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Want profit? Think turnover and cash flow

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Watch each Friday for Doug Ferguson's Market Intel blog on Beef Producer and BEEF magazine.
This week the market tells us profits can be made in lighter cattle and upgrading unweaned replacement-quality heifers.

Cattle auctions were interesting again this week. The people who were there were just as interesting. I made it to a few calf specials this week and there was a packed house, which we haven’t seen in some time. I would say the energy in the crowd was mixed.

I met a few people who read this blog. We had superficial conversation about markets and the marketing school I am teaching with Wally Olson in early October. Then it turned to questions about why I don’t write about this or that topic.

I try to just stick with useful information for this column. Think of a funnel for a second. Now imagine all the information there is out there and it swirls around inside this funnel until it gets to the bottom where it all comes pouring out. That point offers us the perfect distillation of information. It’s called a bid.

I called the bid “perfect” because we can do math with it. We can use it to calculate value of gain (VOG). We can use it identify relationships between weights and classes of stock. We can use it to do an algebraic equation to find the efficient market value of cattle (the maximum amount we can bid and still hit our profit target).

For some reason the cattle industry has a strange need to go up into the funnel and then try to figure out how we got here. Or to see if there is a chance it might pour out in a different spot: that would be forecasting.

Some people like to take one thing out of the funnel and examine it by itself, hoping it will change the market, and their chance at being profitable. This also is forecasting, or betting on the come. Problem with this method is all the other information still exists.

Our perception matters

A few weeks back I wrote about market literacy. This is based on interpreting the bid. I mentioned the energy was mixed at the auctions. A lot of buyers were not in a very good mood. That’s probably because they are losing money, and their hesitation to buy cattle kinda confirms that hunch. One of the things we plan to teach at the marketing school is how a slight change in perception can have a big affect on how we interpret the market, and utilize it to make some money. So when people say something like “The market is screwed up. We need to fix this somehow. Or we need it to level off,” That is an admission of lacking market literacy or needing a slight change in perception.

I saw one real good example of this. I was at an auction and I saw what seven-weight heifers sold for, and what nine-weight heifers sold for. The nine-weights were undervalued to the seven-weights. Now most people think they need to hold the cattle and make them bigger because bigger cattle get more dollars per head. That’s not always reality. The VOG between those weights was less than 50 cents. I’ve had some people tell me their cost of gain (COG) is well below 50 cents. Maybe it is if all you count is salt licks, ear tags and Draxxin.

Watching the market as closely as I do every week, I know those nine-weights could’ve been sold and replaced with something else that was undervalued a couple months ago, making a profit. Whatever was bought back would already be to the point of being overvalued to something else, setting up another profit taking opportunity. Turnover and cash flow are the lifeblood of this business.

Some might say their COG is not that high because they raise their own feed and its cheap. If we calculate COG like this we end up giving our feed away instead of capturing full value of it.

Holding cattle for that “bigger” payday is just ignorance. Ignorance is different that stupid, because we can fix ignorance. It is this ignorance that ends up leaving money on the table at every auction. This is somewhere around an $80 billion industry that leaves a ton of money on the table. This is what enables some people to get into this business on the ground floor and build an operation.

Check VOG

This week unweaned cattle were $5-17 back. Replacement-quality heifers caught a $7 dollar premium. I also saw some replacement-quality unweaned heifers sell. The premium didn’t come close to covering the discount. Plain weaned cattle brought more. The discount on the unweaned replacement kind compared to bred heifers is setting the stage to capture some nice appreciation value

The VOG on cattle weighing under the 600- to 700-pound range had a VOG that will easily cover the COG, making feeder-to-feeder trades on the lighter-weight cattle easy to profit from. The VOG on the heavier cattle fluctuated from one auction to the next. It’s kind of like the market is searching for an equilibrium there.

Geographical spreads are in play once again. A few hours drive could mean a $4-14 difference in price.

The southern markets remained undervalued and feeder bulls were $5-17 back. Fats got a little bump and with the heavy feeders fluctuating it would be possible to replace at a small profit.

The opinions of this author are not necessarily those of Beef Producer or Farm Progress.

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