DiamondSCattleCo
Well-known member
Had a random thought cross my mind today while I was working, so I thought I'd pop it onto the forum.
Since people have asked for my opinion on how to fix what I think is a broken cattle market, lets try this idea on for size. Like I say, it was a random thought, nothing fleshed out, so poke some holes in it.
Since the dawn of time, or at least the 1800s, sale barns have been used by cattle producers, both cow/calf and finishing producers to sell their critters to the highest bidder. The sale barn is the essence of the "free market economy". Several guys with big rolls of cash bidding against one another in a free for all. He who has the most cash wins.
I'm not sure when it all began, but one day someone had the bright idea to contact one of the packers direct, and sell a liner load of cattle straight to him. The packer, unsure of this new arrangement but knowing the producer and his cattle, likely offered him whatever market average was last week, or maybe even a couple pennies more. After all, the packer managed to avoid paying their market buyer a commission of 3%. Shipping? Well heck, to show good will, the packer would pick up half the tab (saving them another few bucks in the process). The producer likely jumped at the offer. What the heck, he just risk managed himself a quick guaranteed buck, skipped the commission and barn fees, and saved half the trucking bill.
Win/win all the way around right?
Well maybe. Over the next few months, more and more producers got ahold of the packer with offers to sell direct. The packer went and had a peek at the unknown animals, made his offers (again, likely what the producer would expect to get at the barn, maybe a penny or two more), and raked in the cattle. The packer, seeing how nice it was to have the cattle coming straight to him, started telling his buyer to shave a couple cents off the max price he would be allowed to pay at the next sale. Or, if you're a little less conspiracy minded, perhaps the packer had almost enough animals from direct purchases that his demand at the barn wasn't quite so intense. Either way, the producer lost a couple cents at the barn. So next weeks average was off by a bit, and the guys selling direct were offered a couple pennies less. Oddly enough, all the packers who were buying direct had about the same thought, maybe not in the same time frame, but these guys were good businessmen. It wouldn't take long.
Then someone had the ingenious idea of contract selling to help further manage risk. Boy, the bank sure liked that idea. Less risk = safer loans and lines of credit. The packer liked it too. Price was more predictable, since less buying was being done at the barn. Many contracts were based on a market average + basis (or - basis) and since buying at the barns was beginning to become a little stale, price fluctuations were a little tamer. Even more predictability. Companies like predicitability. What a great idea.
You can see where it goes from here. Everybody thought they were winners, however we were beginning to lose the market mechanism that worked so well for so many years. That mechanism, if not gone in the fed cattle market now, is definitely much different than it used to be. I see similar things happening in the feeder market, with feedlots bidding outside the barns and producers signing market average cost + (or -) delivery contracts.
We're slowly risk managing ourselves to a captive market.
Oh sure, the feedlots and packers all swear this is a good thing for the industry. They don't say much about the downfalls, or possible downfalls.
But then, neither does the drug pusher on 11th Ave.
Sidebar: We don't actually have an 11th Ave in our little town, but it just seems like if you were going to find a drug pusher, 11th Ave would be the place to find it.
But I digress.
I see a problem, or at the very least, a problem in the making, so how about this as a possible fix, or at least a bandaid until an even better solution can be had?
Outlaw direct selling to feedlots and packers. No contract purchasing. If you want to sell an animal, whether it be a fat or a feeder, good quality or poor, you haul that thing to the sale barn and you take what the market is giving that week. If you want to buy an animal to turn into a steak or to feed out, you head on in to the sale barn (or call your buyer who goes there for you. I wouldn't want the businessmen taking the chance of getting manure on their loafers).
To stop the wheeling and dealing that takes place between buyers, and don't anyone try to tell me it doesn't happen (I know too many buyers), we build cubicles for each of those buyers. They have easy viewing of the stock entering the ring, but they can't see one another. They are prevented from socializing before the big event. Oh sure, they could call one another before the sale or find ways around the cubicles, but its just that much more difficult to gossip like little old ladies about their orders.
So, since the packers and feedlots swear that direct buying and contracts are good for the producer, and don't hurt the free market mechanism at all, they really shouldn't have a big problem with this. After all, if the contracts and direct purchasing don't interfere with the free market mechanism, they won't be paying any different for their animals, so whats the big deal? The producer will have to watch for market swings, and ensure that they have the absolute best cattle they can grow to minimize their risk when heading to the barn. By the same token, as long as the sales are big enough and enough buyers are attending the sales, they can be reasonably assured that they are receiving the best dollar that the market is willing to pay at the time.
Its getting a little late now, and I've rambled much more than I ever intended to ramble, so what are your thoughts? Poke some holes in Rod's Theory Of Economic Bliss In The Cattle Market.
Since people have asked for my opinion on how to fix what I think is a broken cattle market, lets try this idea on for size. Like I say, it was a random thought, nothing fleshed out, so poke some holes in it.
Since the dawn of time, or at least the 1800s, sale barns have been used by cattle producers, both cow/calf and finishing producers to sell their critters to the highest bidder. The sale barn is the essence of the "free market economy". Several guys with big rolls of cash bidding against one another in a free for all. He who has the most cash wins.
I'm not sure when it all began, but one day someone had the bright idea to contact one of the packers direct, and sell a liner load of cattle straight to him. The packer, unsure of this new arrangement but knowing the producer and his cattle, likely offered him whatever market average was last week, or maybe even a couple pennies more. After all, the packer managed to avoid paying their market buyer a commission of 3%. Shipping? Well heck, to show good will, the packer would pick up half the tab (saving them another few bucks in the process). The producer likely jumped at the offer. What the heck, he just risk managed himself a quick guaranteed buck, skipped the commission and barn fees, and saved half the trucking bill.
Win/win all the way around right?
Well maybe. Over the next few months, more and more producers got ahold of the packer with offers to sell direct. The packer went and had a peek at the unknown animals, made his offers (again, likely what the producer would expect to get at the barn, maybe a penny or two more), and raked in the cattle. The packer, seeing how nice it was to have the cattle coming straight to him, started telling his buyer to shave a couple cents off the max price he would be allowed to pay at the next sale. Or, if you're a little less conspiracy minded, perhaps the packer had almost enough animals from direct purchases that his demand at the barn wasn't quite so intense. Either way, the producer lost a couple cents at the barn. So next weeks average was off by a bit, and the guys selling direct were offered a couple pennies less. Oddly enough, all the packers who were buying direct had about the same thought, maybe not in the same time frame, but these guys were good businessmen. It wouldn't take long.
Then someone had the ingenious idea of contract selling to help further manage risk. Boy, the bank sure liked that idea. Less risk = safer loans and lines of credit. The packer liked it too. Price was more predictable, since less buying was being done at the barn. Many contracts were based on a market average + basis (or - basis) and since buying at the barns was beginning to become a little stale, price fluctuations were a little tamer. Even more predictability. Companies like predicitability. What a great idea.
You can see where it goes from here. Everybody thought they were winners, however we were beginning to lose the market mechanism that worked so well for so many years. That mechanism, if not gone in the fed cattle market now, is definitely much different than it used to be. I see similar things happening in the feeder market, with feedlots bidding outside the barns and producers signing market average cost + (or -) delivery contracts.
We're slowly risk managing ourselves to a captive market.
Oh sure, the feedlots and packers all swear this is a good thing for the industry. They don't say much about the downfalls, or possible downfalls.
But then, neither does the drug pusher on 11th Ave.
Sidebar: We don't actually have an 11th Ave in our little town, but it just seems like if you were going to find a drug pusher, 11th Ave would be the place to find it.
But I digress.
I see a problem, or at the very least, a problem in the making, so how about this as a possible fix, or at least a bandaid until an even better solution can be had?
Outlaw direct selling to feedlots and packers. No contract purchasing. If you want to sell an animal, whether it be a fat or a feeder, good quality or poor, you haul that thing to the sale barn and you take what the market is giving that week. If you want to buy an animal to turn into a steak or to feed out, you head on in to the sale barn (or call your buyer who goes there for you. I wouldn't want the businessmen taking the chance of getting manure on their loafers).
To stop the wheeling and dealing that takes place between buyers, and don't anyone try to tell me it doesn't happen (I know too many buyers), we build cubicles for each of those buyers. They have easy viewing of the stock entering the ring, but they can't see one another. They are prevented from socializing before the big event. Oh sure, they could call one another before the sale or find ways around the cubicles, but its just that much more difficult to gossip like little old ladies about their orders.
So, since the packers and feedlots swear that direct buying and contracts are good for the producer, and don't hurt the free market mechanism at all, they really shouldn't have a big problem with this. After all, if the contracts and direct purchasing don't interfere with the free market mechanism, they won't be paying any different for their animals, so whats the big deal? The producer will have to watch for market swings, and ensure that they have the absolute best cattle they can grow to minimize their risk when heading to the barn. By the same token, as long as the sales are big enough and enough buyers are attending the sales, they can be reasonably assured that they are receiving the best dollar that the market is willing to pay at the time.
Its getting a little late now, and I've rambled much more than I ever intended to ramble, so what are your thoughts? Poke some holes in Rod's Theory Of Economic Bliss In The Cattle Market.