July 28, 2023
This week my family and I went to the county fair, and while we were there, we watched the bull riding. The bull riders that rolled their shoulder and controlled their free arm left with the money. I pointed this out to my daughter, telling her that to be successful at anything you must have the fundamentals ingrained in your head. Cattle marketing is no different.
The first year I rode bulls I was not aware there were any fundamentals to it. I was bull hanging-oning. Once I was aware there were fundamentals, I drilled them repeatedly that winter, and started winning some money the following spring. I went through the same thing with cattle marketing. I learned the fundamentals, and as a result, my operation consistently cash flows, no matter what the market is doing.
Years later I came to understand that the reason sell/buy marketing works is because it is in harmony with immutable laws of the universe. The reason people think the cattle business is a struggle is because they are ignoring these laws and the fundamentals.
If you are running break-evens you are not in harmony with the immutable law of relativity. While most people would think a breakeven calculation is fundamental to business, it is not. The only way we are ever going to positively cash flow the business, even if the market is going down, is to compare the animals we have in inventory to the animals we could replace them with. The fundamental calculation then is figuring Return on Gain (ROG). Without the ROG calculation, or cattle square, we have no way of comparing animals. It is this calculation that determines the over/under-valued relationships.
Here’s an example. Let’s pretend we own a feed yard in Nebraska, and we sold fats last week for $188. We then go to the local sale barn and replace with nine-weight steers. In this example, we just bought a loss. The ratio of dollars to pounds on this replacement buy against the fats we just sold is off. The ROG would be lower than our Cost of Gain (COG). We violated the law of relativity with this buy back.
Breakevens don’t work
This example is why breakevens don’t work. The breakeven says we sold out for more than we had in them, so we made money. But then we went to the local cattle auction and bid away the Value of Gain we should have captured in the fats we sold.
If we are running breakevens, we are gambling. We are betting on the come, or that the market will go high enough to bail us out. In some cases, people will then try to hedge their bet by purchasing LRP or options. We now have a situation where a bet is in place to offset our previous bet. This may be a good fundamental to have in Vegas, but it is not a fundamental of business. Also, let’s not forget these hedges are not free, which drives up our costs.
Discipline is key
With sell/buy marketing our control is on the buy. This will require discipline. This means that we pass on the fancy nine-weight steers at our local auction, and we buy a plainer looking load of nine-weight steers south of I70.
I know how some people are in Nebraska. They would be concerned about the difference in quality. We have free will to make our own choices, however we are not free from the consequences of those choices. This is another immutable law called cause and effect. We can buy the undervalued plain steers south of I70 at a profit, or we can buy the fancy local steers at a loss.
Cattle = weight gain business
In the feeder markets the VOG remained strong for the most part. There were a few occasions this week on cattle weighing over 700 pounds where a leapfrog would pop up. For the most part, this is a weight gain business. Some feeders are overvalued to fats, while others are not. Feeders are trading over and under to each other as well. The people with market literacy and the fundamentals that come with it can navigate this market and prosper.
Here's something else to be aware of. With these higher prices, and the smaller national herd size, it is more important than ever to understand and be able to calculate these relationships. Now that some feed yards are starting to buy losses into their inventory to fill bunk space, the stage is being set that in the not-so-distant future some of these operations will come up for sale.
The biggest mover in the market place this week was the bred heifer in the drought affected areas. She was up a few hundred dollars this week and is almost bringing the same dollars per head as an open feeder heifer. With this rise in the bred heifer’s value the bell curve would look pretty flat. There is little appreciation in bred females. The good news is due to the law of polarity, which means opposite, there is also very little depreciation in bred females. Situations like this do happen and that is the reason we cannot allow ourselves to get locked in to the 5-year-old and out program.
Spring pairs are overvalued (again this is in drought affected area) and this is where the relationships get interesting. Most pairs and breds are selling under their intrinsic value. This is not necessarily a bad thing, if we look at it the right way. Currently it is possible to sell broken mouth and short solid pairs and replace them with bred heifers. While this trade means selling value into the market, we could get paid more for that value than it is worth.
Think of that. With market literacy and fundamentals, we could market an old cow and replace her with a bred heifer and make money doing it all while battling the struggles of a drought.
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