More on those predictions?

[cowman]

Okay, if we accept that in the next couple of years we are going to crash on calf prices, what will happen in the general cow/calf industry? I'm not convinced we'll see 80 cent calves, but actually even dollar calves would be a disaster?
Now I'm only going by what I see, and that is that right now a lot of the older producers are bailing...and quite frankly there aren't a lot of younger producers! ...and yet somebody is buying those cows!
Now I don't know how these cow buyers are swinging this deal? I suspect a lot of these cows are being financed? How long do you finance a cow?
When/if the crash comes...how do you make the cow payments?
Over the years the cattle industry has seen its ups and downs. Quite often you will see big outfits who went out on a limb and took a chance...go belly up in a spectacular show! They basically walk away with the shirt on their back! Also some old outfits who should have been stable lost the whole shebang because someone got foolish?
Personally I don't think there is enough money in cows to afford much debt at any time...the numbers just aren't there to justify it? And yet someone is sure bankrolling these cow buyers...whether the bank or the feeder associations? Does the banker or feeder association rep look down the road and understand the cattle cycle?

[mb_rancher]

Cowman how the hell do you know things are going to crash? Youve got to get something else to do with your life.

[cowman]

Well I don't, I'm only going by what both sean and kpb think. But I think they are both younger producers who have a fairly good grasp on the cattle cycle and I strongly suspect they are probably right in that we are soon going into the down part of the cycle?
Now I like to think I look fairly long term...so that concerns me quite a bit? Not sure if I need more to do with my life? Its Easter Sunday and I'll be working all day, just like every other day! I try to take off Christmas though, or at least half a day. LOL

[kpb]

cowman, you just keep on keeping on. It cracks me up that some guys will take the time to read our posts, than bash us for taking the time to write them.

As far as my thoughts that calf prices will decline over the next few years, I've got to say that I didn't come out with this by myself. Smart guys like Harlan Hughes have been saying the same thing--it looks fairly plain that we are on the down side of the cattle cycle. I don't think things are going to "crash" but I do think things will go lower and lower.

If people don't want to believe me, that's ok. I put it out there because I think it's going to happen. But lots of people want to live in a world where they just hope good things will happen, not in the real world.

You can lead a horse to water....


kpb

[grassfarmer]

kpb, It strikes me that your "cattle cycle" isn't the only cycle in agriculture. It seems we are in, or heading into, a period where survival depends on lowering input costs and being more self sufficient on our farms. This would just be a repeat of the 1930s depression cycle. As cswilson alluded to in another thread producers unwittingly ramp up their production costs in the times of higher output prices - this seemed to be the case through the very profitable 1950s onwards period. There is not much new in the world of agriculture - merely a series of repetitive cycles.

[kpb]

grassfarmer, exactly right. I also think that cswilson has the right approach to cattle ranching--the low-cost, low-input, extensive ranch will be a survivor, I think.

kpb

[smcgrath76]

I don't think prices will crash. More like swoon.
There aren't a lot of young producers, and probably the biggest challenge they will face is that banks do not understand cattle cycles, and are often reluctant to lend to non traditional approaches.
For example, purchasing of land is cost prohibitive where I live, rendering expansion somewhat mroe challenging (CS - I am not P & M, just stating the fact. The AB advantage is just a different problem to solve). Banks are quite ready to lend for overpriced land (based on it's productive capability) at the moment. That may change if things go south a bit. The question becomes, is it a better investment to spend $160,000 on a quarter of grass, or to borrow that same amount for an investment in a packing plant? If you are my age, the potential returns from a good value added investment are way better than the return from that quarter of land (agriculturally speaking).
I would not begrudge someone their new diesel or their off farm job. We all work hard to support whatever lifestyle we choose, however I do think that it is important for those in Agriculture with an off farm job to appreciate and understand the implications of their decisions. For example, understanding that $10,000 of their new diesel is need, and $50,000 is want.
I often wonder in total amazement at what other people borrow money for, and sometimes in hindsight I wonder at what we have borrowed on. I do think (worry) about the debt repayment aspect of other operations, because it will indirectly affect my ability to borrow. Banks do not understand price cycles and borrowing is much easier immediately pre/post market highs than it is at the bottom.
Just my thoughts.

[farmers_son]

Actually, it never fails to impress me what my banker knows about agriculture. He worked in a feedlot before turning to the dark side and working for a bank. I am sure he knows quite a bit about cattle cycles, even to the point where he knows there is no such thing. LOL. I should correct myself, I should say a predicable cattle cycle, obviously cattle inventory numbers go up and down and calf prices go up and down but not necessarily in concert and for certain not in a predictable manner, at least in this day and age. And we do not have a normally functioning market which would allow normal business cycles to take place in any event.

Just something to consider….I used to play the games of trying to predict cattle prices. And I thought I was quite good at it. Until the time when the market did the exact opposite of what I thought it should and I realized I had been deluding myself all the while. The truth was I had absolutely no idea of which direction the market was going. When you come to a point in your life where you understand that you really do not know what the market is going to do in two years then you will have gained some wisdom. What separates the men from the boys is when you finally come to that point where you have gained that wisdom but you invest in cattle anyway.

I never forget that my banker is in the business of selling debt and just because he is selling does not mean I should be buying.

Smcgrath76: It really does not matter what we borrow for. Debt is debt. Money is fungible and it does not matter one little bit if the debt is for a new truck or for a cow or for land. Hopefully we have our money wisely invested but it does not make one little bit of difference if I have borrowed for things which make me money if I have paid cash to invest in things which do not. A given cash flow will support a certain debt repayment ability, it does not matter what particular items were borrowed for. If you have invested wisely you will have a greater cash flow and greater debt repayment ability than if you have purchased a new truck whether the truck was financed or paid for in full.

Even though I am a fan of value added investments it is not a good idea to compare returns on land to returns on a value added investment without considering the associated risks. You need to consider a risk adjusted after tax return.

[kpb]

farmers_son, you and I are going to have to agree to disagree on this issue. I have made money before by figuring out where we are in the cattle cycle and I will again. I guess if I'm in your boots, I just have to trust in, what? fate?? since you don't think there is such a thing as a cycle.

When I was in the financial industry, every time there was a prolonged upturn in a particular industry, the guy on the street would always say that this time was different, that this particular industry was not cyclical, that times had changed. They said it the last time gold spiked and they said it again when the high tech industry went straight up. But, in reality, everything is cyclical and those guys, like you, who think that there is no cycle to industries are the ones who keep buying gold at $800 an ounce, Nortel at $120 and bred cows at $1,500. The guys like me who think that everything goes up and down, can try to separate out the emotion and make some rational decisions about when to buy and sell which is generally directly opposite to what the masses are doing.

That goes for everything--from cows to steel. This time around I'll make my bet based on past experience on where calf prices are headed. I might be wrong but I don't think so. I guess we'll have to have this discussion again in a couple of years.

kpb

[farmers_son]

Actually our thinking is not all that far apart. I too think you should buy when prices are below average and sell when prices are above average. Prices do go up and prices do go down. It is not always possible to predict when that might happen however or what the highs or lows would be. We need to accept that uncertainty if we wish to be cattle producers. Underlying my lack of faith in a cattle cycle however is the firm belief that our prices are fixed, at least in this country, by a packer monopoly and I see little signs of that changing. There is a saying that without competition all else fails.

I recall seeing calculations to the effect if a speculator had taken the money that he had invested in Nortel at the high and instead had bought a case of beer, drank the beer and took the bottles back for his deposit refund, he would have been money ahead buying the beer. Hope the cattle market does better than that.

The belief in cycles and what comes around goes around is refreshing in that we then should see oil trading at $11 a barrel in a short while and land trading for about half its present value. And for that matter we would then expect to see the dirty thirties again, Cargill disappear to be replaced by about 50 medium sized packers just like it used to be and a return of the country elevator. Might happen, might not...however if so the question is when. Don't hold your breath. I think agriculture has changed and if there is a cycle it is a new cycle and we don't yet know what shape that cycle will be.

[kpb]

Your comments about oil are particularly interesting in that the price of oil is, of course, controlled by a cartel. This is pretty close to what you think about cattle, if I'm reading you right.

And yet there is a cycle, too, in oil, despite the cartel. That cycle is based on supply and demand which would seem to be controllable by the cartel but, in fact, is beyond the control of the producers. It is beyond their control because it is based on world-wide economic strength and demand which is not easily discerned or controlled.

In my old industry we used to have a saying "The market will out" that meant that in any situation, the forces of supply and demand will eventually overcome other forces. I think it is unlikely that we will see oil at $11 a barrel again, at least short term. And we may not see the other highs and lows that you outlined in the short term. Note that I have never said that we will see feeders go to .40 a pound, either.

But not seeing those lows does not negate the idea of the cyclical nature of commodities. I think we could see oil pull back to, say, $40 to $50 a barrel (it's rash for me to make a prediction on oil since I know little about where we are in the oil cycle). That sort of pullback would be a roughly 40% decline from where we are now. But in an economic slowdown, that could easily, easily, occur.

Your point about buying when prices are low and selling when prices are high is interesting but, generally, directly opposite to what most people do. In fact, most people only feel comfortable doing what most other people are doing and that is buying when things look good, prospects are fine and prices are high. And they sell when things look tough and prices are low. The opposite, of course, to what they should be doing. The keys to making money in anything, I think, is to seperate your emotions from your decision-making, remember that the market doesn't care if you make money or not and, finally, realizing that making a decision based on what you want to happen is a poor way of proceeding.

So where are we now? What I see is a market that has been bouyed by getting over the BSE crisis, with the U.S. border open, with real high bred cow prices and high prices for our calves and with the U.S. cow herd in an optimistic, expansion mode. So, a good time to buy, right, with only good things ahead in the future? For me, it looks like a good time to sell, or at least cut back. I'll wait for the time that people hate calves, can hardly give their breds away to buy back some heifer calves.

kpb

[cowman]

As usual, I probably look at this all wrong? I don't believe you can jump in and out if you want to build a cow herd!
Think about the calves that come through the mart and ring the bell? You know...when they say a reputation herd? Those calves mommas weren't bought down at the local auction mart?
Now I don't know if these guys are dumbies who have no idea if they are making money or not...all I know is their calves consistently sell for more money?
Back sometime in the seventies, when cattle were in the tank and grain was going through the roof, I told my Dad we should skid the cows and plant it all down. He said well those cows have paid my way all my life, I guess I can support them for a couple of years! I replied get rid of them and buy back cows when the prices look better. His answer "You have to own them when they aren't worth anything, if you want to own them when they are worth a lot. No one gets rich jumping in and out!
Now I realize some of you guys on here are astute farmers and hey I'll admit I mostly just go with the flow? I just plod along and hope like hell I can make a few pennies somewhere along the way.