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

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.)