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Watch each Friday for Doug Ferguson's Market Intel blog on Beef Producer.

Understand overvalued and undervalued

Older pairs had abnormally tight depreciation and value of gain especially thin in southern markets this week.

This week I went to an auction in west central Nebraska. We have all heard about the drought gripping parts of the nation but sometimes that doesn’t really sink in until you witness it. While there, I made a comment about how much different it looked compared to where I live, which is only a few hours away. This led to some interesting conversation.

I heard stories from some of the buyers there that they had purchased cattle on video that were to be delivered later this month or in October. Due to the drought some of the sellers have run out of feed sooner than they expected and asked if they could deliver the cattle sooner. Some of the buyers agreed to take them. This led to a question among buyers as to why the price of feeders is staying so high because pen space is not available. Then you talk to the next guy and hear about all kinds of empty pens because some feedyards are sitting it out until we get a price correction. I even heard of some buyers releasing the sellers from the contract and letting them load them and sell them somewhere else.

Every week I try to point out profitable opportunities in the cattle business. The implied hint that I should make more clear is that your No. 1advantage in the cattle biz is marketing skill. Your number two advantage is managing your inventory. Inventory is the triangle of feed, money and cattle.

Feed inventory

My Australian friends have come up with a phrase that I think is really great. The refer to the “feed budget,” which is to say the amount of forage they have available. A simple example I can offer is to assume we have eight-weights on grass, and that they will consume all the grass in 50 days. If we sell the eight-weights and replace with four-weights we can extend our feed budget to 100 days.

At the central Nebraska auction where I was, it was possible to sell eight-weight steers and replace with four-weight steers with a return on the gain (ROG) of $1.07. With a break-profit cost of gain of 96 cents, we can easily hit our profit target since the ROG is higher. This sets us up to take an excess profit, more than we were trying to get.

This is a great example of excellent marketing and inventory management: We still have cattle in inventory and we added to the money we have in inventory, plus we extended our feed budget, allowing us to keep feed in inventory for a longer period of time.

That period of time has value as well. During the period of time we own the four-weights they will grow. The value of gain (VOG) throughout the feeder spectrum is signaling that the market is willing to pay us for this weight gain. Another thing is that by extending the feed for another 50 days, it may begin to rain again during that time. We all know a rainfall can have a dramatic effect on the cattle market.

To summarize this scenario, marketing skill coupled with sound inventory management can help alleviate the burden of drought.

Pair pricing is tight

This week there were enough pairs for me to make a comparison to write about. In the drought area I saw some three-in-ones sell of all ages. Pairs 3 to 8 years old only had a $22-per-year of age depreciation. I don’t know that I’ve ever seen the prices that tight on that age spread. The broken-mouth cows only dropped $60 in price from the price of 8-year-olds.

The following day I saw some pairs sell in eastern Kansas. These were not bred back and they were fleshier. They brought $500 more than the pairs in the dry country.

Stocker/backgrounding operations should be feeling pretty good about themselves right now. The eight-to-four-weight trade I outlined above would scratch out a three-figure-per-head profit. And just like the pair trades, geographical spreads are in play with stockers. A four-hour road trip can equal to $4-14 dollars per hundred price difference. If we figure that in to the steer trade we can easily be well into three figures her hundred.

The VOG throughout the feeder spectrum should easily cover the COG. At each auction I attended, or market report I looked at this week, there were a few hiccups. The hiccups were caused by an overvalued price for one weight compared to the weight right above it.

I’ll give an example of what I mean. At the western Nebraska auction four weight steers were overvalued. I made a comment about that to a buddy who doesn’t understand sell-buy marketing and he asked how I could so quickly determine they were overvalued. I told him it was easy to spot, everyone was bidding on the four-weight steers; that’s one sign. The other sign was the $20 slide between them and the five-weight steers.

Law of relativity

If you’re going to buy feeder cattle you must understand the law of relativity as a universal law. Simply put, nothing is big or small, overvalued or undervalued until we compare it to something else. The four-weight steers were overvalued to five-weights. They were also undervalued to eight-weights. So, it is possible for a weight class to be both overvalued and undervalued. When we really understand price relationships it becomes easier to spot what I call fault lines, which is the narrow gap where the most undervalued cattle are. One of the guys bidding on four-weights should have stopped bidding on them and started buying five-weights. That’s where the fault line was that day.

This week there were not many unweaned calves in the offerings, with the unsettled weather that was a wise move to keep them home. Feeder bulls were $10-24 back. The southern markets were undervalued to the plains markets. The VOG in the south was nowhere as good as in the plains, and the heavier the critter the more undervalued it was. The price of fats continues to be depressing. The only profitable buy-back is the heavy feeders in the south, and even that is a thin margin.

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