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Commodities offer income opportunities

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Watch each Friday for Doug Ferguson's Market Intel blog on Beef Producer and BEEF magazine.
While there is some doom and gloom on the economic front, you can still control your destiny in the cattle market

Inflation has many people concerned right now. One headline I saw this week was “What will Americans do when inflation forces US households to spend 40% of their income on food”. Last year we learned the answer to this question. People simply rush out to buy things because of the headlines. This of course raises demand and causes prices to rise. It will also intensify ongoing shortages.

Here’s something else that got my attention. One article I read was pointing out what inflation has done to certain commodities. It pointed out home prices were up 16%, cotton 50%, corn up 50%, lumber up 200% from a year ago. Personally I am skeptical of this because not everything is soaring. Are some prices soaring because of inflation or is it because of government’s intervention in business when it issued a shut down last year? Whatever the cause it’s the ride we are on.

Economic doom and gloomers have been warning about recklessly spending, creating, and borrowing money. Telling us it will lead to the death of the dollar. Well, I also read this week that crypto currencies are now worth more than the US dollars currently in circulation.

I do not know much about crypto; I do know commodities. In the past commodities have been a good thing to own during times of inflation. As marketers we must understand the value of relationships between things in our inventory, money being one of them.

Putting money to work

Here’s an example. Years ago I was buying four-weight heifers when this guy comes up to me and says “I don’t think those heifers are worth that much” I told him that I didn’t think my hundred dollar bills were worth those heifers. At the time we were undergoing one of the quantitative easing phases. I knew my bills were rapidly losing buying power. Most people didn’t see it that way, they thought the market was doing just great because cattle prices were going up daily. By buying those calves I had a hard tangible asset that was holding value while my dollars were losing value.

When we market something, we should be improving our position. We should capture the value of time, lay off risk, replace with something that will increase in value, and generate a positive cash flow. Here is what gets a burr under my saddle. Some people think that since we are supposed to sell the overvalued and replace with the undervalued that we hold onto the money when it is undervalued. I do not see it that way. If we do a good job marketing, we should be able to replace the inventory we sold and capture a profit. I would much rather have something in inventory that can’t have its value manipulated as easily as a fiat currency.

What if we did sell some cattle and decided to hold onto the money. We decide to put the money in the bank to draw some interest. If we leave it in there for 120 days the interest would barely average out to $8 per head. A skilled sell/buy marketer could buy back replacement cattle and turn them in the same 120 day window and make more than $8 per head easily. One thing I’ve learned is that money is meant to be circulated, that is how it grows.

To be clear I am not saying we should spend every dollar we have on cattle and feed. We should have a reserve of money laid aside for emergencies, to pay bills and to be able to buy something when it needs buying.

The financial power of cattle

One of the many great things about cattle is they are extremely liquid. All it takes is one trip to the sale barn to either be in or out of the cattle business. When the market gets volatile prices between weights, sexes and classes fluctuate creating opportunities to make some great trades and generate some positive cash flow.

If you decided to hold onto your cash for awhile you may miss out. You may also find yourself in a situation where your cash has less buying power. You also must remain disciplined and not spend it on something foolish. I know some people who pull their money out of cattle and invest it in something else for a while. If you are knowledgeable about other investments that may be an option for you.

Market report

This week the value of gain remained well above cost of gain on feeders under 600 pounds. From there it is hit or miss. Some auctions had heavier cattle with attractive VOG while others had poor VOG on the same weights.

Geographical spreads were a strong factor this week. If you sold fats it was next to impossible to replace them and capture a profit buying back replacements in Nebraska. It could be done buying them somewhere else. Nine-weight and heavier steers, and heifer weighing 800 pounds and up appear to be the best replacement buys for fats.

For those looking for a virgin buy the fly weight calves are the place to be. They don’t cost much per head and are showing the highest VOG in the spectrum right now.

This week feeder bulls were 6-22 back. Unweaned cattle this week brought slightly more than weaned cattle, on some fly weights, to 20 back on heavier weights.

For those of you who are believers remember that Parable of the Talents. We are to go trade and grow our holdings, not burry it in the ground.

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