How far can we go?

Source: Farm Progress. The original article is posted here.

How far can we go?

Optimism has returned from vacation! After visiting with cattle producers from across the western half of the United States and witnessing a female sale myself this week, it is clear some people are eager to burn some cash. At the sale I attended, females were $300 to $800 higher than they were a few weeks ago.

I couldn’t help but notice some of the headlines that resulted from the National Cattlemen’s Beef Association (NCBA) convention in Orlando were highly optimistic. “If you think prices are high now, you ain’t seen nothin yet” was one I saw. I don’t know if they are right or not, only time will tell. I am not predicting this time will be like 2015 all over again either. The thing is the talking heads told us those record prices were the “new plateau” and that came crashing down hard and fast.

Trickle-down effect

Millions of dollars have been spent to indoctrinate us into believing in a trickle-down effect. If beef demand continues to rise, so will the price for it. This will result in higher cattle prices that will make us all wealthy. We have seen this yarn blown to pieces many times over.

Here is something else that caught my attention. When we were at Sam’s Club a couple weeks ago stocking up on refreshments for our last marketing school, my wife commented on how much canned meat there was. We have never seen Sam’s stock that much, and it wasn’t just a little more than usual, it was a lot more. I am confident Sam’s is in tune with what the consumer is purchasing. I can’t help but wonder if the increase in canned meat is connected to 37% of Americans leaving a bill unpaid at the end of December. How high can we push prices before they stop buying?

Along the lines of how high can we push before people stop buying, five weight steers are up 48% from a year ago (based off Nebraska sales). Eight weight steers are up 35% and fats are up only 13%. I haven’t written about fats on here for a while because as you can clearly see, they are under-valued to feeders.

Cow/calf budgets

Sticking with Nebraska. prices from this week and comparing it to cow/calf budgets several university extensions have released five weights are only a drop of 15% away from being breakeven. This underscores the importance of managing costs to keep a cow. It also signals the great risk some producers are exposing themselves to by trying the old, failed method of giving young females years to pay for themselves instead of utilizing sell/buy marketing to capitalize on relationships.

Bred heifer market

The bred heifer market got a huge, long overdue boost this week. This is only one week and let’s hope it is the beginning of a trend. Bred heifers finally sold for well over what a producer would have invested in them. When I calculated their Intrinsic Value (IV), based off this week’s market and current cost structure, it is below what a producer would have invested in them. That may sound confusing to people that haven’t yet attended one of my marketing schools so here is what it tells us. We know our costs, and we know our two values, now we can compare relationships to other breeding females. Here is what makes me hopeful this market begins trending. The relationships that were in place this week signaled to retain and breed heifers.

The 3- and 4-year-old cows still outsold the bred heifers. They would be the top of the bell curve. From there their value experienced a 43% drop in actual value (AV) to the short solid bred cows. And 15% of that depreciation was realized on one trip around the sun when the cow received her fifth birthday candle. Broken record here again, but do not get caught up in five-year-old and out programs that are based on one calculation. When I have compared relationships, I have already done three calculations. We need several metrics to make intelligent comparisons and generate positive cash flow.

The bred female market takes another 15% AV drop when she gets called a short solid. Here is another one of my crazy thoughts that hit me while teaching my last marketing school. If mandatory EID is implemented, it could easily crush the value of mature cows. I could easily see many producers throw their hands up at the idea of an added expense of enrolling an old cow and just sending them to the packer. If this happens, producers will be forced to keep back heifers setting up a heifer bubble. If you look at a five-year feeder chart you will see a hard dip in the year 2020 when the government stepped in and issued shutdowns. If the government steps in again with mandatory EID and we do experience a heifer bubble, be prepared for that bubble to burst because they all do.

Gestation period matters

Just about every female I witnessed sell this week sold right at or well over her IV. If she sells over her IV she is easily considered overvalued. As you can probably see with the 15% drops there is still an abundance of cash laden trades to be made between females. Another thing of note is that type or condition didn’t affect selling price, gestation period did in a big way. A producer that sold 6 year-old and 7 year- old pairs, and bought back 6 year and 7 year-old breds that are late second trimester could’ve had a trade that looked like selling $100 value into the market, and getting paid almost $1,100 for it.

It's about the fundamentals

I know, you already calved one out and that is enough for the year. Like I say, if you are going to run from the work you might as well hide from the money. For $1,100 I would think everyone would be willing to calve again, it’s not like you’ve made that kind of margin just selling calves. Or those later born calves don’t fit my marketing window. People buy all weights of cattle year-round. The big feed yards would like to see supply spread out a bit instead of getting slammed with similar weight of calves at all at the same time. Besides, if you are letting the calendar dictate when you sell, you really don’t have a marketing plan, all you have is a quit date.

Last night in NCAA women’s basketball all kinds of records were either tied or broken. This doesn’t just happen by dumb luck. Championship caliber players do the monotonous drills over and over until fundamentals become habitual. Coaches have benched star players whose egos got a little too big to reset their focus on what really matters. Coaches drew up great plays to exploit the opposition’s weaknesses. I started this column this week outlining some of the traps that could be out there. With solid marketing fundamentals we can navigate through all those traps. "The math way is the pathway" is the same as a great coach resetting a player’s focus and blocking out the noise. This week some order buyers told their customers to be sure to get a put or an LRP under the cattle they are buying. I am not recommending one way or the other. What I will say is that playing the game to not lose is a losing strategy. The only way to win the game is to play to win and sell/buy marketing is the play book.

The opinions of Doug Ferguson are not necessarily those of, or Farm Progress.

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