The sleeping giant of excess capacity

By: Jill J. Dunkel

The issues facing feedlots today is considerably different than those of two years ago. Just last year, cattle were flowing into feedyards. People across the south, especially Texas, were looking for anywhere to go with their cattle. A historic drought had driven cows out of the area, forced ranchers to wean calves early, led to a virtually non-existent grazing season for stockers, and cattle on feed were up five percent.

Oh, how times have changed. Cattle on feed have reached record lows. In fact, the most recent report has cattle on feed at their lowest level since the current cattle on feed series began in 1996. How will feedyards adjust from once busting at the seams to now surveying a yard of empty pens?

Some will adjust. Some will not, suggests economist Mike Sands of Informa Economics. “There’s not enough (feeder cattle) to go around. There’s going to be empty pens,” he says. With the drastic drop in the domestic cow herd, feedyards must deal with the excess feeding capacity. Packers are in a similar situation looking at excess slaughter capacity.

Although this problem didn’t happen overnight, it is now becoming a major issue for feedyards. “We’ve seen a long, slow decline in terms of overall inventory numbers. The total size of the cattle industry has been shrinking and shrinking rather abruptly the last couple of years,” Sands says, adding he doesn’t see inventory turning around until at least 2015.

“The drought has been part of it. It’s accentuated the problem. It’s magnified it, and it stretches out for a longer period of time,” he says. No matter what led to lower numbers, feedyards are now left to deal with a lack of cattle.

Sands says the country has experienced a 4 million head drop in feeder cattle over the last three years. “Not only do we see smaller numbers to feed, but if we are going to hold back heifers to get back to the breeding herd, where do they come from? The same pool. The pool of feeder cattle is getting progressively smaller.”

The latest trade data reveals another reason for tighter feeder cattle supplies – a lack of Mexican feeders crossing the border. The August 2012 import total was down, according to Dr. Derrell S. Peel with Oklahoma State University. Preliminary data for September indicates Mexican cattle imports will be down sharply, and imports in 2013 are expected to be sharply lower than recent years.

Add to that the fact that price levels have gone up, and the financing required in terms of increased equity in cattle has skyrocketed, Sands notes. “And the price volatility makes that financial risk even greater.”

“We’ve probably got 25 percent more excess feeding capacity as we stand here today, maybe even more,” Sands says. “There are going to be some empty pens. Some of those can be used in terms of growing programs or other ways. But the bottom line is we’ve got more pen space out there than we are probably going to be able to productively use over the next few years.

“We’re talking about a feeding industry that’s going to have to figure out a way to operate with something around 70 percent, or at times in the low 60s, in terms of capacity and utilization. That’s pretty tough to do.”

Some are already feeling the stress.

In mid-October, Hays Feeders announced it was closing. An article in the Salina Journal quoted Jerry Bohn, manager of Pratt Feeders, the umbrella company that owns Hays Feeders, as saying the decision to close the Hays, Kansas, feedyard is a function of the economics of the industry.

Of the yards owned by Pratt Feeders, the Hays location was doing the least amount of business. Bohn cited the small supply of feeder cattle, the high cost of feed and competition from the ethanol industry. According to the article, Bohn and the other stockholders do not intend to sell the yard at this point and are hoping for better times.

Sands says it’s time for feedyards to find their niche in the industry. “It boils down from a feeder standpoint, being able to work out marketing agreements. Maybe that’s a working relationship with packers, or a way to access feeder cattle, or perhaps developing retained ownership programs.”

Finding what works for an individual feeder could be key in riding the excess capacity train.

“It’s going to require doing some things differently than in the past. They are going to have to figure out ways either in terms of acquisitions of raw materials, risk management programs or create a niche which they can thrive,” he says.

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