The sell buy equation at its worst

There has been plenty of movement out of cow calf operations and into trading over the last 10 years. It is one of the reasons weaner steers are so expensive this year. A favourite trading strategy is to buy and sell on the same market, but this year it’s hard to make it work.

The sell/buy strategy has been around forever, and it tends to work well. Traders buy cattle at a similar time to when they sell, and by doing this negate price risk.  The margin is calculated on the difference between the dollars per head sold, and the dollars per head to buy back in. 

The sell/buy strategy has been used to justify buying weaner cattle when they were at perceived high prices.  In general, it has been a pretty good strategy.

Figure 1 shows some rough prices for weaners, feeders and heavy steers in dollar per head for the last 20 years.  We used 280kg lwt for weaners, 450 kg lwt for feeders and 600kgs for heavy steers.

We can see that prices for feeders and heavy steers have historically mostly been at a reasonable premium to weaner steers.  This year though, the rise in weaner steer prices has pushed all three cattle categories to new record highs, but weaners are up 63%, feeders 11% and heavy steers just 6%.

Figure 2 shows that during the drought and improving international beef demand of the past six years, the heavy steer trade has delivered record margins.  Where $400-500 used to be the norm and thought a reasonable margin, from 2015-2020 margins averaged $780.

For the feeder trade, margins for 2015-2020 have averaged $480, up from $320 for the 10 years previous.  The last five or six years have been pretty good for traders who had grass to feed cattle.

This year we are seeing the first real challenge for the sell/buy strategy for the last twenty years.  Figure 2 shows that weaners are being purchased for the smallest margin below sell prices we have seen for the past 20 years.  This year feeders have been at a $232 premium to weaners, and heavy steers at a $388 premium.

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What does it mean?

While the margin for sell/buy operators is thin, it is because feed costs are small, and the abundant grass is driving the tight margins. It’s possible that weaner cattle bought now might not turn an actual profit at all, but when the cattle come to be sold, the buy-in price should reflect a better margin.

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Key Points

  • Buying and selling on the same market has been a good trading strategy over the last 20 years.
  • The sell/buy equation has been very good over the last six years.
  • This year the sell/buy margins are very tight, but cheap grass is seeing traders still jumping in.

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Data sources: MLA, Mecardo

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