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Feedlot Pain, Changes Will Echo Through Beef Industry

Feedlot Pain, Changes Will Echo Through Beef Industry
Feeding overcapacity coming to a head next two years and consumer resistance to high prices will add pressure for change.

Increasingly, the supply of feeder cattle will be inadequate to maintain feedlot inventories regardless of price, says Derrell Peel, Oklahoma State University extension livestock marketing specialist.

The newest USDA Cattle on Feed report underscores the challenges feedlots are facing.

Feedlots are paying record prices for feed and what amounts to record prices for feeder cattle, Peel adds. These and other factors contribute to dim feedlot prospects.

One of the biggest concerns is beef demand, Peel says. If demand were strong enough the margin squeeze on feeders and packers would be eliminated.

Feeding overcapacity coming to a head next two years and consumer resistance to high prices will add pressure for change.

Instead, the next two years will put beef demand in "relatively uncharted waters," Peel says. He thinks beef demand will continue to limit retail and wholesale beef prices, especially relative to the input price squeeze that feeders and packers face.

Private economist and advisor Bill Helming has been predicting serious declines in the feeding sector for some time as well as further declines in beef demand. Helming says the drought of 2012 has intensified the problem by cutting beef numbers.

"I expect, for example, that the U.S. beef cow inventory numbers will be 28.7 to 29.1 million head on January 1, 2013, compared to the 29.9 million head number on January 1, 2012," Helming said in a recent newsletter to his clients. "Bottom line, I expect U.S. beef cow inventory numbers to decline by 3% to 4% in 2012 and possibly more."

This will cut calf crop and therefore feeder numbers much lower in 2013-2014.

"These realities mean further increases in excess cattle feeding and beef packing capacity and therefore reduced capacity utilization rates for at least the next three years."

Peel adds that drought is a double antagonist for feeders and packers. He says two years of unplanned, additional herd liquidation has pulled cattle supplies lower than market conditions appear willing to support. Without the 2012 drought, corn prices might be closer to $5 per bushel instead of near $8/bushel.

Longer view

Peel also says, "While these short-term 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 per bushel, Peel says. From 1965 through 2005, corn prices averaged $2.15 per bushel and only in three years -- 1980, 1983 and 1996 -- did the season-average corn price exceed $3 per bushel. Crop-year average corn prices have exceeded $3/bushel every year since 2006.

Peel thinks it likely that future corn prices will average at least twice the level under which the feedlot industry that we know today evolved. Therefore, feedlots face a significantly different business environment today, which has structural implications on the sector. This would have occurred even without the effects of this year's drought.

"Forty years of cheap corn had many impacts on the beef industry, most of which were manifest through the feedlot sector," Peel says. "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 ever-higher percentage of the total cattle weight -- and thus beef production -- was based on grains."

The trends

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, Peel adds. In the decade of the 1970s, the average January 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% of total cattle numbers and 31% 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 each 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% of total inventory and over 40% 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 ten 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, representing almost 15% of total cattle inventories and 51.4% of feeder supplies.

"The record January 1 cattle on feed inventory was 14.8 million head in 2008, up 14% from the 1970s despite the fact that total cattle inventories were down 20%," Peel says.

Slight decreases in feedlot inventories since 2008 have been more than offset by decreased cattle inventories and feeder supplies, Peel adds. In 2012, the January 1 feedlot total was 14.1 million head, which represented a record 15.6% of total cattle inventories and 54.9% 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," Peel says.

However, corn prices averaging 2 to 3.5 times historical levels make calf feeding economically infeasible. High corn prices are a strong incentive for more yearling feeding rather than calf feeding, Peel says.

He adds when beef cattle inventories are finally rebuilt, feedlots will "respond appropriately" to high corn prices by placing heavier cattle and reducing days on feed.

"Unfortunately it will likely take until 2015 or 2016 or later before any appreciable increase in feeder supplies can occur," Peel says. "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."

Peel adds the problem of feedlot excess capacity will increase sharply in 2013 and 2014 and almost surely will bring news of more feedlot closures.

Helming says the industry faces real problems with high retail prices and demand.

"The reduced beef, pork and poultry supplies in 2013 will result in higher beef cattle, pork and poultry prices in 2013, compared to 2012 levels," he explains. "However, higher beef cattle prices will very likely be short lived and will end up declining because of painful economic conditions and consumer demand destruction forces over the next five years."

Ultimately, this will be another form of pressure on cattle feeders.

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