled by our paradigm, right along with our perception. We can get our pom poms out and cheer all we want about higher prices, yet if we do not market our cattle in a certain way this paradigm can still cause us to lose money. At one sale I attended this week there were people there making money hand over fist, and there were people hemorrhaging money. A rising tide doesn’t raise all boats, it will sink some.
With the traditional buy/sell paradigm that most people have it is believed that the rising tide of higher prices is making us profitable. Backgrounders that did a good job buying cattle last fall are advancing the stock they purchased. They think they bought low and are selling high so this means they have to be making money. Eventually the market will go down and they will be forced to sell off a pen of cattle that they have more invested in than the cattle are worth. Here's another traditional paradigm, it’s a break-even business, win some lose some.
How does anyone know if they are buying low and selling high if they do not understand price relationships? The answer is they do not. How can anyone manage to generate positive cash flow when the market crashes? The answer to that is doing sell/buy marketing in a certain way.
The nature of sell/buy marketing
Let’s revisit what sell/buy marketing is. It is real-time cash flow reckoning. This is how we know this method works, it exists in the present and doesn’t rely on trying to predict the future. This is how I can sit in the seats and be a little judgmental.
At this sale a backgrounder sold a sweet set of black heifers, and got a good price for them. This set of heifers was discounted a bit for being fleshy, but it was still a great sell. The problem was this backgrounder jumped back into the market and bought lighter weight market topping heifers.
When we cattle square his trade, he has a Return on the Gain (ROG) of less than a dollar. With Cost of Gain (COG) being higher than a dollar in our area we know for certain this was not a good swap. Subconsciously he must have known too because he was mad at the guy who bid him up and after the sale wanted reinforcement from other buyers and the auctioneer that he made a good buy. With sell/buy marketing being real-time, it gives us control. Our control is on the buy, and he should have quit bidding long before he did. Watching this happen shows the unprecedented power a paradigm has over our ability to make money.
On a side note, the set of heifers the backgrounder sold were also a great buy for the feed yard, as they were under-valued to fats this week. This set of heifers could have been both under and over-valued. There were other light weight cattle in the offering that were under-valued to them.
I saw the same thing happen during the breeding stock sale. People sold some cows and bought back other females. The females they bought were “a really good set” and “they have time to pay for themselves”. The ten-year calculator does not work, it never has. For it to work we’d have to accurately predict feed costs, weather conditions, and black swan events.
Just like with our backgrounder, breeding stock should be marketed in real-time. While his paradigm tells him he bought a good set of cows, the math says he bought value and paid more for it than that value was worth. Most of the good cow trades will involve selling value into the market and getting paid more for it than it is worth, and an excellent trade will pay us to take value home.
Another thing that was interesting to witness during the breeding stock sale was that some people were selling off some stock due to the ongoing dry conditions here. Logic and reason are also controlled by the paradigm. The people that were buying them bought them because they need to have X number of cows to turn out, again another paradigm. The dry dusty conditions do not matter.
Cattle marketing impact
I am going to shift gears for the conclusion of this week’s post. In talking to some sale barn owners this week, they all agreed they will sell considerably fewer cattle this year. This comes as no surprise given all the cows that have been sold in the last year and a half. While podcasts, webinars and market “experts” all seem to have their pom poms out about this new wave of prosperity I see things differently, and not just as I proved above.
Take the local crossroads sale barns where I live. If their predictions are correct about how many fewer cattle they will sell this year, it is the equivalent of taking 3 to 4 months off.
Commissions and deductions from a seller check vary from one yard to another. If I just plug in $30/head for that figure that is $750,000 less the sale barn will collect. All the sudden this picture looks differently doesn’t it. It just got a little more difficult to meet payroll and other expenses.
On the flip side fewer cattle sold means there will be less direct costs. Thing is those direct costs are paid to someone. The guy that comes in and welds the broken gates, or the guy that hauls off the manure. My point is there is a trickle effect that will take place
That many fewer cattle at today’s average price of a five-weight steer and heifer is 27.5 million dollars that won’t be circulating in the local economy. Money is called currency because it flows from one place to the next.
How will this affect the current? I am not sure. As the predictions converge with reality the price will adjust. I am doubtful it will adjust enough to offset the 27 million. We all know that sale day has a huge economic impact on a local economy. We see the cattle trailers at the fuel pump, the grocery store, and in front of cafes. If these predictions manifest the community will feel it.
This is not meant to be a doom and gloom prophesy. People with legit sell/buy skill and the market literacy that comes with it will still prosper. What I am saying is there are other things to pay attention to.
This week feeder bulls were up to 30 back and unweaned calves were up to 25 back.
For a long time on this column, I ignored the fat-to-feeder relationships because they were ugly. The fat-to-feeder relationship is a beautiful thing right now
The opinions of Doug Ferguson are not necessarily those of beefmagazine.com or Farm Progress.
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