AUTHOR'S NOTE - All of the premises presented in this series of posts are solely based on personal experience as a livestock producer and strictly as a cattleman (I have a basic understanding of farm commodities markets, but no real experience with such, and cannot speak with much authority from the farm side of things; Though I would think there are going to be some similarities). The information represents my opinion and is based on personal experiences. Any factual information may or may not be referenced, but be aware, the majority of the content is personal conjecture. Dialogue and comment are welcome.
"When you are ranching and farming, you have to take what the buyer offers." (John Hodges)
Few people are formally trained in the study of economics, but everyone makes economic decisions.
Any attempt by an individual to earn or spend money involves economic decision making. Earning and
spending or buying and selling influence the way our economy functions. It is this economic influence that also makes the cattle market move each day by establishing prices for cattle and putting beef on the consumers’ table.
Economics is also thought to be a mathematical science by many people since economists are
constantly working with numbers trying to predict the outcome of some economic event. Actually, economics is the study of human behavior. Economists try to relate how people will react to changes in supply and demand, to higher or lower interest rates or to increases in the cost of production.
Beef cattle marketing is also a study of human behavior. Cattle prices are determined by how much beef people choose to buy and sell in the market place. If people want to buy more beef than is available in the marketing channel, then the price of beef is bid up rationing the beef among buyers. If producers need to sell more beef than people are willing to buy, then the price of beef will be forced downward to move the excess supply.
Cattle producers often say that to make money in this industry you must buy low and sell high, but that only works when the individual who is selling has some way of influencing the price. Since the overwhelming majority of beef is sold via auction, the price the individual producer receives is thus dictated by commission agents (Buyers) representing the interests of large feedlots and/or beef processors. Which means they will try to buy at the lowest price possible....
We learned (above) that economics is based on human behavior and the supply/demand function of pricing. So, a producer could just hold his/her cattle until demand is high and thus improve the price...simple, right? Uh...no. The cattle being sold today will not be available to the consumer for 6-12 months. The price received today is based on a "best guess" of what consumer demand will be at a future date...which means the "buyer" will hedge the price against unknown factors...thus, no matter what the individual producer does, the selling of cattle in the auction process is nothing more than a "roll of the dice".
PART 2.2: A Living Wage From Commercial Cattle: Cattle Barons - Today