Mad Cow = Distractions= Beginning Cattlemen

BSE made the news again.  I have a different view point of it than most people.  Past experience tends to shape how we view things.  Everyone else seems to be a bit shaken by it, while I kind of embrace it and laugh about it.  My Facebook status right now is “We have 140 breeds of cattle and the black and white ones seem to be the center of most of our problems.  Before Angry Birds came along Holsteins gave us Mad Cow.”

How did I come to this paradigm?  It was back when I was really still struggling to get my cattle feeding enterprise off the ground.  I had been buying calves and co-mingling them.  All I could buy at that time was the singles, the sorts, and well junk.  I would back ground them and resell them.  At the time if I could get about 30 to 40 head put together in a week that was pretty good.

My pen was empty when we had the second inconclusive mad cow.  Everybody panicked.  I went to the bank to get a loan to buy cattle.  They looked at me like I lost my mind.  “Don’t you know what’s going on?” they asked.  Every bank in town turned me down.  At some of them I didn’t even get the chance to sit down before being laughed out of the place.

Here is what I did.  I had some money that was in a CD.  It was put there after my aunt was killed in a car accident.  My grandmother divided up her retirement money between us grand kids.  It was to be used for college.  But as I stated earlier in another blog, I dropped out.  I had scholarship money that covered it when I was there.  I also had another CD that my great grandmother put together for me to use for college.  I cashed them both in.  Paid the penalty and went to the sale barn.  Remember those penalties are only there to make you feel trapped.

I had budgeted everything out.  I knew how much money I needed for propane to heat my home.  How much I needed for gas and food for each month, and so on.  I saved that amount back.  I turned down the heat in my house.  It was cold enough in here that I slept in a hoodie under a few blankets.  I quit driving around so much, and so on.  I already had enough feed to background several groups of 40 head for the rest of the year.

So I tripled my efforts.  I bought about 100 head.  I could background them for a few months.  Put a couple hundred pounds on them, and then I sent them to a custom yard.  There I valued them, so I had a check and money to live on for a while.  I financed the feed, so that was deducted from my check when I sold them as fats.

Here’s what happened.  I made a shitload of money.

When I was buying those calves people tried to talk me out of it.  I even had a guy here last week that recalled I did that.  He told me people were really worried about me buying those cattle.  They really got cross with me when I ignored their warnings.

Here is what I knew.  None of the borders had been reopened since the first cow with BSE was discovered.  So we did not lose any trade deals.  Yet when that cow came up inconclusive the market dropped about $40 a hundred here.  Get it?  We really lost nothing yet the market was sustaining that level before that cow was discovered, so I figured it was only a matter of time before the market came back.  To my surprise it came back in only a few weeks.  Of course that was due to the cow coming up negative on the long test.

Here is my take away.  Sometimes the best time to be successful is when everyone else is distracted.  Maybe today’s mad cow will provide some buying opportunities.  Maybe not.  The thing is, this is the type of thing you need to keep your eyes open for, and have the balls to cash in.  I did this when I was in my early twenties, and it greatly accelerated the growth of my operation.

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.  Old ranchers tell us that cattleman are willing and ready to accept a loss as long as they have an out to blame it on

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

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 demand	Guessed 08 price with 04
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.)