A North American view of the meat industry. Steve Kay is publisher and editor of Cattle Buyers Weekly
Feeder cattle prices are unlikely to decline much until the cattle feeding sector removes a significant amount of pen space
Capacity and corn continue to confound the U. S. cattle feeding industry. Too much pen space chasing a shrinking feeder cattle supply, high corn prices and weak beef demand are keeping feeding margins in the red. The U. S. feeding industry has lost money every month for the past 20. Yet there’s little or no relief in sight.
Corn prices worked lower in early July after USDA said two million more corn acres were planted this spring than earlier estimated. Cash prices in mid-July were more than 50 per cent lower than the same time last year. They will go lower percentage-wise because corn prices rallied above $7 per bushel last year. But the July prices were still 57 per cent higher than they were in 2006 when they averaged $2 per bushel. Moreover, the higher corn acreage merely pushed feeder cattle prices higher. Prices are still too high for people to place cattle on feed with a breakeven that can be hedged. Cattle feeders are paying too much money for replacements despite heavy losses. The reason is 30 per cent over-capacity in the feedlot sector and too much competition for available cattle supplies. Cattle feeders say they want to be disciplined but everyone buys some cattle and that drives up the price.
One factor is the impact of mandatory country-of-origin labelling on Canadian feeder cattle exports. They were 164,190 head or 44.4 per cent lower in the first six months of this year versus the same period last year. Declining Canadian cattle numbers and a stronger Canadian dollar were partly responsible. But MCOOL, which took full effect in March, has had a significant impact as well. The decline comes on top of a 1.544-million head decline in the U.S. cattle herd in 2008 and an expected one million-plus decline in 2009.
Feeder cattle prices are unlikely to decline much until the cattle feeding sector removes a significant amount of pen space. Given there is more than five million head of excess capacity, it might take a long time to bring capacity more into balance with the feeder supply. The sector in 2008 had 2,170 feedlots 1,000 head or larger. They had a total one-time capacity of 16.7 million head, according to USDA data. That’s against 2,160 feedlots with a 16.8 million capacity in 2007. These feedlots marketed 22.404 million head in 2008, versus 22.461 million head in 2007. The number of cattle in these feedlots on January 1 this year totaled 11.234 million head, a 67 per cent occupancy rate. The rate fell to 62 per cent on June 1.
Another way to look at the capacity issue is to examine the growth of the largest cattle feeding operations. The Top 30 U. S. operations in 1997 had 108 feedlots with a one-time capacity of 4.572 million head. By the end of 2008, they had 119 feedlots with a one-time capacity of 5.692 million head. So they added 1.12 million head of pen space. Part of this increase was expansion of existing feedlots while part was through mergers and acquisitions. During the same period, the U.S. cattle herd shrank 7.167 million head, to 94.491 million head on January 1 this year from 101.656 million head in 1997.
Cattle feeders also face higher corn prices later this year because of ethanol. The U.S. government is considering a request to increase the amount of ethanol to be blended into gasoline. Corn prices would dramatically increase if the percentage increases from its current 10 per cent to 15 per cent, say two new studies. Right now, the odds are that the percentage will be increased to at least 12 per cent. This will make it even harder for U.S. cattle feeders to make money.
Cattle Buyers Weekly covers the North American meat and livestock industry. For subscription information, contact Steve Kay at P. O. Box 2533, Petaluma, CA 94953, or at 707-765-1725, or go towww.cattlebuyersweekly.com