Call the Market
The Wrong Type of Cattle Are Setting the Market's Price
What if I told you that every week, Holstein-influenced cattle, Mexico-originated cattle, cut bulls, heiferettes or even eared cattle are usually the ones that ignite the fat cattle market's trade and set the week's tone? You might gawk and wrinkle your eyebrows in disbelief because we all love the cash cattle market and even romanticize it to some degree. But I'm here to tell you that's the case. Given how thinly traded the cash cattle market is, packers play on market starters to set the week's tone and secure the prices they want to pay for cattle for the week.
For instance, the last two days perfectly depicted how the cash cattle market and its participants are short-sided and cheap-shotted by market starters. Heading into this week, feedlots analyzed their showlists, soberly looked at carcass weights and what the week was projected to kill and believed that steady money was attainable given that showlists are manageable and front-end supplies aren't unbearable -- and, heck, the board was even trading higher. Monday passed and no cattle were reported as sold -- a win for feedlots, as nobody sold out the week's chances of higher trade. Come Tuesday, however, phones started to ring, texts started to fly and confusion started to brew.
Text No. 1: "A big Texas feedlot got 1,500 head traded to a packer for $136."
Ken Betschart painted the picture as clear as day, saying, "That sounded pretty soft given that $141 was well established in Nebraska on 4,000 to 5,000 head, so the gameplan was to hold out, but then more texts rolled in."
Ding. Ding. Ding.
Text No. 2: "Hold on a minute, I guess it wasn't 1,500 head that traded, it was 3,000 head, and if I heard the guy correctly, it was on Holstein-Angus crossed cattle. You and I both know they can't put them on the grid because of quality so they obviously got dumped in the cash market. But regardless if they're good or not, 3,000 head is a pretty good jag."
That right there is how market starters come in, undermine and short come the cash cattle market. Feedlots knew that higher prices were being had and that their cattle were worth more, but when bids start to fly and time ticks, anxiousness becomes an unbearable beast to wrestle with. If you looked any feedlot manager dead in the eye and asked him/her if they truly believed that the Holstein-Angus cross pen fully represented their best cattle and their worth, they couldn't answer unaffectedly. That right there is the dangerous cost of market starters.
The fat cattle market is a machine like none other. The ways that it buys, sells and trades cattle couldn't be more different. There are cattle that sell through the cash market, there are cattle that sell through grid/formula deals, and there are cattle that sell through alternative marketing arrangements (AMAs). In this business, however, we tend to have tunnel vision, wondering how many cattle sold on cash last week, what the details of someone's grid contract is and how many cattle were bought with time. Arguably, the most important question that gets overlooked, however, is: What's starting the market and setting the tone?
The monotonous nature of the fat cattle market rarely changes. Early in the week, buyers collect feedlots' showlists. Then, on Monday, and sometimes on Tuesday, buyers try to get out and look at the pens. Then, usually by Tuesday afternoon, or sometimes on Wednesday, lower bids start to be thrown out. An anxious or nervous feedlot manager will jump on the market's first offer and justify the $3 ding by saying, "At least I'm guaranteed shackle space, right?" And when being played by the rising cost of gains and all other inputs, it's easy to see how a guaranteed bid (even if $3 cheaper) comes with some comfort. But from that moment on, when packers get their first jag of cattle bought at weaker money, the rest of the market has its work cut out for it. Seasoned feedlot managers know that nine times out of 10, "market starters" are the most dangerous and costly trick played in the fat cattle market.
As Ken Betschart, Consolidated Beef Producer's marketing representative of western Nebraska and Colorado said, "Packers may not even like the market starters that they buy. Market starters could be anything from heiferettes, cut bulls, to eared cattle, but usually, they're the market's less-desirable pens, and they serve as an immeasurable tool for packers as those sales set the entire market's tone lower."
If the cattle that are grading 15% to 20% less than the market's best are setting the market's tone, it's as plain as day that feedlots that procure quality genetics are getting cut short. Throughout the week, you may hear that prices got softer, but rarely do you see prices get higher throughout the week, which amplifies the importance of setting a strong tone from the get-go.
That leads me to my next point: How do you avoid having to sell your best cattle at the prices that the market's starters established?
Brodie Mackey, Consolidated Beef Producer's director of program development and regional manager of Nebraska, Iowa and Colorado said, "In 2013, 2014, and 2015, if you had a mouth on feed, you could hardly make a bad decision. But in today's market, you must watch two things: the market's cycle and leverage cues." Given the drastic pace that we've seen beef cows culled at, there's no doubt that the market's cycle is changing and that leverage is about to favor sellers once again. Even when the pendulum swings and feedlots possess more of the market's leverage, it will be as crucial then as it is now to understand how packers use market starters and how to position your cattle to ensure they receive the prices they deserve.
Feeding and marketing cattle isn't for everyone. Corn prices can turn on a dime, freight expenses can suck all the profit out of any business, and the little tricks of the business, such as understanding market starters, can be hard lessons to learn. However, sharing those lessons so that fewer cattle producers are misled is my goal. Even though not every pen of cattle is the market's best, believing that market starters are a true representation of the market is also a fallacy and a fallacy that comes at cattlemen's expense.
ShayLe Stewart can be reached at ShayLe.Stewart@dtn.com
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