From the time I was a teenager into my early 20s I had a handful of mentors. All were coaching me on different things but they all had one same message. They told me that if I was going to be in it, be in it to win, and be excellent.
I bought fully into that mindset, and still do. However, earlier this week I said two words together that I have not said in a long time: Break even.
Let me be clear. When I said those two words I was telling a guy that I was visiting with that he will no longer say break even if he’s going to do business with me. I used to think that the first thing we needed to be profitable was marketing skill. I now believe that the first thing we need to be profitable is a committed decision to be profitable. Then we will commit ourselves to gaining and implementing marketing skill.
Every friend I have is an entrepreneur, and I have noticed that out of all of them the only ones that ever speak of breaking even are cattle people. So let me be clear about this: If you use break-evens or are excited to be breaking even, you are building a business around failure.
Profit must be treated like an expense to the business, and like all other expenses it must be managed. Among other things, that means you shouldn’t pencil in a profit that is unreasonably too high to be obtainable.
I am not certain how we became so obsessed with breaking even. I have been told my whole life that running cattle is a break-even proposition. That would make sense from the simple view point that the market goes up 50% of the time and the market goes down 50% of the time, but it’s not a viable business acumen.
That leads me into the markets this week. It seems the market is searching for equilibrium. It’s up one week, down the next. The values of gain between weight classes is changing weekly right now, too. Some people hate this. To me this is the sign of a healthy market. Most people think I am crazy when I say that, so let me explain.
When the market went up every week in 2014 people thought they were making money. All that bull market did was prove how many people could make a buck based on dumb luck. There were quite a few that lost money on that bull run, because they gambled and lost. They didn’t market. That historical bull run then lead us to a crash, and more people lost money. Skilled marketers did better during the crash than they did the bull run.
A market that has frequent and mild swings like we are seeing now opens the door to make some sound marketing moves. It is do much easier to manifest a profit by going with the flow. That just makes sense, since we can’t bend the market to our will. If we buy some cattle and have to hold out for a certain price just to break even, the market has a way of suspiciously letting us down. And eventually we will be out of business. By going with the flow the market has a way of suspiciously rewarding us with a modest profit and invites us to come back again. It seems to me that by holding out for a certain price we miss out on what the market is literally trying to give us. For you new readers I am writing this with a sell-buy marketing paradigm.
I am really struggling this morning to try to put the value of gain (VOG) into words. At one auction the VOG on steers from 500-600 pounds was fifteen cents. At another auction it was just under a dollar. Then at another auction the five-weights cost $10 more per head than the six-weights. The VOG swings were not as wild on the heifer side of the spectrum.
As a market commentary I do not like that last paragraph. I think its wishy washy, and that I may be letting you all down. I have had requests to discuss the buying side of things and I think this is a good opportunity to do that.
Earlier this week I read an email from a discussion group I am a part of. In that email there was a line to the effect that an auction is not always the best place to determine the value of cattle. At first I rejected that thought due to the whole price discovery thing auctions are supposed to reveal. Then this week happened.
Some of the auctions I use for data for this blog are markets I do business at. At one auction the guy that has been making the market for a certain weight class didn’t show up. At another auction the buyer that had been making the market for a weight class there filled his order. This created what I call a hole in those markets. I didn’t realize I was getting email from a prophet. A hole is where there is no buyer interest and the price drops, creating a higher than usual VOG for that weight group. This is when price discovery can fall on its face sometimes.
These holes tend to get filled quickly. This is why you need to be ready when you go to buy. I can’t even count the number of times I go to an auction thinking I am going to buy four-weights because they are so undervalued, only to quickly discover the reason they were so undervalued is because they needed a second-place bidder. I then notice there is a hole when they sell six-weights. So at the end of the sale I have load of six-weights. This is what it looks like when I mentioned earlier about going with the flow and taking what the market wants to give you.
This week unweaned cattle were $3-12 back, and feeder bulls were $6-20 back. The barn burner was a set of seven-weight replacement heifers that caught a $20 dollar premium. After adjusting the price for freight southern cattle were undervalued compared to plains markets. There are some good geographical spreads, even within the plains region.