This series was origionaly posted on Cattle Call in early summer 2011. It is very important cattle producers grasp this. NCBA edited some stuff out of the origional I submitted to them. Part 1 is more of an intro, part 2 is where the good stuff is
Supply and demand is a natural law. It rules socialist and capitalist economies and is as natural as gravity. The law states that scarcity is the driving force of nature. The scarcer a commodity is the more we value it, and the more abundant it is the less we value it.
The law of supply says that as prices rise suppliers will produce more of it
The law of demand says that as the prices rise the consumer will demand less of it.
What this means is high prices are always working to produce lower prices. Conversely, low prices increase demand while at the same time discouraging increased production. Today’s price level is always working to create the opposite. The easy conclusion to draw here is to buy low and sell high. (like anybody can time the market like that) To make a profit you must learn to move in the opposite direction of the current market situation.
An example of this would be the feeder market. A couple months ago, peeps could not buy enough six to nine weight cattle. They HAD to have them because the “smart” people were talking about how small the cow herd is and how tight supply will be. Then bang, we find out placements are way high right now because of the cattle that left the drought regions of the U.S. These guys bought up as many cattle they could at inflated prices because they were told supply would be tight and they thought the price of fats would go higher. Betting on the come is gambling. Now these guys are scurrying around wondering about what they should do. I bet they are the same guys that shorted the cattle market last fall and got hit with huge margin calls. (that is the type of bet I make) So the example of going against the current situation, is I was the guy selling the six and seven weight cattle. Knowledge and marketing skill is what makes me profitable.
So what can you learn from all this? Supply should not be confused with availability. The word supply is commonly used to mean the long term amount. So we can have the second largest supply of placements in history, (which was reported by the “smart” people but a look back into history will show a number of years of higher placements) but that does no good to us if they are all five weights. Available supply is the amount that is readily obtainable. The confusion surrounding supply is what can lead to “pipeline shortages”, and people are often tricked into long term decisions based on short term price rises. This is why cattle on feed reports are totally meaningless. People with the proper marketing skills know this.
In a long production cycle such as the cattle biz we have a confusing act to deal with called “lag”. An example of lag, is in order to produce more beef we must first produce less by withholding heifers from harvest. Or to produce less beef we must first produce more by sending cows to harvest. As I stated earlier we are always creating our opposite.
The price that currently exists for any commodity will not be the price that will exist tomorrow. So any profit that is obtained through increased production will be temporary, if it is achieved through an increase in underlying fixed costs. The result is the inevitable cost-price squeeze.