Source: Glynn T. Tonsor, Associate Professor, Department of Agricultural Economics, Kansas State University

Feedlot Returns: Current and upcoming situationCurrently discussion of values of gain available to stocker operators, prospects of herd expansion (or lack thereof) signals that may appear in the closely watched January Cattle Inventory report, and similar issues dominate many industry conversations.  It is important however to step back and assess the situation for feedlot operators – the focus of this commentary.

A couple months ago I worked with Dr. Kevin Dhuyvetter to update and expand the process used at Kansas State University to track historical, and project future, returns for finishing cattle.[1] While no approach is flawless, we believe this provides a reasonable barometer of profitability trends in the industry.  Consistent with other approaches to assessing finishing returns, our approach suggests returns from closeouts in recent months have been historically low (-$265.35/steer and -$253.16/steer sold in July and August, respectively).  These significantly negative returns mainly reflect a squeeze resulting from placements being purchased prior to the spring price pullback, increases in feeding cost of gain triggered by this year’s drought, and the lack of an offsetting increase in fed cattle prices.  During the remaining months of 2012, we project returns to progressively improve reflecting mainly adjustments in both feeder and fed cattle prices as compared to those underlying recent closeouts.   

While an improvement from the recent large losses is certain to be welcomed by those in the feeding industry, some additional words of caution are in order.  Narrowly, in aggregate the feeding industry appears to have not initiated substantial adjustments which could alleviate excess capacity concerns.  That is, there is too much bunk space relative to available cattle supplies which will continue to pressure returns for many feedlots.  Moreover, this excess capacity situation has benefited over prior months by the accelerated imports of cattle from Mexico and multiple impacts of our domestic drought.  Going forward however, imports from Mexico will likely decline and any net expansion in the U.S. cow-herd will pull heifers from the feedlot placement pipeline.  Both of these adjustments will exacerbate the excess capacity situation and managers are encouraged to take note of implications for their operation.  Operations that not only stay aware of similar industry trends but also have identified and acted upon their comparative advantage(s) will be in best position to survive and maybe even thrive as a result.

The Markets

Cattle prices in several markets and weight classes were up last week.  Fed cattle prices were higher trading at nearly $124/cwt on a live weight basis and nearly $193/cwt on a dressed basis.  Nebraska yearlings traded more than $5/cwt higher at over $151/cwt while Nebraska calves were up slightly and traded at over $166 for the week.  Corn prices were also up about $0.24/bu for the week.

Feedlot Returns: Current and upcoming situation

[1] Details of how returns are calculated, monthly updates, and a short video overview are available at: http://www.agmanager.info/livestock/marketing/outlook/newsletters/FinishingReturns/default.asp