A historical perspective on the U.S. feedlot industry
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 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 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 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. Feedlot inventories have represented almost 15 percent of total cattle inventories and 51.4 percent of feeder supplies for the last decade. The record January 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 January 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.