Although there were a few auctions this week, I don’t feel I have enough market information to accurately comment on. So I figured it would be a good time to do here what I should have done in the beginning of this blog -- define some of my terminology.
I write this column from a sell-buy marketing paradigm. Most people do what they think is buy-sell marketing, in which they hope to sell an animal for more than they have in it. If they are lucky enough to pull this off they think they made a profit. To me buy-sell is just a form of gambling. I call it betting on the come. They only way this works is if they successfully predict the future price of cattle. We can tell how successful this has been since we seem to accept that raising cattle is a breakeven proposition. This implies they hit the jackpot 50% of the time. I don’t care for those odds. Believe it or not, this is a relatively new way of marketing cattle. It's only been around for a handful of decades. I say it is new because the livestock business has been around since Cain and Abel.
First let’s examine what marketing is not. It is not haggling with a buyer over price, that is just a negotiation. It is not driving sharp bargains to get top dollar, that is just price gouging. It is not running ads to drive up demand, that is just advertising. It's not taking your cattle to auction when you think the price is good, that is just selling.
I have two definitions of sell-buy marketing, kind of like in the dictionary. I got both of these definitions from Ann Barnhardt. It is unclear to me if she came up with these or they were taught to her by Bud Williams.
1. It’s a real-time cash-flow reckoning. What that means is we look at current price relationships to determine what is overvalued and undervalued. Since its real time we can determine what is profitable right now. We remember the past, we live in the present, and we can only try to predict the future. This is why sell-buy marketing is much better than buy-sell.
By focusing only on price, many of the other trendy things people like to spend time talking about don’t matter much. I say they don’t matter because all that information has already been considered and what it all boils down to is a bid. This is why I don’t spend any time discussing or even looking at cattle on feed reports(COFR). All they tell us is what the supply is, they do not tell us what is available. Available is what’s for sale, supply is how many they have. For all we know all the cattle in a COFR are three-weights. If we knew that it would certainly change things, wouldn’t it?
2. Sell-buy marketing is a continuum of liquidation and replenishment, generating cash flow and profit.
We must take this one and dissect it. First the word continuum. Of course it has to continue or we would be out of business. Liquidation is the sell. Replenishment is the buy. Notice the order or the words: Sell-buy equals liquidation-replenishment. Put another way, the sell generates cash flow, the buy-back generates profit.
Further, selling and buying back could apply to any of the three things in the inventory triangle of feed, money, and livestock. We sell cattle to buy money. I know it sounds weird but that is what we are doing. If the word sell bothers you substitute the word trade. We then trade-sell our money to buy more cattle. We sell cattle because we value the money more. We trade the money because we can buy back cattle to which we can add value. Same with feed: We buy feed because it is undervalued to our money. We add value to our feed by feeding it.
This leads me to Value of Gain (VOG). VOG tells us what the weight gain is worth between two differing weights of cattle. It is calculated by dividing the net difference between dollars per head by the net difference of weight. If the VOG is higher than the Break Profit Cost of Gain (BPCOG) we know the market is paying us to put weight on cattle.
A word of caution, VOG is frequently manipulated by feed salesmen and registered cattle breeders. When they use it to sell you something they conveniently leave out the price slide, and the added cost of the feed, or paying a higher price for a bull. Value of gain must include those costs to be an honest and valuable aid.
I mentioned the slide and I realize some people don’t know what that is. As cattle weigh more, they usually bring less dollars per pound. I’ll give an example: If a 500-pound calf is bringing $1.50 and a 600-pound calf is bringing $1.38, that is a 12-cent slide. Sometimes this is called rollback.
BPCOG is all our expenses, including profit, divided by the weight the cattle gained. I have no interest in breakevens. A business can go broke just breaking even. We must figure profit as a cost, since profit is what gives a business sustaining life. Once in a while I hear someone say they made money on a group of cattle, but they don’t have enough money to pay their bills after the cattle were sold. This tells me they are not accurately calculating their costs. Include everything. This is why I stress you must know your costs.
During this holiday break my 8-year-old gave me a math quiz. She asked me, “3 times X is 9. What is X?” I answered her then asked her a question. “What do you call X?” She was a bit confused, so I informed her that it is the unknown factor. I then sat her down and walked her through a cattle square to determine at what price we could profitably buy back a 500-pound heifer if we sold a 700-pound heifer. We know the weights. We know the sell price and the BPCOG, so all we have to do is solve for X. Profitably marketing cattle is that simple. Some people call X the Efficient Market Value. I simply just call it my card.
Here's my last point this week. I realize every time I write these I cover stockers, and I leave out the female side and fats. Sometimes when I write these the fat market hasn’t traded yet so I don’t know the current price. The female market tends to be more seasonal in some areas, while other areas have monthly specials. This is why I don’t include them every week. I do feel it's important to include stockers every week because we are all involved with stockers. The cow-calf segment produces them, the stocker/backgrounder buys and sells them, and the feeder buys them. So we all need to be aware of what is going on with stockers.