It’s the price relationships that matter
Doug's Market Intel: If you want your results to make a quantum leap forward, here are some simple, but not easy, methods to get there.
June 9, 2023
The high cattle prices have certainly caused a buzz. It’s difficult to tell someone what you saw a group of cattle sell for without cracking a grin or shaking your head in near disbelief.
In 2014 the market did something I have never seen it do before. It got me curious and I looked at other commodities and the history of their market prices and they all did the same thing at some point in their history. With that knowledge I am not surprised at what we are seeing price wise in the cattle markets. What does surprise me is that I am seeing it again before my 70th birthday.
As exciting as this price level may be we can not abandon the fundamentals of marketing in a certain way in order to prosper. Last week one sell/buy cozener got caught up in the hype being created on Facebook and sent out an email showing a picture of the weight of a load of eight weight steers and their sell price. All he wrote about the picture is “The good times are here.”
All a rising market does is prove how many incompetent fools can make money based on dumb luck. The market went up high enough to bail them out of their position. Keep this in mind, the market goes up half the time, and it trades down half the time.
What would you rather do?
In my marketing schools I show a slide that asks the question of “what would you rather do?” Would you rather have the net margin from selling 100,000 units at a 10 -cent net margin? Or would you rather have the profit from selling 1,000 units at a $5 net margin? There are always people that go for the $5 net margin. I do this to illustrate the point of our fascination of market toppers. So, I can see why the sell/buy cozener is abandoning the principles of sell/buy marketing and getting excited himself about these high prices.
I will examine the market he shared the picture from. Remember the picture was of a load of eight weight steers that sold, showing their weight and sell price. I admit it was an attention getter. Thing is I also know what fats sold for the day before and I know what the Cost of Gain (COG) is that is attached to those fat cattle. It is the COG that is going to act as a fulcrum on a lever and help create relationships between cattle.
This useful information told me that the eight weight steers were overvalued to fats. Remember he said in the email that the good times are here. This is certainly not a “good time” or good trade if you were the feed yard that bought those eight weights because in a real-time cash flow reckoning, which is what sell/buy is, this was a losing trade.
Examining the sale some more, what if we compared the eight weights to what six weight steers sold for. With even just a little real-world experience we know that a trade will not work between selling the eight weights and replacing with the six weights based off the monstrous price slide between the weights. There is no possible way the Return on Gain (ROG) will be high enough to cover the COG. Still not finding the good time yet.
Getting a feel for the market
Another sell/buy cozener is quoted as saying that they enjoy looking at market reports to “get a feel for the market.” If we look at the smoothed out data set from this sale the weighted average leads us to believe that five weights were also overvalued to the eight weights.
If we examine a little closer and look at what actual drafts sold for we would find a hard price break at 550 pounds. Steers that weighed over 550 pounds were overvalued to the eight weights, while steers that were under 550 pounds were under-valued to the eight weights. Now this useful information, that was not found on social media or a USDA report, tells us that we could sell the eight weights and replace with light five weights at a slim profit.
A participant in the marketing school I held this week pointed out that I almost always write on here that fly weight cattle have the highest Value of Gain (VOG). It’s the same loop this week. If we replaced the eight weight steers with four weights we captured a handsome margin.
2015 Market Crash
I am going to back in time to the crash of 2015 to illustrate my point even further. I sold some steers then that were close in weight to 830 pounds and I got $1.24 for them. I bought back bulls and steers that had an average weight of 615 pounds for an average price of just under a dollar.
This trade made me over $200 in positive cashflow. When everyone else was losing money and ranting that there needed to be an investigation and someone needed to go to prison for the market crash, I was having a “good time.”
Market literacy matters
I can not over emphasize this enough. It is not the absolute price that matters, it is price relationships that matter. Having the marketing literacy and the marketing skill to pick up on the existing relationships and execute trades that generate positive cash flow is what makes the “good times.”
If the good times are a result of a market function, in this case going higher, I have bad news for you. The market will go down, or you will end up in a situation where you over-paid for a set of cattle and the market failed to go high enough to bail you out and you won’t reach your break even. Then the party is over and you will have to clean up the mess.
The legit sell/buy traders will keep the party going somewhere else. I received an email from a sell/buy marketer in Australia last weekend. They have had high market prices over there for a while and now they are experiencing a big correction. The conventional buy sell marketers are getting their heads handed to them. But as this Aussie wrote “it’s sell/buy full steam ahead.” The legit sell/buy marketers are still enjoying good times because they creating them.
The same goes for breeding stock
Even though feeder cattle were the point of focus for the relationships in this piece. I will point out the relationships also exist in breeding stock. You can create your own good times by knowing how to execute sell/buy trades with them in a certain way as well.
Cattle markets
I tried to be a little more creative this week pointing out the VOG on fly-weight cattle. As I look at sales form the week it appears that right around the six weights the VOG gets a bit bottlenecked. It gets squished right there falling well below the COG. Then in the heavier feeders it jumps well above the COG again until it hits a price cliff in the nine-weight group. This may certainly sound volatile to those with the traditional mindset. Legit sell/buy marketers see this as a great opportunity to create their own personal good times by utilizing the relationships to execute some good trades. Fats got a nice price bump again this week and there are some wonderful buy backs against them.
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