This market gives me an overabundance of material to write about. First, I want to acknowledge and thank the sale barns for trying their best to keep us all safe. I have never seen some sale barns so clean.
Most are enforcing the buyers-only rule. I saw one auctioneer remind the people there that to be a buyer they had to buy something. If they didn’t buy in a short period of time he told them to leave. I understand this may upset some people since he just ran off a possible buyer. The way I see it he is trying to protect his market in coming weeks by reducing possible exposure to his dominant buyers that are there every week. With the coronavirus now spreading in my home county I can really appreciate this.
Recently I have found myself on the email list of many farm associations, several of which I’ve never heard. I get these messages informing me of all the hard work and great things they are doing to get to the bottom of these black swan markets. To people like me, these markets are a dream.
I know I need to explain that. Look at it this way: If we start a business we have certain challenges to overcome to make that business successful. Sometimes we have to change how we view those problems in order to overcome them. For our new business to thrive and make a million dollars will require a certain mindset. Once we achieve that and set a goal of making $10 million it will require a different mindset since we will face different challenges. It isn’t the challenges that are the problem, it’s how we perceive them that is the problem.
More good news is that math is fundamental, it never changes. Even with this common core garbage they are teaching in schools and its 20-step process and bubble gaps it still comes to the same answer. If an accountant makes a mistake he can catch it by using the fundamentals and go back and correct it. If math were subject to change, making money in the cattle business would be hopeless.
So instead of waiting around for the alphabet soup of ag associations to “change” things, we must change our thinking because we need to market cattle now, not after some miracle act of congress. I have had cattle in custom yards and have experienced the collusion. I also know and accept the responsibility that it is up to me to make a profit now. Until we rise superior to our challenges, in our thinking, we will have no hope of overcoming them. Until we learn certain truths and fundamentals, replacing ignorance with knowledge and skills, we fall into the blame game and end up obeying a false ideology.
So right now I am going to give away a secret to making money in the cattle business, no matter which segment you are in. You must think profit, and commit to it. If you hope to make a profit but spend most of your time worrying and/or thinking about losing money the predominant thought will certainly cause you to lose money. And you already have your excuse handy, its these up and down markets that make it impossible. There is nothing we can do right. However, if you commit to making a profit you will find yourself taking the necessary steps to hit that mark.
So here’s why I say this week is a dream. We had the opportunity to make $200 per head, and we had the opportunity to lose $200 per head. This made cattle auctions really interesting to watch this week. At one auction I had two buyers tell me before the sale that they both needed over 500 head of grass cattle, that they are due to ship to grass in two weeks. This led to a bidding war. Five-weight cattle are overvalued. At the same auction we could buy an eight-weight for $50 per head less than what five-weights were bringing.
So if you sold fats last week at $112, and bought back the eight-weight heifers you made $200 profit on that buy back. If you sold eight-weights and bought back five weights you lost $200 on that buy back. (using a 90-cent cost of gain)
This price discovery is laissez-faire free market capitalism at its finest! Our free will dictates what we do.
This is what made it entertaining to watch. Some of these buyers were trying so hard to by five-weights that they missed the golden opportunity. Here’s the rub on those eight-weight heifers, they are three-way cattle. We can feed ‘em, breed ‘em or just run ‘em out.
With this market yo-yo, it’s frustrating watching your inventory valuation. Market goes up $20, and your inventory valuation goes up roughly $12,000 per 100 head. When the market goes down $20 the opposite is true. We’ve seen this a couple times in the last few weeks. I don’t get caught up in this and here’s why. I do not plan on retiring any time soon and I know the market will go way up and way down in the next couple decades. Inventory valuation becomes extremely important when we decide to quit.
Last fall, after the Holcomb slaughter-plant fire, I went all in selling and buying back. My banker looked at my balance sheet and freaked out. I patted myself on the back and told him it was awesome because I did a great job buying undervalued cattle that were also on sale. I told him this will work itself out and I’d probably end up selling them for more per hundred than what I paid for them, and I did. So these violent market swings are creating selling opportunities and buying opportunities.
Here’s a “fun with math” proposition. We haven’t done this in a while. This is a real trade I did. I sold 705-pound heifers at $1.25, and bought back 595-pound heifers at $1.15. By taking advantage of the swings I had a return on the gain of almost $1.80, and my cost of gain was less than $1. The real beauty of the trade is that the cattle I sold were a profitable buy-back for the feeder at the time compared to fats. We both win! Selling those 595-pound heifers was probably a tough sell. The thing is, they may have brought even less that day had I not been bidding on them so I helped that seller a little too.
Fats dropped to $105 this week. That really swings the needle. If you sold fats last week at $112 and replaced with an eight-weight heifer you could potentially make $190, or made $60 replacing with an eight-weight steer. By selling at $105 we could still profitably replace with an eight-weight heifer; but we will only be making $95 profit, and if we tried to replace with an eight-weight steer we’d lose $30.
Five- to six-weight cattle are in high demand making them king of the hill as far as being overvalued. There is a high value of gain (VOG) on flyweights up to this five- to six-weight range. Then it falls off a cliff again. The last several weeks, this is where I mentioned it’s not a weight-gain business. Early in the week that remained true, but later on in the week nine-weights made a spark. With eight-weights being so undervalued, and nine-weights gaining some friends, the VOG between the two landed between $130 and $150. This opens the door for people holding undervalued heavy feeders to make a profitable feeder-to-feeder trade. Or they can go ahead and feed them on out since there consistently has been profitable fat-to-feeder trades.
This week unweaned cattle were $2-15 back, and feeder bulls were $18-25 back. Southern markets were undervalued compared to plains markets. With this widening geographical spread there is an opportunity to trade out of some undervalued feeders in the plains to some lighter-weight, even more undervalued cattle and put a little cash in the pocket.
Open replacement heifers caught a $10-30 premium this week. When I saw some of these heifers hit $150 (they were seven-weights) my first thought was “that guy just bid away all the appreciation value in them.” But then yesterday a friend from Colorado called and told me of some first-calf heifer pairs that brought $2,300. That quickly changed my perception of $150. Due to sale cancellations and social distancing I haven’t seen any other cows sell.
Here’s my closing thought this week: People are upset and saying silly things like the market is broken and we need government intervention or a bail-out for cattlemen. I once again outlined the market is trying to help us this week. How is that broken? We can make money on fats. We can make money as back grounders. The cow calf operator can make money with all the different classes of cattle in their inventory. The market is giving us a chance to make some real money right now. It’s also giving us the opportunity to lose big. Our free will and our way of thinking will dictate which side we choose to walk on.
The opinions of the author are not necessarily those of Beef Producer or Farm Progress.