We have all got questions. Questions are a good thing. I feel that if we have questions, it means we are paying attention to something going on around us. To find answers to questions we must elevate our level of thinking which raises our level of awareness. This causes some of us to get out of our comfort zones and for most of us that is all that is required to stop us in our tracks. For those of us willing to get out of our comfort zone, when we find the answer, it gets locked into our brain. Once we see it, we can never unsee it.
I am going to do something different this week and write about some questions I have been receiving lately and share my thoughts on those questions.
Comparing past markets to today
A frequently asked question lately is coming from young people not financially involved in the cattle business in 2014. They have been asking how the market prices today are comparing to back then and what they should be doing about it.
When I answer this, I remind them I am all in on Sell/Buy Marketing. I do not entertain any other thoughts when it comes to marketing cattle. This makes things much simpler because the only thing that matters is price relationships between different groups of cattle today. It is these relationships that make capturing a margin possible.
With these higher prices people have the old paradigm that “higher prices mean more profit”. What that really means is the market rose high enough to bail them out of their position. With sell/buy marketing that is not the case, the margin stays consistent.
What I have been cautioning these young people about is that these higher prices mean we will burn through our capital quicker and not own as many head, if we are virgin buying. Imagine we have $100,000 to go out and buy light weight feeder cattle. Last fall we could have bought 120 head with that money. Today buying the same weight of calves we will only be able to purchase 93 head. That is 27 fewer units we will have working for us to capture a margin, or four figures less profit.
These higher prices will also affect other variables on our cost structure. With fewer units in our inventory, we can’t allocate our overheads out as thin. Thus, driving up our Cost of Gain (COG). Also, if one dies there are fewer surviving cattle to allocate his high price across. This too swings the needle as far as COG is concerned. Few people understand that the COG is the fulcrum point for price relationships between cattle. If it starts getting too high, it begins making other cattle over-valued to what we have in inventory. All the sudden being able to allocate over the 27 head difference becomes a big deal.
The other thing to keep in mind in 2014 we didn’t have the interest rates we have today. If we are financing cattle, or feeding the interest the payment will be much higher today than it was then. And referring to the previous point we have fewer cattle allocate that expense across.
Another thing that is significantly different is in 2014 a bred heifer was worth as much as an acre of pastureland (Southeast Nebraska). Back then we saw record high prices for pastureland, and we are seeing record high prices for it again today. The big difference is that the bred heifers are nowhere near worth as much as an acre of pasture. In 2014 the higher price of feeders helped drive the female market higher, based on the false paradigm of a cow paying for herself by weaning off high dollar calves. Today the higher feeder prices aren’t affecting the female market much.
What’s happening in the market?
That leads me to the second question I have been receiving. Are people scrambling to buy up replacement heifers like we are being led to believe? It may be happening in other regions, it sure isn’t happening around me. In fact, I have been almost alarmed at how many OCV and fancy heifers I have bought since January. That right there tells me there is no demand for them.
We must examine the relationship between differing classes of breeding stock just like we do with feeders. When we examine the price of first calf heifer pairs, and bred heifers to the open replacements the value capture is unattractive at best and nonexistent at worst. The heifer development guys will keep doing it because that is what they do. Maybe they will get lucky this fall and the market will rise enough to bail them out too. After all that is what the predictions were.
In 2014 the older generations that were in the seats were talking about how it reminded them of the 80’s minus the high interest rates. I haven’t heard one hint from those guys that what we are seeing today reminds them of the 80’s.
In 2014 people had false hope that we were on a new price plateau, and prices would never fall. This time around people seem to be much more aware that these prices could collapse at any moment. I will tell you that those of us who know how to do sell/buy marketing in a certain way are not worried. We know that with sell/buy skill we will easily be able to generate positive cash flow.
View from the cattle market
This week feeder cattle under 450-pounds had the highest VOG. These flyweights just don’t have many friends in the seats right now. VOG takes a hard dive around the 7- to-800-pound range then rebounds at 900-pound. There are some fantastic feeder-to-feeder trades to be made right now.
With some heavy weight feeders posting a sell price slightly above to slightly below fat price there are some outstanding fat-to-feeder trades to be made as well.
On the breeding stock side of things there are some fabulous trades to be made there also. Some people are done calving, even though all their cows haven’t popped yet. The females that are close are still selling well. Females still in their second trimester are heavily discounted. Young pairs are highly over-valued to the other bred females.
If someone was willing to sell, and we should always be willing sellers, their young pairs and buy the “late” calving females that willing seller could easily capture hundreds of dollars per head in the swap if not four figures per head! The potential for a four-figure capture per head means I can not over state this: it suggests the cow-calf segment is not just in the business of selling calves. It doesn’t matter who tells you that you are in the business of producing or weaning calves. The relationships don’t lie.
If you live in one of those areas “to expensive to run a cow” and you could make $700 to $1,000 per head on one trade in the first quarter of the year, is it really to expensive to run a cow there? Now we finally are asking the right question. Maybe it is marketing skill that is missing.
All the breeding stock I saw sell this week (and to be clear I am writing about large/medium frame number 1’s) sold above their intrinsic value (IV). I did not see any cows sell that were over 8 years old. These younger females selling over their IV is not uncommon.
Feeder bulls were up to 30 back, and unweaned calves were up to 18 back.
The opinions of Doug Ferguson are not necessarily those of beefmagazine.com or Farm Progress.