It may seem that livestock producers are getting rich at these high prices, but you can be assured that for the most part they haven’t enjoyed the ride nearly as much as the packer. The packer is a smarter trader who objectively understands the fundamentals.
For example: You don’t lock in prices when the market is on the way up! You lock them in on the way down!
Trying to pick a top or bottom in any market is nearly impossible, but a lot of folks have left a lot of money on the table trying. The fear of not getting all there is to get is the reason for most costly marketing decisions.
As a result, higher prices benefit the meat industry a lot more than they do the livestock industry. Imagine delivering contracts at 30 to 40% below the current cash market. There are even worse scenarios, and the results can be catastrophic at so many different levels; close relationships, business associates, and others can get stressed beyond repair.
Unfortunately less than 10% of the livestock are even sold at the top of the market, while nearly 90% is sold at the bottom. The reason is that of greed, always thinking the market is going higher or it will eventually bounce back off its lows. Those that make these bad decisions are either poorly advised, or they have no basic understanding of market fundamentals.
So, who makes all the money at these unprecedented high prices? You can be assured that the meat industry loves these numbers. Imagine only having to buy 10% of your “kill” at the highest prices, while having the rest of your “kill” delivered to your doorstep for contracted prices well below that of the current cash market. On the other hand, meat prices are computed in accordance to the level of current cash values.
Don’t get me wrong–some meat processors get caught up on the wrong side of the market also. They are the smaller, more vulnerable companies that rely on day to day cash markets. But the big boys are making hay, just as you should be if your market planning was in sync with the market.
That’s why packers are eager to contract. It takes the pressure off their procurement needs. The more livestock you have bought up front, the less you have to compete for at the higher levels. Market planning is just as important for the packer as it is for the producer. A big part of the packers plan is to have at least half of its “kill” under contract, regardless of price. Price is always tied to the futures market, for which he can always hedge to protect his price.
Sound familiar? It’s the same strategy that a producer should be using when he’s putting his own livestock marketing plan together. But, unfortunately most producers don’t understand forward pricing or how to get in step with trend lines and support levels.
It is amazing how a packer understands all of this and has the marketing technology in place to determine the value of every single animal he buys, yet producers somehow don’t even find it necessary to have adequate sorting and weighing equipment on their premises. Why is it that producers seem to think that eyeballing and averages are the only criteria they need? Is it because they don’t know any better, have never been taught, or even attended a livestock marketing seminar? These questions and more have to be asked when one considers the amount of money that is at stake. What used to be a $100/head differential in marketing techniques is probably now more like $200/head. This is a lot of money to just nonchalantly throw around!
It’s the difference between pro t and loss–or, in some cases, about even staying in business. Combine this with the high risk that high prices bring to the table, and it’s no longer a job for an amateur. The investment of up to two thousand dollars to put a calf in a feedlot is scary in and of itself. Causality at that level makes poor marketing strategy look like peanuts.
With the level of risk being at an all-time high, it will be a long time before these empty feedlots across the country begin to ll up. Nervous bankers and negative spread sheets call for extraordinary measures — beyond that of just ordering and selling cattle at the drop of a hat. And if things don’t change, it will be the packers wearing the Stetson instead of the proud producer of days gone by.
The plan is the same, be it a packer or a producer; one is selling meat, the other livestock. And the results can be the same if they have a marketing plan in place. Unfortunately, for the most part, the packer has done a better job, thus it’s the packer that is getting rich.
Related: How Things Have Changed
(Editor's Note: For more in-depth information regarding the topics that have been touched upon in this report, Knightro conducts livestock marketing seminars on a regular basis. To schedule a seminar, auction, judging, or speaking engagement, please contact Ken Knight, Knightro, call or fax 715-262-8480; e-mail [email protected], or write him at: Ken Knight, Knightro Report, 136 Hillridge CT, Prescott, WI 54021.)