High prices low profits – Little relief in sight
By: Terri Queck-Matzie
High feeder calf prices and high feed prices are eating into feedyard profits like a hungry steer at a feed bunk.
“U.S cattle feeders have encountered the longest period of sustained losses on record, running in excess of $150 per head over the last year and a half,” says a June RaboBank Ag Focus report.
It’s a situation that is not likely to change in the near future. Supply is tight, and feeder cattle prices have risen accordingly. Dr. Derrell Peel, Agricultural Economist at Oklahoma State University, agrees there will be no relief on the feeder side of the cattle production equation – at least not this year. He expects there will be 700,000-800,000 fewer Mexican cattle on the market this year compared to last, and that will combine with a smaller 2013 calf crop for tighter feeder cattle supplies.
The drought has dealt a “double whammy” to cattle feeders, according to Peel, raising feed prices and stalling attempts to grow the herd. According to RaboBank, fed steer and heifer slaughter is up 2.5 percent and dairy cow slaughter is up 5 percent for a combined increase in slaughter of all cows of 3.6 percent.
There may be relief in grain prices in sight with the new corn crop (the latest Drought Monitor shows the smallest drought area in a couple of years), but Peel says the supply of feeder calves could grow even tighter as drought conditions lift and forage conditions improve, encouraging producers to finally hold back replacement heifers.
“If the corn crop is better, there could be more heifers held back from the fall calf crop,” says Peel. “But we’re still likely to see a net liquidation of the cow herd this year.” That leaves feedyards trying to weather the storm as they fight high feed prices and aggressively compete for tight cattle supply.
But the real problem, according to Peel, is not one that will be easily solved by short-term relief.
“We have chronic excess capacity,” says Peel. “The problem originated in the 1970s and 1980s when we had 20 million more head of cattle.” That’s when many feedyards were built, or expanded. Since then cattle numbers have dropped and feedlots have struggled to maintain levels of efficiency.
“The economic pressure has ramped up the problems for feeders,” adds Peel. “They’re paying too much trying to maintain efficiency by keeping capacity up, and they’re losing money.”
Kevin Good, Senior Analyst – Fed Cattle Market Specialist for CattleFax, agrees: “It’s kind of the same old – same old. Feedyards have excess bunk capacity and are facing a limited supply, and herd numbers won’t see significant gains any time soon.”
So while the short term picture could improve a little, at least on the feed side, Peel says long term, not everyone will weather the storm. “It’s going to be about who can tough it out the longest, who has the deepest pockets. They’ll all be hurt. And they’ll use up available equity.”
RaboBank says at this point, there is little to suggest that the consolidation process within the feeding end of the beef chain has reached an end. Peel says 2015 could see the tightest cattle supplies yet.
“It will take prudent buying and risk management,” says Good. “It’s a narrow margin business. That isn’t going to change.”
Peel says there could be short-term opportunities to limit losses. “Hedging, and short term measures to reduce cash outlays can help,” he says. And those who have the ability to be part of a value added marketing program or an alliance will be better able to weather the storm. “But it’s not alright. It’s a tough situation.”
Peel says ultimately it will take changes to the cattle production system to alleviate the problem. “This problem came about because of the availability of cheap grains, so producers leaned toward putting on more total weight in the feedlot, and the days on feed increased, with calves coming into the yard at a younger age. As forages increase with improved drought conditions, Peel says the movement could shift back to a yearling-based industry, with calves on pasture longer before heading to the feedyard to consume high-priced grain.
“It’s a fundamental, long term change to the system,” says Peel. But, it’s also one that only partially helps the feedlot problem. Feed costs could be reduced, but maintaining efficient capacity becomes even more difficult. “The industry is not only faced with short run issues over the next five or six years, but with a 10-20 year structural change.”
And it is that long-term recovery, due to structural change or to market factors, that will be needed for the beef industry. “While it’s a rare occurrence that all sectors of the cattle industry are profitable at the same time, it is imperative that equity recovery takes place,” says the RaboBank report, “especially in the cattle feeding sector, before the industry can rebuild in earnest.”
The grand picture then, is not one of easy relief. “We have to recognize some will not survive,” says Peel. “Feedyards have to figure what they need to do on the backside. And that may not be the way things have always been done. It’s about what they do after they weather the storm.”