Marketing expert warns feedlot model will change
Updated: Thursday, December 13, 2012 11:50 AM
End of cheap corn forces industry to cut finishing time
By CAROL RYAN DUMAS
Record-high prices for feed and feeder cattle, and a dwindling supply of feeder cattle, are painting a bleak future for feedlot operators, who have been losing money since April.
For the foreseeable future, feedlots face feeding animals at a loss because of high corn prices, and not having enough animals to make their operations viable, said Derrell Peel, an Oklahoma State University livestock marketing specialist.
The problem, he said, is a 40-year-old feedlot model based on cheap corn. While it worked well for decades, Peel said it's no longer functional.
From 1965 through 2005, corn prices averaged $2.15 per bushel, offering the industry a set of incentives to use that corn. The cattle industry became a calf-feeding industry where an ever higher percentage of total cattle gain was based on grain, as opposed to forages.
The industry responded to the opportunity provided by cheap corn -- making notable advances in rates of gain, feed efficiency and carcass traits and grade, he said.
In addition, there were more available calves to replace animals in the feedlot. With cheap corn, feedlots could afford to take in light calves, feed them longer, slowing the rate of turnover and keeping their pens full.
But grain prices have risen, with corn prices exceeding $3 a bushel and averaging $4.50 a bushel since 2006.
This year's Midwestern drought has driven corn prices near $8 a bushel, and two years of unplanned herd liquidations have pulled feeder cattle supplies lower.
Feedlots face a significantly different business environment than they have in the past, he said.
"We've reached a point where we can't keep feeding the way we have. We don't have enough cattle to keep feedlots in business," he said.
Corn prices in the future are likely to be at least twice the level under which the current feedlot industry evolved, he said.
Peel sees an industry that will be forced to return to the bygone days of forage-based feed.
Although some feedlots will go out of business, Peel said they will continue to be a part of the industry because finishing cattle is important for carcass quality. But he thinks the industry will have to cut the number of days cattle are on grain, with a higher percentage of weight gain coming from forages.
Feedlots can return to viability by increasing placement weight, feeding for shorter periods of time, and decreasing or moderating finished weight, which have increased 7 to 8 pounds per carcass a year for the past 20 years, he said.
Feedlots have already adjusted to the high price of corn by feeding alternative feeds and byproducts, said Cevin Jones, owner of Intermountain Beef in Eden, Idaho.
Peel's arguments make sense when cost of production is high, and the industry's model in those times has always been to bring cattle in heavier, feed fewer days and send them out lighter, Jones said.
"It makes sense, but it's not what we're doing as an industry. You have to have so many pens full to cover costs and stay in business," he said.
High grain prices aren't the only issue. With excess capacity in feedlots, operators are trying to buy lighter cattle, feed them longer and feed them bigger. And packers are raising carcass weights, he said.
"Margins are thin, if not nonexistent. There are too many buyers chasing supply," he said.
Today's feedlot model needs more cattle, and the industry needs more cows to drive more calves. If not, there will be shrinkage in both feedlots and packers, he said.
Zack Skaar, chairman of Idaho Cattle Association's feeder council and manager of the family feedlot in Lewisville, Idaho, agrees with Peel's assessment.
He said individual operators will have to consider how changes in feeding practices will affect yield and grade.