By Donald Stotts, Oklahoma State University
Conversations about Mayan prophecies of doom have been all the rage this year, but for the U.S. cattle industry, dim feedlot prospects for the future have been a much more worrisome topic.
"Not only are feedlots paying record prices for feed and essentially record prices for feeder cattle, it has been recognized for quite a while now that the supply of feeder cattle will be increasingly inadequate to maintain feedlot inventories at any price," said Nathan Anderson, Payne County Extension director and agricultural educator.
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," said Derrell Peel, Oklahoma State University Cooperative Extension livestock marketing specialist. "However, 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 has contributed to feedlots’ difficult circumstances. Two years of unplanned additional herd liquidation has pulled cattle supplies lower than market conditions appear to support.
"Without the 2012 drought, corn prices might be closer to $5 per bushel instead of near $8 per bushel," Peel said. "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 per bushel. From the 1965 through 2005 crop years, corn prices averaged $2.15 per bushel. In that time period, in only three years – 1980, 1983 and 1996 – did the season average corn price exceed $3 per bushel. Crop-year-average corn prices have exceeded $3 per 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 we know today evolved," Anderson said. "The point is that even without the drought, feedlots face a significantly different business environment."
Forty years of cheap corn had many structural implications on the beef industry, most of which were manifest through the feedlot sector. Much of the changes in cattle genetics and preferences for animal size and type were largely a function of feedlot-driven demand, which was in turn based on inexpensive corn.
"More than anything else, feedlots have become a calf-feeding industry where an ever-higher percentage of the total cattle weight, and thus beef production, has been based on grains," Anderson said.
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 million head, with an average all-cattle inventory of 120.4 million head and an average estimated feeder supply of 42.1 million head.