A historical perspective on the U.S. feedlot industry

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The latest Cattle on Feed report underscores the challenges feedlots face in the coming months. Not only are feedlots paying record prices for feed and essentially record prices for feeder cattle, increasingly the supply of feeder cattle will be inadequate to maintain feedlot inventories at any price. It is easy to identify a variety of factors that contribute to dim feedlot prospects for the future. 

Looking ahead, one of the biggest concerns is beef demand. Obviously, if demand were strong enough, the margin squeeze felt by feedlots (and packers) could be eliminated. The next two years will put beef demand in relatively uncharted waters so it is impossible to know exactly what to expect, but it seems likely that beef demand will continue to limit retail and wholesale beef prices relative to the input price squeeze that feedlots, as well as packers, will continue to face.

Drought is another culprit that contributes to feedlots’ difficult circumstances. Two years of unplanned additional herd liquidation has pulled cattle supplies lower than market conditions appear to support. Moreover, without the 2012 drought, corn prices might be closer to$5/bushel instead of near $8/bushel. While these short run factors would have changed the feedlot picture somewhat, they do not 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. Since the 2006 crop year, season average corn prices have averaged $4.50/bushel. From the 1965 through 2005 crop years, corn prices averaged $2.15/bushel. In that time period, only in three years (1980, 1983 and 1996) did the season average corn price exceed $3/bushel. Crop year average corn prices have exceeded $3/bushel every year since 2006. It is likely that corn prices in the future will average at least twice the level under which the feedlot industry that we know today evolved. The point is that even without the drought, feedlots face a significantly different business environment which has structural implications on the sector.

Forty years of cheap corn had many impacts on the beef industry, most of which were manifest through the feedlot sector. Much of the changes in genetics and preferences for animal size and type were largely a function of feedlot driven demand, which was in turn based on cheap corn. More than anything else the industry became a calf feeding industry where an every higher percentage of the total cattle weight (and thus beef production) was based on grains. 

As cattle numbers peaked in the 1970s and began to fall, feedlots maintained inventories by feeding lighter and younger animals for longer periods of time. In the decade of the 1970s, the average Jan. 1 feedlot inventory was 13.0 million head, with an average all cattle inventory of 120.4 million head and an average estimated feeder supply of  42.1 million head. Feedlot inventories represented just under 11 percent of total cattle numbers and 31 percent of feeder supply. This last figure means that there were just over three feeder cattle available to replace every animal already on feed at the beginning of the year. These proportions persisted into the 1980s but began to change late in the decade. The changes became more dramatic in the 1990s with feedlot inventory representing nearly 13 percent of total inventory and over 40 percent of feeder supply. Thus, in the 1990s there were slightly less than 2.5 feeders available for every animal in the feedlot.

In the last 10 years, the situation has reached an extreme level. While total cattle inventories have fallen to an average of 94.6 million (2003-2012) and feeder supplies have fallen to an average of 27.4 million head, average feedlot inventories increased to 14.0 million head. Feedlot inventories have represented almost 15 percent of total cattle inventories and 51.4 percent of feeder supplies for the last decade. The record Jan. 1 cattle on feed inventory was 14.8 million head in 2008, up 14 percent from the 1970s despite the fact that total cattle inventories were down 20 percent. Slight decreases in feedlot inventories since 2008 have been more than offset by decreased cattle inventories and feeder supplies. In 2012, the Jan. 1 feedlot total was 14.1 million head, which represented a record 15.6 percent of total cattle inventories and 54.9 percent of feeder supplies. This means that 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 long periods of time. However, corn prices that average twice the historical level and currently are 3.5 times historical levels make this economically infeasible. High corn prices are a strong incentive for more yearling feeding rather than calf feeding.

Eventually, rebuilding of beef cattle inventories will allow feedlots to respond appropriately to high corn prices by placing heavier cattle and reducing days on feed. Then, and only then, will the beef industry be able to respond to high grain prices to its fullest potential. Unfortunately, it will likely take until 2015 or 2016 or later before any appreciable increase in feeder supplies can occur. The manner of feedlot business that carried the sector through the herd declines since the 1980s until 2006 is not feasible now. For the foreseeable future, feedlots are faced with the dilemma of feeding economically infeasible animals; not having enough animals to feed; or more likely both. The already high pressure resulting from chronic feedlot excess capacity will increase sharply in 2013 and 2014. The recent announcement of the closure of a sizable feedlot in Kansas is surely not the last such news in the coming months.

Source: Derrell S. Peel, Oklahoma State University Extension Livestock Marketing Specialist


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William    
Texas  |  October, 30, 2012 at 04:20 PM

Must be an election year. Would someone besides a NCGA, EPA, USDA,or an Obama admininistration expert economist please make public the ingredient cost ramifications on animal agriculture feed costs since 2007, as a result of burning 40% of our corn crop to "reduce our dependance on foreign oil, reduce fuel costs, and feel green" so we can ruin small engines, reduce efficiency, and export to foreign countries. The drought created a perfect storm that accentuated our stupidity in allowing an EPA mandate to burn a food source for fuel. Shame!

d    
Canada  |  October, 30, 2012 at 04:38 PM

Well - - its would appear that DDGS has never been heard of!! What's real interesting is that DDGS is actually a far better feed than straight anything else. So where has the loss of feed come from?

William    
Texas  |  October, 30, 2012 at 06:06 PM

Some folks realize that various species have a protein requirement. Feeding levels of DDGS at the levels that corn is "normally" fed results in excess nitrogen and phosphorus excretion due to amounts and inferior digestibility relative to more desireable protein sources. My goodness, what in the world would the EPA say about animal agriculture if our animals were overfed protein and we allowed excess nitrogen to be excreted. Then there is the matter of excess blood urea nitrogens and negative effects on reproduction and energy utilization to facilitate the excess nitrogen excretion. Oh, yes...and be careful for the afflatoxin and mycotoxin concentrated in this years drought stricken corn by-products. Have you checked the DDGS price lately?.... Wow, what a bargain. So let's keep making fuel from food so we can have such wonderful by-products and great feed costs!

Alan Peggs    
Western Australia  |  October, 30, 2012 at 06:56 PM

Very perceptive analysis.

H    
Wisconsin  |  October, 30, 2012 at 10:51 PM

So let's see... cheaper corn and cheaper feeders and the feedlots will be ok ?? And it is all ethanol's fault... Has anyone asked the corn growers about this? To bad US ag feels it has to take from one segment to benefit another... and may the side with the highest paid lobbyists win!? In the end the retail price of beef needs to increase. As the article states, corn has been "cheap" for 40 years. But "cheap" because of government subsidy programs. Calves have been cheap too. Times are changing. Calves and feed are no longer going to be cheap. The feedlot side of the business needs to adapt and change also.

H    
Wisconsin  |  October, 30, 2012 at 10:56 PM

With better weather next year and many producers planting corn fence post to fence post corn prices will come down somewhat. Weather this year is the primary cause for $7-8 corn, not ethanol.

William    
Texas  |  October, 31, 2012 at 12:16 AM

So when refineries get shut down for a few weeks, and gasoline prices go up because of shortages we can explain that, but when we mandate 40% of a crop be burned up as fuel, it's the drought. Then explain 2007, 2008, 2009, 2010, 2011 feed costs. Pretty sad when you have to "mandate" something to make it work. Makes me feel so good when my small engine repair man tells me "ethanol is the best thing that ever happened to our business"!

KB    
Minnesota  |  October, 31, 2012 at 12:51 PM

Please understand that without the ethanol mandate and its associated corn demand, the corn wouldn't have been supplied. We wouldn't have seen corn acreage rise from 70+ million acres to 90+ million acres. Which means that this years drought would still have had a major impact on feed prices.

DJW    
New York  |  October, 31, 2012 at 02:13 PM

How much fuel is used to dry the bi product of ethanol, distillers grain, so it can be transported to the west and east coast?

Matt    
Minnesota  |  November, 01, 2012 at 01:43 PM

William, you need to get off your wagon. We feed cattle as well as have a 500 hd feedlot. We continue to feed corn or distillers depending on what we have available for feed sources. We had a drought throughout the nation. That is why we are short on corn. I have followed markets for several years and take a trip every year to see how the nation is doing with corn. If we would have continued with our corn corn as of June 10th when I took a tour of the major corn producing states you would have seen $3.35 corn easy. This could have been the best ever corn crop. I know this because with a mild drought here MN will set the record for amount of corn grown. We have guys that have their best crop of a lifetime here. With that being said, next year may see 100 million acres of corn grown with an average of 190 bu/ac and you will see 2.25 corn. So then it will be ok to have the crop farmers bash the livestock guys? We all should be working together to make money. Ethanol is a good thing whether you can look by your hatred and realize or not is something different. I would rather use the corn for fuel that America farms than buy fuel from a country that pillages and rapes their women, beats people, tries killing others, and bombs themselves. That just doesn't make any sense. I do agree that higher calf prices would be nice, however, what comes around goes around. $7 corn is not here to last, either is 10K land. A couple good crops and prices will come tumbling. Drop made the market do what it's doing, now ethanol.

William    
Texas  |  November, 01, 2012 at 10:22 PM

Wow! Hit Matt's nerve. Really, no "hate" intended. Please, just read comment #1, and realize I'm seriously looking for "unbiased" answers for a specific period- the introduction of an ethanol "mandate" to present to time.


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