Last Saturday I got an awesome phone call from a participant of one of my marketing schools. He sold some of his steers and was able to execute a sell/buy trade. His buy back was a group of steers that were a little lighter than the ones he sold, and they were over thirty-five dollars back from his sell.
At this point we do not even need a calculator to figure a Return on the Gain because we already know he’s generating positive cash flow. After we got off the phone, I did run my calculator just to see how well he did. His trade had a ROG of almost $8. Again right there we know he’s doing well because his Cost of Gain will be no where near eight bucks. But I plugged in a COG of $1.50 and this trade made over $250 per head.
He told me this before we got off the phone “I am having so much fun now”. And it should be fun.
Late November, early December I sold all my cattle and for personal reasons decided not to buy back for a couple weeks. Then I fell ill and haven’t started buying back until this week. From the time I sold until now there has been a market rally. At a quick glance at market reports I should not be able to execute a sell/buy. But, like I’ve said on here many times before the market has a way of taking care of us if we a patient and take what it gives us. This week I have filled most of my pens while capturing a respectable margin.
I mentioned looking at market reports and I want to expand on that. First is we look at a sale barn website they post them in three different ways. One way some do it is to just post their market tops. Another way is to post the price spread. An example of that is: 400-499 pound steers brought $179-$210.
Don't focus on market tops
Here’s the thing about that. People are obsessed with market tops. Sellers look at those top quotes and get excited. Stockyards do this for a reason. They are trying to attract those sellers to consign with them. This is why sellers are often disappointed with what they receive for their cattle. They look at the top quote for the weight of cattle they have. What is often overlooked is that they may not have the type that will get that price. And sometimes the top quote is a small group of two or three that someone wanted to put in the back yard and eventually the freezer and another buyer ran them. This is not an accurate reflection of the market.
The third way some stockyards post their market reports is by posting some of the drafts. This gives us a much more accurate feel for the market because it shows the volatility within the market.
Weighted averages are a useful tool. It is my opinion that market reporters have the only meaningful job at USDA simply because they give us the only information we can use to prosper. But here’s the thing about weighted averages. They are a smoothed out data set. So it doesn’t reflect the volatility of the market between drafts.
There are also a lot of cattle that don’t meet the USDA guidelines to be included on those reports. These reports are very useful in that they give us a good idea of what the relationships between weights and classes of cattle are. This tells us what kind of trades are possible and how good they may be. Thing is, with the volatility between drafts the possibilities are much better.
The cattle that my student and I bought are not the kind that will show up on a market report. They are still good cattle, they are just plain. They are also the kind that create prosperity
Here’s the catch. We both have market literacy, we were at the auction, we were paying attention and ready to capitalize on what the market was willing to give us.
Selling market toppers does not mean we make the most profit or capture any profit at all. Take the steers my student sold. They were lighter than he thought, and they were not market toppers. Since they were lighter than expected this made his COG higher than he anticipated, nor did he get the price for them he was expecting. Here’s the rub, I can almost guarantee that he captured the biggest margin of anybody there that day simply by understanding the relationship between his sell and the replacement buy. And don’t forget I kicked the COG up to $1.50 which I doubt was that high.
This is why top quotes don’t matter. Only the over and under-valued relationships matter. We need to get the absolute-price monkey off our backs. It holds us back from seeing what is possible.
Buyers driving the market
This week in the markets one thing was very clear: Buyer desire creates the market.
As we look at Value of Gain and prices paid for certain weights of cattle we can easily tell where buyers are setting their sights. Some heavier weights of cattle, going by hundred pound increments, brought more per hundred than the lighter weight right below it.
Buyers really want that weight class. What this did to the VOG is make it look like yo-yo. It gets high between two weight classes and narrow between others. Now not every sale was like this. At other auctions the VOG was the same as last week, having the trough effect were it was higher on light and heavy feeder and smaller on the middle weights
Three and four weight cattle saw the most volatility this week. From one sale to the next these calves could see a $50 price swing! That is not a typo, a five and a zero. The price they got depended more on who was there than on quality.
Heifer demand on the rise
Another thing we are seeing last week, and this week is an increased demand for heifers. There is not as big of a rollback from steers and they have a consistently better VOG than the boys do.
This week feeder bulls were 5-20 back, and unweaned cattle were 5-15 back
This week I also caught a couple female sales. Keep in mind the sales I watched were in Nebraska so what you see in other states may differ some. Again buyer desire was clear on female sales. An animal is over-valued because that is what people want to buy.
First-calf heifers were in high demand. Their weight and stage of pregnancy (we preg them by months bred here, not trimester) mattered more than AI vs. bull bred or color.
A heifer that was over 1000-pounds and 8 months bred had the highest demand. Female buyers will pay more for cattle that fit their desired calving window. If the heifers were over 1000-pounds and 9 months bred they brought just a little over $100 less.
Heifers that were in that 8 month window but weighing under 1000-pounds were $300 back.
Heifers that were 6 months bred or less took a $500 hit.
Here’s the thing when we compare them to open replacements. If we have the 8-month bred that is over 1000-pounds there is a margin to be captured if our cost to keep it low enough. We have to know what our cost to keep is because the margin is tight. The open replacement is overvalued to any other bred heifer than the heavy 8 month bred. The 6 month or shorter bred heifers were only a couple hundred dollars more than feeder heifers.
The 3-4 year old cows had a $250 drop in price from the most desirable bred heifers. They were also equal to or higher than the bred heifers that buyers didn’t key in on. From there on there was a $100 drop in price for each addition year of age until they reach the short solid stage, at which point they were selling a bit over the scale.
To summarize that the heifer development business looks tough right now. If one falls out of the desired calving window, she is costing you money. There are some good margins to be captured if we are willing to sell the 8 month bred females and replace them with the late calving females. The older cows look like a good buy. They are old for a reason, they know how to do the job, and they are almost fully depreciated.