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.
"Feedlot inventories represented slightly less than 11 percent of total cattle numbers and 31 percent of feeder supply," Peel said. "This last figure means that there were approximately 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 more than 40 percent of feeder supply. Thus, there were typically fewer than 2.5 replacement cattle available for every animal in the feedlot during the 1990s.
In the last 10 years, the situation has reached an extreme level. While total cattle inventories have fallen to an average of 94.6 million head for the 2003-2012 time period, and feeder supplies have fallen to an average of 27.4 million head, average feedlot inventories increased to 14 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-setting January 1 cattle-on-feed inventory was 14.8 million head in 2008, an increase of 14 percent from the 1970s despite the fact that total cattle inventories decreased 20 percent during the same time period.
"Slight decreases in feedlot inventories since 2008 have been more than offset by decreased cattle inventories and feeder supplies," Anderson said.
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," Peel said. "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.
Peel and Anderson point out that the rebuilding of beef cattle inventories will eventually 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," Anderson said. "Unfortunately it will likely take until 2015 or 2016, and possibly later, before any appreciable increase in feeder supplies can occur. The manner of feedlot business that carried the sector through the herd declines of the 1980s through 2006 is not feasible now."
Anderson and Peel contend that for the foreseeable future, feedlots are faced with the dilemma of feeding economically infeasible animals, not having enough animals to feed or both.
"The already high pressure resulting from chronic feedlot excess capacity will increase sharply in 2013 and 2014," Peel said. "The recent announcement of the closure of a sizable feedlot in Kansas will surely not be the last such news in the coming months."