October 23, 2020
This week I got a call from a rancher friend who was in a panic. It’s getting close to the time he has to sell his calves and the market being down hard early in the week had him shook.
Two weeks ago he told me the market was going to go higher and he was feeling good. He told me he listened to another market commentator and that guy said we need to back these bills and ideas floating around about market transparency and price reporting on fats, in order to boost the price of fats and that would set up a trickle-down effect for calves. He also told me the market analyst said backgrounders aren’t making any money. Since that is what I do he was curious if I was losing money right now.
My friend is busy gathering useless information and it’s scaring him. I asked him what his calves were worth. If I sent a truck to pick them up this weekend what do they weigh and what will they cost me? He had an idea of what they weighed, but no idea on the price. He should be looking at market reports instead of YouTube.
Before I continue on, I want to take you back five years to when I had some fats in a custom yard. The week they were show listed two packers weren’t bidding and one packer had no interest in my cattle. Isn’t that convenient for the remaining packer. I was offered a decent price for that pen, but the bid was only good if he could buy the entire show list. My ability to market my cattle was in some other fool’s hands.
It’s my responsibility to sell my cattle and replace them at a profit. I made some calls to buyers and got the pen sold, and then carried on my way and got them replaced, making a little money. I didn’t know what anyone else sold their cattle for, or if they got an offer from the third packer. All I knew is what cards I was dealt, and I knew I could make it work. My positive result there was from the conclusion of my own thinking, or philosophy. The Irish playwright George Bernard Shaw once said, “The people who get on in life are the ones who look for the situation and circumstances they want, and if they can’t find them, they create them.” That’s what I did by placing those calls.
I read the emails this week about NCBA’s 75% plan. I am not sure what they think this will accomplish. Nowhere did it mention how this will make us profitable. They use the word “robust” a lot. So, I guess it will help us somehow to know what our neighbor is selling his cattle for. Yet the paragraph above shows that all we need to know is what our cards are and how we will play them.
There is one line in NCBA’s bullet points on triggers that bothers me. “Achieve no less than 75% of the weekly negotiated trade volume that current academic literature indicates is necessary for robust price discovery in that specific region.”
I have no clue what academic literature is, or what it says. I asked Google and Siri for help and here is what they came up with. Academic literature: “All the literature that has been published on a particular subject used to describe things that relate to work done in schools, colleges, and universities, especially work which involves studying and reasoning rather than practical or technical skills.”
When I got my fats sold and replaced five years ago it was the result of the practical application of technical marketing skills, not classroom theory. We all know people who graduated from college and then found themselves not equipped to deal with the real world. So why are we relying on academic literature when it comes to markets? Again this is the difference in my philosophy and that of the mainstream.
A great point from a friend of mine who used to work in university extension is this: Would these university experts follow their own advice if they had to sign their own name to the bottom of checks that are $50,000 and larger? Could they explain it to their wife if they did?
I explained above I have been involved in the collusion. It’s real. I am in favor of transparency and accountability. But one thing I explained to the marketing school students recently is that our neighbor can sell cattle for a higher price and have a lower cost of gain, but if he doesn’t have marketing skill and we do, we will run circles around him. Robust price discovery won’t do a thing for us without the practical application of technical skill.
I’m going to add my disclaimer here. I am not advocating one way or the other whether you should join NCBA. That is a personal choice. I write this blog with the profit motive in mind and it is still unclear, even after NCBA’s six-page email, how their bullet points will help us.
I have addressed the trickle-down myth before, but I’ll do it again. This past year (2020) has given so many good examples. I reached into my drawer where I keep my market notes from each week. I randomly pulled one out from this summer. It was for the week of July 10. That week we had 96-cent fats and $1.41 eight-weight steers in Nebraska. If the trickle down were real those eight weights should have been $1.09 in order for the feedlots to make money replacing with them. Five-weights were $1.74
Now we have $1.05 fats and eight-weights at $1.43, and five-weights at $1.58. Those eight-weights have stayed in the $1.40s for quite some time. The reason the five-weights changed is because there is a glut of them right now. There is no trickle-down, only price relationships.
One other myth is that when the price of corn goes up the price of cattle goes down. During this time corn has added almost a whole dollar, yet the price of the eight weights has held constant this whole time.
Let’s do a “fun with math” example to check up on the claim about backgrounders not making money. We could’ve sold 770-pound heifers in Nebraska this week for $1.34, down eight cents from last week. We could easily buy back bawling 550-pound heifers for $1.32 by buying the small lots. This gives us a return on gain (ROG) of $1.38. If we have a break profit cost of gain (we add profit is as an expense) of $1.10 this trade will net us $60 excess profit above what we already penciled in. Backgrounders who are going about it in the right, with the right philosophy, are crushing it right now. And they should every year during fall run.
Current price relationships
With the price drops this week, the relationship between feeders and fats changes as well. It is now easy to replace fats, especially on the heifer side. When buying steers, feeders will have to be selective. Some of the average prices on market reports are too high to work against fats, but by buying the ones that don’t show up on the market reports it will work. That’s what I mean by “selective.”
One thing that is clear to me by now is that cow-calf operations are not reading this blog. I mention the discount for bawlers every week and every week I see more bawlers. This week they remained $2-14 back. I decided to run a VOG on them. If we weaned them long enough for them to gain 50 pounds the VOG is $2.35 or higher! This is one reason why back grounders are crushing it right now. A 30-day wean is worth $100. Feeder bulls were $6-20 back for weaned, and the discounts are even bigger if they aren’t weaned.
Feeder auctions were $4-12 lower this week. That makes people nervous. The thing is, the VOG actually improved a little. Last week seven-weights were the hot ticket. This week I didn’t see any weight that stood out as a hot ticket. With the change in relationships and the bump in VOG it’s making it even better, and easier to do some trades between feeders and fats to feeders.
This sounds unreasonable to the mainstream guys. I explained this recently in the marketing school that Wally Olson and I conducted. Not all weights change in price at the same rate, so when the market goes down we need to be trading. This allows us to pull cash out of the market and maintain a full inventory of cattle. This is being self-hedged in a bear market. I showed the class some examples of how freezing up, holding out for a higher price, and not trading during a down turn can cost cash flow and profit, even digging such a big hole it may be impossible to get out. Some people think they need that higher price. Remember Walmart got as big as they did by selling for less. Margin and turnover are what we are after.
I caught some female sales this week. One thing is clear, it is cheaper to buy a bred heifer than it is to buy an open heifer, run her for a year and breed her. The appreciation value doesn’t exceed the cost to keep. The top of the cow bell curve is the young to solid mouth cow-calf pair. As they increase in age from there to broken mouth pairs there is about a $200 per year of age depreciation cost. Good mature bred cows are selling just over the scale. Much to my surprise, at one auction they let broken mouth cows go for below weigh-up price. That’s a good example how when you go to an auction you need to be ready for anything.
While the No. 1 females double in value from being bred to pairs, the number twos didn’t fare as well. From a bred to a pair they only appreciate $300. That’s the bad news. If you can upgrade them to number ones you could easily add some big value. The other good news is there isn’t much depreciation on the number twos. Their bell curve is pretty flat.
The opinions of the author are not necessarily those of Beef Producer or Farm Progress.
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