Still no sign of herd rebuilding

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

Still no sign of herd rebuilding

As young kids we were taught about our five senses. As is typical of government run schools, they failed to teach us the important things such as how to utilize the six faculties of our minds. This week’s post will require two of them and they are perception and reason.

Last weekend (end of June) I was present at a female sale. Three long-time cattlemen dispersed of their entire herd and retired. I bet these guys never would have guessed they could sell off all the cows and walk away with a check for almost 1 million dollars. I can’t imagine what it feels like to see all of it to come to an end. I can only think to myself that the size of the check made the sendoff less painful.

The trend

As I watched these herds be auctioned off it all seemed to follow the trend we’ve seen for well over a year. The 3 in 1 pairs (a pair where the cow is bred back) did something strange. The heifer pairs sold for a price, then the three–four-year-olds sold for a bit more. Then five and six-year-old 3 in ones sold for more yet. But it was the seven-year-old 3 in 1 pairs that topped the market.

When I saw this happen with the first herd, I thought to myself there must be some local knowledge of these cows and a neighbor really wants them for some unknown reason to me. The entire sale was like that. Consignor after consignor 7-year-old pairs were the hottest ticket in the barn.

As a retirement sale perception certainly leads us to believe it was a great day for those guys, and it was. The thing is I am not retiring anytime soon, and I need to use reason to analyze, compare and evaluate what I was seeing. Even though these 7-year-old 3 in 1’s brought $4,000 and were the highest selling lots there, there was only one buyback against them and that was the short solid and broken mouth breds. When we learn to use reason and calculate relationships the highest selling ticket was the second most under-valued. How do you like that one for defying conventional wisdom?

The bred sale

I wish there would have been some seven-year-old breds in the offering. The bred sale followed the current trend of 3- and 4-year-olds outselling bred heifers. The five-year-olds brought the same price as the 3’s and 4’s. Short solids and brokens were $700 back of the 5-year-olds.

I went back through my market notes. If a producer bought or kept his heifers to breed, and we use the heifer’s value at time of weaning and add in the cost to carry her until sale time all they did was recover their expenses. I pointed this out back when the heifers were being weaned that there was not a signal to breed heifers. There still is not a signal to breed heifers.

New mental model

We hear this worn out, outdated message all the time, keep your heifers to capture appreciation and sell off cows of a certain age to deflect depreciation. These people saying this have ignored the market signals for well over a year, while I have been writing like a broken record that bred heifers recover their costs at best.

Let’s use our reason once again, the guys that keep repeating that message are all 20+ years older than I am. That strategy worked for them years ago, no denying that they figured it out. However, they are locked into that mental model and projecting it onto young people, and it isn’t working anymore. This is that one year’s experience repeated over and over thing. We need to build the mental model that will allow us to succeed in current market situations.

I just mentioned the age gap between myself and the guys that preach keeping heifers. It is their generation that is making the market. The Boomers want these proven females and are eager to buy the overvalued cows. We have heard for years about the wealth and land transfer that is to come.

Wealth transfer

The wealth transfer is happening right now in the sawdust! The Boomers are creating a wonderful opportunity for the rest of us to prosper ourselves simply by buying what they don’t want and selling them what they do want. All we need is the ability to evaluate the value differences in the market, and the government schools that failed to teach is about our mental faculties succeed in teaching us math. It is our personal responsibility to be practitioners of that math and not be theorists of using a females age to dictate what to keep and what to sell.

Herd size

Since I began writing this column, I have paid attention to what other authors write about cattle markets. I read some articles this week that have me confused. We are all aware that we do not have as many cattle. I read two articles written by smart people, and I know they are smart because they have letters behind their name. They both agree that placements are down by the same head count. They had conflicting numbers on how many cattle we have on feed and how many pounds heavier carcass weights are. In my head I knew the math would be way off between these two but since they didn’t do the math I did.

According to the numbers one author used we should be producing 100 million more pounds of beef. Do the math on the numbers presented in the other article and we should be producing 100 million pounds less beef. Who is right? The answer is it doesn’t matter.

Doing a simple cattle square we realize that a feedyard can sell fats and replace with nine weight steers and make a profit. The cattle square also tells me that nine weight steers south of I70 are more undervalued than nine weight steers north of I80.

Math way is the pathway

Now we have some useful information we can use to prosper ourselves. I’ve said this before and it’s worth repeating, the math way is the pathway. By using reason and doing the math we can clearly see what is really important.

I read another article that said the board is important for price discovery. I have no use for the board since the price relationships that make me money are in the saw dust. Last I knew the board had a trading limit. That stifles price discovery.

Markets are changing

At a sale barn I go to frequently they were selling six weight steers for $2.85 one week. The next week a new buyer showed up and he was paying $3.25 for six weight steers.

Could you imagine the auctioneer stopping the bidding at $3.00 and saying “Ok boys we’re up the limit so I’m going to have to stop you right here and knock ‘em off.” Heck no! What we witnessed by the market being 40 higher was really honest to goodness laissez faire free market capitalism that leads to true price discovery. I can only assume the other author also doesn’t remember the “flash crash” of 2010 caused by HFTs, or how MF Global customers had their accounts frozen, that lead some straight to bankruptcy. How does that factor into real price discovery?

Here is the last point on my perception and reason, since I do get asked why I ignore the board. I have been told by many people that I need to protect myself and get hedged. Yet when something happens these same people end up paying margin calls. If the swing is volatile enough, they cry out that there needs to be an investigation into market manipulation.

So, the way I see it they put money into a system to protect themselves from the money they invested into another system, yet it is their “protection” that ends up causing them heartburn. Yet every week on here I write about prosperous opportunities in the cash market.

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

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