October 8, 2015
You can’t blame the cattle feeding industry; it has been a particularly brutal stretch for profits. But it’s worthwhile to take a look back to see how we got to where we are now.
The feeding industry responded to every signal it was given to make cattle bigger, such as lower costs of gains and reduced discounts on heavies. The feeding industry was bleeding red and needed to reduce breakevens, and everyone’s individual math said to make them bigger. Of course, one of the great ironies of agriculture is that individuals making the right decisions based on economics actually leads to wrong decisions for the industry as a whole. The market wants more corn acres so it bids up corn, farmers respond by planting more corn, which ultimately results in lower corn prices. In much the same way, the feeding industry responded by making cattle bigger.
Yet, at some point, we met that magical tipping point where feeders lose what little leverage they have by growing the front-end supply of overdone cattle too large. Suddenly, the packer stops buying the big cattle and when he does jump in the market, he is buying those heavies at sharp discounts. Once started, this cycle is only corrected by coughing up the front end supply of overdone cattle, providing you can get the packers to take them. It is like pulling off a bandage; you can pull it quick or you can go slowly, but it has to happen.
Fear, outside markets, cheap pork, and a host of other factors all combined to precipitate as large a drop in prices and equity over the last month as we have experienced since the outbreak of BSE. Feeders understandably are trying to buy profits and things have conspired to give them that opportunity. Talk to cattle feeders and they are hoping to buy calves for $300 per head less than a year ago, or even more; an unprecedented drop in calf prices. And they have been successful in a few instances at doing just that. Feeders are praying that will continue, and cow-calf producers are panicked that it just might.
I’ve been agreeing with the analysts who predicted at the first of the year that we had seen the market highs in the fall of 2014 and that prices would be decidedly lower in the fall of 2015. The question has always been how much lower? We may yet to know the answer.
We have a strange situation in that the cattle on feed number is larger than a year ago, despite significantly lower placements. We have simply fed them longer and marketed them less aggressively, so there is a glut of supply on the front of the fed market. But months of lower placements also tell us that once that glut is marketed, there is not as much behind them as there has been. The calf crop remains historically small, and like the feeder, the cow-calf producer is responding to new signals. Abundant and cheaper feed, coupled with lower expectations in the market, are encouraging cow-calf producers to hold calves and put on extra weight and increase heifer replacement rates, which will tighten supplies even more.
The feeding industry’s desire to buy profits in the feeder market in the face of significant losses in the fed market is understandable and even predictable. Unfortunately, cattle feeders remain the segment with the least amount of leverage. With historically tight feeder supplies, continued overcapacity in the feeding industry and cost of gains that are dropping, it is difficult for the feeding industry to maintain the leverage needed to break the market to the degree they are hoping.
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Will they buy calves cheaper this fall? Most certainly. But will they buy them cheap enough to ensure profits? Almost assuredly no. I saw a bumper sticker the other day that said sometimes you are the hammer and sometimes you are the nail. The feeding industry right now is the nail.
The cow-calf and feeding industries have always been predatory, but there is also a strong bond there. That bond goes beyond the fact that there is a lot of cross-over between the segments. We are generally cut of the same cloth. There is the obvious understanding that we need each other, and while history tells us that it is rare when both segments are making good profits simultaneously, we still feel the pain of the other side.
It wasn’t that long ago when feeders were openly discussing how much they would have to pay for calves to encourage expansion. Today they are focused on how cheap they can buy them in order to survive. Perhaps the feeders will take solace in the fact that at some point that leverage will shift and the cow-calf industry will be the nail.
The opinions of Troy Marshall are not necessarily those of beefmagazine.com and the Penton Agriculture Group.
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