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Cattle Biz Headlines

It’s been what, six weeks since my last post?  A lot has happened in the world during that time.  I like to troll around on social media and see how people react to it.  I have come to think I must be kinda dyslexic,  because I see things differently.  Over the last few months I have got to meet a few readers of this blog.  The biggest compliment I get is “I don’t always agree with you, but damn, you sure made me think about it.”

Here very recently my Facebook and Twitter feeds have been full of the news of Japan taking beef up to 30 months of age. (If we have not met in real life do not friend request me on Facebook.  Follow me on Twitter @mrcattlemaster instead)  I saw very little about Cargill closing the Plainview plant.

One of these will affect the cattle biz in a big way.  The other not so much.  While everyone has their pompoms out for the Japan deal I am talking to guys who are facing reality.  Think for a moment.  Will Japan suddenly import more beef from us?  I doubt it.  They will probably just import cheaper beef.  See their economy is imploding in a huge way.  In case you didn’t know they are in way worse shape than the EU or the US.  We are printing $4 Billion a day to prop up the stock market, just to give you some perspective.   (Don’t think that funny money doesn’t spill over to commodities.  If you are in the market in any way get out!  I don’t care to hear your hedging BS.  You tell me that you obviously don’t know what hedging is).  So what will this do for the market?  I have seen very little affect so far, and I’ve been buying cattle just about every day since that announcement.  I think it will be difficult to gain much when we are in a currency war.

One thing that has had a profound affect is the closing of the Plainview plant in TX.  There are groups that think this will be a huge positive for our state.  Couple that with the Japan news and man they got their pompoms and megaphones out.  “NE is the beef epicenter of the world”.  Um ok.   I currently have the privilege of buying cattle for a big feed yard.  The owner tells me that the National buyer has not been there to bid cattle for a couple of weeks.  He called the guy up to find out why.  The buyer told him that he didn’t need to buy cattle in NE anymore.  They can get all the cattle they need in TX and KS.  Less competition down there now.  This leaves only a few major buyers in the yards here.  I spoke to the Cargill buyer in my area last week.  He told me that if I had some fats that I better get them on his list because they are filled for the next three weeks.  As show lists continue to grow I can only imagine the wait will get longer.

Learn a lesson from the sheep industry.  It is my understanding they had three for four packers.  Sheep producers were making money.  When I was in NCBA’s YCC group a few years back there was a buyer from Tyson in our group.  He told me that packers hate each other so bad they will buy cattle at a loss just so the other packer can’t own them.  That is what the sheep producers had going on.  One packer finally had enough of buying at a loss just to keep the doors open.  So they closed.  This left only two or three packers.  The reduced competition has allowed to the remaining packers to bid less for sheep, resulting in the packer making money and the sheep producer losing money.

I do  not understand the meat complex we have in the cattle biz.  Guys, unless you are a packer you sell CATTLE, not beef.  Japan in this case is not your customer.  The packer  or feedlot is your customer.  So do you need more end consumers or more customers?

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Posted by on January 31, 2013 in Uncategorized

 

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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 3 of 3

Now let’s think logically for a minute.  I live in reality so I see no need to worry about what the price MIGHT have been.  I can’t read cards, palms or stars so I just deal with what I have at the time

The only reason I can think of to have the demand conversation is to give ourselves an out for losing money, like in the example earlier.  We all know we like to have someone to blame for our short comings.  Bud Williams says in his years of experience (2 of my lifetimes) he has noticed that cattleman are willing and ready to accept a loss as long as they have an out to blame it on (that is not a quote it is a summarization)

You see there is another law that trumps the law of supply and demand.  It is the law of substitution.  If feeders were to get that high I would go buy range maggots  (sheep).  If the price of beef gets to high the consumer will take their ball and go play in the pork or poultry yard.

Now this is where “smart” people tell me, see if the consumer goes elsewhere the price for your product drops.  Maybe so.  Just remember earlier that I stated the market is currently trying to create its opposite.  So we ALREADY KNOW  this is coming.  Now I don’t sell BEEF.  I sell cattle and buy cattle. (notice the order I put that in.  Sell/Buy.  This is a clue. )Moving BEEF is a packer and retailer problem.  If you have any marketing skill you would still know how to make money when this happens.  Going back to the example of 08, that was my best year ever.  I doubled the size of my operation and that set me up for great years in 09 and 2010.  Knowledge and marketing skill, is how I did it.  None of this demand bull  was ever a thought in my head.

Here is a bit of trivia for you.  This whole concept of making charts and graphs, depicting the scam of supply/demand making cattlemen profitable was created by a commodity broker in Denver.  It really did wonders for his business.  At the time he was the only one doing it.  The boys over at cattlefax felt left out and took it to a whole new level.  How many of you have ever sat through one of their seminars and left totally confused?  That confused feeling wasn’t because you aren’t smart enough to get it.  No, it was because you were trying to make sense of something totally irrelevant.

 

To think that an increase in demand will result in higher profitability is absurd.  To say that the law of supply and demand leads to increased profits, is a politically correct way to say “We now know how many incompetent fools can make a profit based on dumb luck”    All it takes to look like a marketing genius is a rising market.  Knowledge and marketing skill are what separates the profitable operators from the rest

 
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Posted by on February 8, 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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Supply and Demand 1of 3(unedited)

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.

 
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Posted by on February 6, 2012 in Uncategorized

 

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