Changing economics mean new ways of doing business
By CAROL RYAN DUMAS
Tight supplies of feeder cattle and record-high feed costs combined last year to turn the bottom line red for many feedlot owners, and industry insiders say they don't see any immediate relief ahead.
Average losses in 2012 on unhedged cattle were $76 per head, said John Nalivka, owner of Sterling Marketing, a consulting firm for the red meat industry.
That means the nation's 77,120 feedlots may have lost upwards of $1.9 billion on the 25.4 million steers and heifers slaughtered in 2012, based on figures from Nalivka and USDA.
The biggest average weekly loss was $270 per head for the week ending July 21, Nalivka said.
That compares with an average profit of $46 per head for all of 2011, he said.
Nalivka emphasizes that his estimates are based on unhedged cattle and unhedged corn. Hedges on either or both can change the outcome for feedlots, he said. A hedge locks in the price of cattle and corn on the futures market or through forward contracting.
"Feedlots are a hotel that turns grain into beef. The risks are the cost of feed and the value of the cattle," he said.
As many feedlots have seen their profits disappear, they have increasingly turned to hedging cattle and feed costs and developing market niches, from feeding bison and other livestock to marketing beef directly to retail customers.
2012 was marked by high feed costs and tight margins, said Cevin Jones, owner of Intermountain Beef Producers feedlot in Eden, Idaho.
In south-central Idaho, there were enough feeder cattle to buy, but feedlots had bid up the prices in anticipation of a tight supply of fed cattle and the potential for higher prices when they were sold to packing plants, he said.
Those predictions evaporated on the futures market the week ending Jan. 18, when fed cattle prices dropped $10 per hundredweight on the news that Cargill was closing its Plainview, Texas, packing plant.
Texas and Oklahoma have been gripped by a multiyear drought, forcing ranchers there to sell millions of head of cattle outside the region and reducing the number of cattle bound for the Plainview plant.
Cash markets followed the futures price decline, Jones said.
"It was a bad week. It dashed any hope for those cattle that were unhedged," he said.
The plant's closure will increase utilization at other packing plants and boost packer profit margins, but it took a major fed cattle buyer out of the picture, reducing competition and prices at the same time.
Underutilization of packer capacity will continue to plague the industry, particularly in the uncertainty of demand and how consumers will respond to higher beef prices, Nalivka said.
That has cut fed cattle prices $8 per hundredweight on the futures market and $6 per hundredweight in the cash market, adding to feeders' losses, Jones said.
"It's going to make for a real ugly first half of the year," he said.
Intermountain Beef's break-even price is running about $130 per hundredweight, and fed cattle prices are running about $123, he said. For a 1,300-pound fed steer, that's a loss of $91 per head.
"I hope we found the short-term bottom and start to climb out of it ... but I think we may have found the highs for the year," he said.
The situation will probably lead to downsizing in the feeder and packer sectors until ranchers get more calves. And he's expecting to see another packing plant close this year, he said.
In the meantime, Jones said he's doing more niche-market feeding, such as custom feeding bison and buying lower-quality cattle and trying to "class them up." He'll also likely get into feeding dairy replacement heifers and feed fewer of his own beef cattle, he said.
His strategy in the year ahead will be to keep an eye open for any pricing opportunities to buy feed and feeder cattle, try to hedge both and protect against risks.
That's not an innovative strategy in the industry, he said. The year ahead "is just going to be a lot of hard work."
As the price of feeder cattle, corn and other feed have risen, the break-even price -- the price needed for a feedlot to cover all of its expenses -- has also risen.
The estimated break-even price for a 1,300-pound fed steer in 2012 was $129 per hundredweight, compared with $111 in 2011, Nalivka said.
"That's pretty significant. We continue to add more and more and more to breakevens," he said.
The average corn price in June, July and August was $6.20 a bushel, up from 2011's average price of $5.60, while prices for feeder steers -- animals to be fattened at feedlots -- averaged $152.81 per hundredweight, up from $123 in 2011.
At the same time, prices for fed cattle dropped from $125.54 per hundredweight in the first quarter of 2012 to $118.41 in June, July and August.
Fed steer prices are currently about $125 per hundredweight, but the break-even price on them is about $134 per hundredweight, he said.
"That kind of represents a problem," he said.
This year, breakeven from January to June will be $130 to $134 per hundredweight, he predicted. By September, breakeven will be about $141, with fed steer prices $11 lower, at about $130.
Beef Northwest, headquartered in North Powder, Ore., relies on strong risk management in every aspect of its operation to make it through lean times and to create a financial cushion during the good times, said managing partner John Wilson.
Last year was particularly challenging with the increases in corn and grain prices, doubling feed costs and changing the landscape of the business, he said.
Monthly average corn prices ranged from a low of $3.51 a bushel in 2011 to a high of $7.60 a bushel in 2012.
"Our company tried to cut costs and be as efficient as we possibly can. We also utilize the futures markets to manage price risks," he said.
But a lot of times there aren't many options, he said. The company is always tweaking its strategy, adjusting its model to new opportunities, and it's been pretty successful, he said.
Beef Northwest forward contracts feeder calf supplies, does some custom feeding and has a good relationship with its packers, but the lean times will continue in the industry for another two or three years, he said.
Like Jones, he expects more packing plant shutdowns, although not for a while and not in the Northwest. He also expects some attrition in the feeder industry, he said.
"It's a tough business. It's going to take very aggressive management to stay in business," he said.
The low-cost feeders and those adding value will be the ones who make it through the next couple of years, he said.
"And we intend to be one of them."
A new strategy
Like most cattle feeders, Jesse Larios, manager of Foster Feed Yard in Brawley, Calif., finds himself wearing many hats these days.
"I have to be a banker, an energy trader, a political analyst, a weatherman, a nutritionist and a veterinarian all here at home," he said.
But most of his focus is on marketing. The industry is requiring feeders to be more dynamic in buying and feeding cattle, but they also have to be more flexible in understanding what consumers want and giving it to them, he said.
That means traceability through age and source verifications and knowing which feed or medicine went to the animal, all to address consumers' food-safety concerns, he said.
"We have to be on our toes. The past doesn't exist anymore," he said.
Consumers want a wholesome product with traceability, and the beef industry can do that through technology, he said.
"I'm not changing what's best for us. I have to be changing what's best for the consumer. The consumer is dictating what I'm changing," he said. "The tail doesn't wag the dog."
His commitment to consumers used to end when fed cattle left his ranch. Now it runs all the way through to the consumer's plate, he said.
"I used to sell cattle; now I sell beef. I have to be working every detail," he said.
That means working with ranchers, packers and consumers. Last year, he traveled to Chicago and Cleveland to give presentations on his beef at retail outlets, telling consumers his story.
The industry needs to tell its story and work together, instead of against each other, to reach consumers with a unified voice, he said.
It's not going to get any easier over the next 20 years. Feeders will continue to work with minute margins, he said.
"The times of hitting a homerun and making a bunch of money are gone," he said.