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Its Already a Trend

Give this article a quick read.

 

http://www.salina.com/news/story/haysfeedersclosefull

 

Now I don’t usually write a blog post and put it up right away.  I usually wait a day or two and reread it, before posting and I try to put some thought into them.  This article is almost a perfect reflection of what I talked about in my last blog

I wanna quickly go over some of the points that were brought up.  First they said this is not a trend.  This summer the big feedlot in the county where I live told the local paper,  that they would close if it stayed dry and input prices stayed high.  I drove by that yard two days ago.  They had pens that never had cattle in them this summer, and you could see they had shipped some cattle out of other pens sometime in the last week or two.   Time will tell if they repopulate.  Will this be a trend?  I talk to a lot of order buyers and feedlot owners weekly.  Their greatest concern is if they will be able to find replacement feeders in the near future.  We saw so many calves come to town already this summer  that normally come in the fall, and winter months.  For now it sounds like the bunk space is filled.  And there was the mention of supply lag in heifer retention.  That is a good point.  Right now I know of a lot of people who sold their steers and are hanging on to their heifers to see what happens.   There was the mention of  “do we need all that bunk space?”  I read a cattlefax article a couple years ago that said back then that we had 25% more bunk space than we had cattle!  After the blizzards of 09/10 and the drought of 11/12 taking a huge toll on cow numbers I can’t imagine how over build the feeding sector is today.

If you are new to what I write you are about to find out I continually harp about skill.  The number one factor in profitability is marketing skill.  In the article he blames the drought for high input prices.   Go back several years with me here.  When fuel hit $3 for the first time I heard people in the salebarns whining that it would put them out of business.  I made the retort that if $3 fuel was going to force them out they were already out the door they just didn’t know it yet.  Funny how a guy in his late 20’s was right.  Those producers still have cattle on the yard today, thing is they went broke and now are a grower yard for some big feedlot.  So here is why I bring that up.  There is a quote in there that says “We ship cattle from dry areas to wet”.  Yes we do.  With fuel at well over $4 where I live transportation is still cheap, compared to geographical spreads.  I buy cattle in different areas.  Sometimes a couple states away from here.  I can get them home for $20/head.  Thing is I bought them for $10 to $40 a hundred cheaper than I can buy them locally.  I can pay the driver  $500 to $2000 depending on how far he has to ship them and on a 50,000# to 56,000# load just look at how much money I saved!  They said they were going to wait until the economics improved.  It looks pretty good to me

I can just hear you now “Not so fast my friend.  What about the drought raising the price of corn?”  Corn is not the biggest input.  You can not do anything about the price of corn.  If you buy an 8 weight steer you will need to feed on 550# to get him to finish, roughly.  Here’s a quick rule of thumb I use and it’s usually pretty accurate.  Take the price of corn per bushel and divide it by 5.6 and you will be close to the cost of gain in a custom yard.  So today that would be around $725 per steer.  But an 8 weight steer will cost you around $1100 to buy.  Funny thing a 1000# steer also costs $1100/head.  Just to be sure my point is clear.  We can’t do anything about the price of corn or fuel.  We can control how much we spend on replacement animals and the type of animals we buy.

Look how much money we just saved by buying the right animals!  That’s marketing.  We don’t need to wait for economics to improve.  The markets are blessing us with opportunities to profit right now!

Because this yard lacks the proper marketing skills their employees are forced to move or find other jobs.  Not to mention the impact this will have on the local community.  There will be millions of dollars that will leave the area.  I’m talking everything from the fuel they buy, supplies, parts, payroll, meals, feed, taxes, and the list goes on and on.

They said they are going to remain competitive even in a drought.  When you close the gates and step off the playing field that is a forfeit.

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Posted by on October 17, 2012 in Uncategorized

 

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Supply and Demand 2 of 3 (unedited)

Remember this was written half a year ago, when you get to the part of cattle prices.  After this blog was posted last summer the author of the article I wrote this piece in response to made some flattering insults directed at me.  He even insulted my ability to be a father.  I was asked dozens of times what my response is.  I do not have one.  I am only interested in helping the cattle biz.  And if that means pointing out flaws in other people’s data I will do so.

 

Nobody can predict what the market will do, to try and do so is gambling.  That is my uncreative lead in for this next part.

Now I don’t read many, if any, of the cattle biz magazines that mysteriously find a path to my mailbox.  But occasionally I do read one.  The article that I read yesterday lead me to write this blog.  It  was an article on the affect demand has on cattle price.

This article used data from cattlefax.  It showed that the average fat steer price in 2008 was $.93 and that the average price for a 550# feeder steer was $1.14.  Now remember this was the average.  I found it quite interesting that they used 08 for this example since that is the year the market tanked in the fall right after we all experienced inflation.  Since that is the year they chose we will go with it.  Now the point trying to be made was if we had the same level of demand in 08 that we had in 04, (04 being higher I guess), the price of cattle would have been greatly affected.  Somehow  they “know” ,(I would say guessed), that the average price of a fat steer WOULD have been $104 and the average feeder steer price would have soared to a whopping $140.

This is about when I took my right hand and, THWAP,  Right upside my head.  How dumb!  Thousands of peeps read this article and didn’t even see the error.  I’ll line it out

08 AVG                                                                                 Guessed 08 price with 04 demand

1300# @ .93 = 1209                                          1300# @ 104 = 1352

550#  @ 1.14 = 627                                                           550#  @  140 = 770

750                     582                                                             750                     582

 

THWAP THWAP THWAP!!!! Come on man, if you’re going to make up numbers at least show me that somehow demand helped people lose LESS money.  I know some are asking how do I know it’s a loss.  Easy,  the Return On The Gain (ROTG)is lower than the Cost Of Gain (COG)  The COG in 08 was over a buck.  But since we are making up numbers lets just go with a buck for easier math.

$582/750#=.776 ROG     .776 – $1.00 COG = -$.224 loss per pound * 750# = -$168 head

Or if you are one of those that doesn’t understand marketing do it this way.

Buy feeder steer  at $627+$750 COG = $1377 total costs

Sell price of $1209 – $1377 expenses = $-168

So he made his point, maybe it has an effect on cattle price.  It didn’t affect profitability.  I am in business to make a profit so I would like to see USEFUL  information.  The out come on those made up  numbers is the same and in the real world that would most likely not happen.  It is easy to see the boys over at cattlefax used a coefficient to come up with those numbers.   One thing I have learned about the markets is there is one factor that always ruins any market analyst’s predictions.  The human element.  IF the fat cattle price got that high, who’s to say show lists wouldn’t bloom as everyone tried to go out the door at the same time?  This would have caused the market to come cruising back down.  In the mean time, the guy who has feeders would hold them back.  This is usually the case because a rancher will say “if the price of feeders is this high I will wait cause it will go higher”    If this were the case the feeder/fat  spread would widen.  Or this scenario could all go opposite, since I can not predict what people will do.  Either way, the prices that would have been paid for cattle would not have been what cattlefax predicts based off a coefficient.

Now what kind of relevance does a coefficient have in the cattle biz?  I remember a table from my high school physics class, that had a coefficient of deviation for velocity.  Our velocity is -$168 so on this table the coefficient is the number 19.  If you take 19 divided by 168 you get .11.  Multiply that by 100 (as a percentage) you get 11.  Ah ha that is the $11 that we presumably add to fats.  Now we then divide 1300# by the feeder  weight of 550# and you get 2.36.  We have to do this because the feeders are lighter so they have to go faster to have the same velocity as fats.  Take the $11 and multiply it by the 2.36 and you get 26.  The same dollar amount cattlecax claims feeders presumably would have been.  This has got to convince you that this demand forecasting is a total bogus pile.  In fact I bet Randy Blach’s ring tone is Dr. Dre’s “Keep Their Heads Ringin”  Ring a ding ding dong!

But the article didn’t stop there,  Oh no.  Some how the data shows that the lack of demand cost us a loss of $25 cwt on fats in 09 and so far in 2011 the difference is $6 cwt.  I guess they missed  the $11? And the $12? Markets we just had.  Any way he goes on to show in the feeder market the loss of demand cost us $308/hd.  So if we were to add the $308 onto what we are currently paying for feeder steers they would cost us $1133 or $206 cwt.  REALLY? (My advise is to stick to the 80/20 rule.  If 80% of your income is not a direct result from marketing cattle then you are not qualified to talk about markets.  I am a college drop out and it only took me a few minutes to figure out all the math on this page.  Kinda sad cause cattlefax has people whose only job is to run coefficients and confuse all of us.  The guy who wrote the article I am reponding to fell for it.)

 
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Posted by on February 7, 2012 in Uncategorized

 

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