The sheep and cattle markets have been on a steep decline in 2023, with this sentiment flowing through to lower than normal clearance rates on AuctionsPlus. Lower clearance rates are typical of a period when the market is falling from record highs. The question is, are vendors expectations too high or is buyer willingness too low, or is it simply a case of a mismatch between the two at any price level?
The proportion of stock selling post auction is at its highest point since 2019, with an average of 22% of stock selling after the fall of the hammer. Although this is a valuable feature for vendors and agents to secure a sale, it comes at a cost. Stock that are initially passed in during a sale sell for lower prices than stock that sell at auction on average. This is despite initially passed in stock having higher reserves on average. So far in 2023, clearance at auction is at its lowest point since 2019, at 36%. Through post-sale negotiations after the auction, clearance has been reaching 58%, indicating a larger number of lots being sold via negotiations (Figure 1).
Figure 1: AuctionsPlus sheep and cattle clearance rates, 2019-2023.
Setting reserves has always been a challenge, especially when price discovery is difficult to ascertain in a fluctuating market. This has seen high reserves set by vendors/agents to test the market, contributing to the lower clearance rates at auction. Vendors have the flexibility to choose this approach as they are not restricted by a lack of pasture available and have the ability to retain stock and carry through to heavier weights if they don’t sell.
Vendors/agents who are setting higher reserves on their lots and then choose to negotiate post sale, are receiving on average $21 less than their set reserve over the last five years across sheep and cattle. Investigating further, average reserves of lots that sell post sale are higher than lots that sell during the auction, although lots with the lower reserves are receiving more competition during the auction and ultimately returning higher prices.
As shown in figure 2, VOR (Value Over Reserve) for cattle that sold at auction averaged $136 above reserve, while VOR for lots that sold via negotiation averaged $28 under the reserve. Importantly, lots that sold at auction had a lower average reserve but returned a much higher sale price than the lots sold via post-sale negotiations.
Figure 2: AuctionsPlus cattle auction and post auction results, 2019-2023.
The story is much the same for sheep, with lower reserves being seen for lots that sold at auction compared to lots that sold post sale. However, sale prices were well above their reserve price, averaging $18 above since 2019. Lots selling post sale had higher reserves but averaged $3 lower than the set reserve. By setting a realistic and market appropriate reserve, vendors/agents are more likely to secure a sale, and at a higher price than if they set reserves that are too high and sell through negotiations after the sale.
Figure 3: AuctionsPlus sheep auction and post auction results, 2019-2023.
In conclusion, setting a conservative reserve that reflects the current market attracts more competition during the auction and ultimately returns a higher final selling price. As opposed to setting a reserve above market value to test the market and then having to negotiate a sale for less than lots that are selling at auction. Setting reserves at what vendors are willing to accept, rather than what they are aiming for, will put them on the market earlier and generate more competition, leading to higher returns. It is the competition of multiple bidders that sets market prices, not the negotiation of two opposing parties.
