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High Costs Challenge Cattle Feeding's Rules Of Thumb

connecting the beef industry dots
Historically high feed and cattle costs are challenging cattle feeding rules of thumb. Don't miss the full series: Part 1: Industry Big Picture Part 2: Seedstock Sector Part 3: Cow-Calf Sector Part 4: Stocker Sector

Cattle feeding has always revolved around opportunity and need, usually both at the same time.

Sugar and cotton mills in California – commonly regarded as the root of modern commercial cattle feeding in the 1930s – offered the opportunity with cheap sources of feed. The need was to feed an influx of Dust Bowl immigrants.

For the record, history tells us the practice of feeding groups of cattle to slaughter weight is at least as old as the nation itself. The sprawling, business-first, intensively managed cattle feeding industry of today grew from those California roots to Arizona and finally the High Plains in the 1950s and 1960s. Farmer-feeders had already been going strong in the Corn Belt and as far west as places like Colorado for decades.

Arguably, it was the beef price freeze in 1973 that spawned the first round of consolidation that led to today’s scenario where five cattle feeding organizations control 20% of all cattle feeding capacity and churn out 80% of the annual fed cattle supply. At the time, survival demanded greater economic efficiency. One opportunity was acquiring the feedyards that had bankrupted others in the colossal economic wreck.

In other words, cattle feeding has never been for the weak of heart. There’s too much money, time and risk tied up in a pen of cattle that will be priced in a narrow marketing window.

Though it was never easy, nor guaranteed, modern-day cattle feeding used to pay well enough, often enough to recover from the losses in between, if you stayed in the market.

One of the reasons is that for all the uncertainty – until the commodity bubble a few years ago – the averages associated with cattle feeding were fairly predictable. These included cheap corn, how much different classes and weights of cattle consume and gain, price seasonality, basis, how various technologies impact performance and carcass quality, even the fundamental way the futures market seemed to ebb and flow.

Though predictability remains for live-cattle performance, commodity markets have become so divorced from fundamentals, and competition for feed resources so fierce, that price volatility and increased financial risk reign as never before.

Another Perspective: Ethanol Policy Is Busted

Citing the “Historical and Pro-jected Kansas Feedlot Returns” report from Kansas State University (KSU) as an example, from January 2002 to September of this year, estimated monthly net returns for steers fed in Kansas feedlots were negative 61% of the time. Only two months in the past 18 (up to September) showed positive returns. This past summer was historically ugly. Steers in August were estimated to have lost $253/head, according to the KSU data.

Keep in mind, these estimated returns are projected on a cash basis; there is no way to account for the risk management of different feedlots on each pen of cattle or premiums received beyond the average price.

As important, keep in mind, the estimated net returns are based on owning, feeding and selling cattle. Feedlots are a different business entity altogether. In the case of commercial ones, revenue is generated from services and feed sold. The line between feedlots and cattle feeding gets obviously blurry because many commercial yards own a substantial number of the cattle being fed there.

Economics demand downsizing

The need has emerged once again in recent years. It points to a need for the cattle-feeding sector to downsize because there are so few cattle relative to available feeding capacity. In part, it also has to do with the fact that cattle feeders have been able to produce as much beef in recent years with a cattle inventory of 90.8 million head or so, as there was produced in the mid 1970s with 135 million head.

“Not only are feedlots paying record prices for feed and essentially record prices for feeder cattle, it’s been recognized for quite a while now that the supply of feeder cattle will be increasingly inadequate to maintain feedlot inventories at any price,” says Nathan Anderson, Oklahoma State University (OSU) Extension director and agricultural educator for Payne County.

Breaking It Down: Feedlot Capacity And Long-Term Profitability

Anderson and Derrell Peel, OSU Extension livestock marketing specialist, explain that feedlots maintained inventories by feeding lighter and younger animals for longer periods of time when cattle numbers peaked in the 1970s and began to decline.

“Feedlot inventories (in the 1970s) represented slightly less than 11% of total cattle numbers and 31% of feeder supply,” Peel says. “This last figure means there were approximately three feeder cattle available to replace every animal already on feed at the beginning of the year.”

By the 1990s, Peel says feedlot inventory represented nearly 13% of total inventory and more than 40% of feeder supply. So, there were typically fewer than 2.5 replacement cattle available for every animal in the feedlot.

In the last decade, feedlot inventories represented almost 15% of total cattle inventories and 51.4% of feeder supplies.

In 2012, Peel explains the Jan. 1 feedlot inventory was 14.1 million head, a record 15.6% of total cattle inventories and 54.9% of feeder supplies. In other words, there are currently 1.8 feeder animals available for every animal in feedlots.

“Obviously, the only possibility for this level of feeder-cattle supplies to maintain feedlot inventories is with the very slow turnover rate that comes with feeding ever lighter and younger animals for longer periods of time,” Peel says. “Corn prices that average twice the historical level, and currently are 3.5 times historical levels, make this economically infeasible.”

If this year’s drought hadn’t occurred, Peel reckons corn prices might be closer to $5/bu. rather than the current $7 plus. “While these short-run factors would have changed the feedlot picture somewhat, they don’t change the fact that the role of the feedlot sector is changing and must change fundamentally in the future compared to how it has operated in the past,” he explains.

“It is likely that corn prices in the future will average at least twice the level under which the feedlot industry we know today evolved,” Anderson says. “The point is that even without the drought, feedlots face a significantly different business environment.”

Peel adds, “The already high pressure resulting from chronic excess feedlot capacity will increase sharply in 2013 and 2014.”

For perspective, there were 2,091 feedlots with 1,000-head or more capacity in 2000, according to the annual summary from the National Agricultural Statistics Service (NASS). In 2011, there were 2,140. In 2000, total bunk capacity of those yards was estimated at 16.5 million head. It was 17.0 million head in 2011. Tables 1 and 2 illustrate other feedlot trends.

Ultimately, Peel and Anderson say that expanded beef cattle inventories will allow feedlots to respond appropriately to high corn prices by placing heavier cattle and reducing days on feed.

The need is there. It’s the opportunity side of the equation that cattle feeders are in the midst of conjuring. 

TAGS: Prices Feed
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