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.