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Feuz on Feedlot Economics

When will profitability return to feedlots?

When will profitability return to feedlots? I maintain a model of expected Nebraska feedlot profitability. It assumes that calves and yearlings are purchased at the average auction market price in Nebraska and that fed cattle are sold at the average live price in Nebraska. It also assumes that feedlots are buying corn on a regular basis and that no price protection is used on cattle or feed. That assumption probably fits many feedlots.
Based on those assumptions, Nebraska feedlots have averaged a $120 per head loss since January 2008. There has only been one week in the last 16 months that my model predicted cattle sold would have had a positive return. That week was the first week in July, 2008. Those numbers assume both calves and yearlings in the average return. The returns are slightly better for feeder cattle place at heavier weights but still are very negative. For cattle placed weighing 750 lbs or more, the average return has been a loss of $110 per head. There have been 6 weeks in the last 16 months that returns were positive for these heavier calves: three weeks last June/July, and the last three weeks of April 2009.
In the last few weeks fed cattle prices have strengthened to the point where some feedlots were likely making a positive return on some of their pens. Still, my model suggests that on average, many pens of fed cattle were still not profitable. Looking at the Live Cattle futures, it appears fed cattle prices will decline into the summer, following a typical pattern. The June and August contracts are presently priced about $4 lower than April is currently priced and the April contract has lost about $3 in the last couple of weeks. As I look at the prices that were paid for feeder cattle that will be finished this summer, I don't see much profitability. Those feeder cattle that were purchased at the lower end of the price ranges may be profitable if they have average or above average performance. However, it would appear that feeder cattle that were purchased near the average market price and that have average feedlot performance will not break-even this summer. For those cattle to break-even, feeding costs would need to remain at present levels and the fed cattle market would need to regain that $2-3 per cwt that has been lost in the last two weeks. I would think that fed cattle prices near $85 per cwt. would be close to break-even for many pens of cattle this summer.
In the past year and a half, if feedlots had locked in the price of corn and feeders prior to placement, in some time frames they would have been even worse off, and at other times this would have been advantageous. However, for most of the past year, locking in fed cattle sales prior to actual delivery would have resulted in a higher price and improved returns. Of course hind sight is always 20:20 and I am not trying to tell you what feedlots should have done.
I return to the original question, when will profitability return to the feedlots? The reality of the feeding industry is there is an excess capacity relative to the size of the cow herd and available supply of feeders. Beef cow numbers have declined the last two years and are down 20% from 1980. The calf crop is the smallest since 1950, and is 30% smaller than at the peak in the 1970's. The result is that to obtain sufficient cattle to run a feedlot at an economically optimal capacity, there is bidding pressure for a limited supply of feeders. With higher priced corn in the last 3 years, and with greater uncertainty about the price of corn, feedlots have also gone away from placing calves on feed and are placing heavier yearlings on feed. These heavy feeders spend fewer days in a feedlot than do calf feds. This in fact adds to the overcapacity problem.
To read the entire article link to Feuz Cattle and Beef Market Analysis.