Feedlots eye profitability

Casper — “Under the current crop of cattle being marketed,” says Nebraska-based cattle market analyst Walt Hackney, “if we could get 85 or better, those cattle would have had an excellent chance of breaking even or making money.”
Recent news that 2010 fat cattle prices could reach or surpass 85 per hundredweight, may however not equate to 2010 profitability in the feedlot sector. “The problem being, as we have become aware of fewer cattle on feed and fewer cattle being placed, we have proportionately increased the price of feeder cattle,” says Hackney. “Feeder cattle, the last week to 10 days, have gone up $4 to $6 per hundredweight in almost every market on nearly every class of cattle being offered for sale. That puts them back in the soup as far as net profit at the end of feeding unless cash exceeds 85 cents a pound.”
“If you believe the cattle on feed numbers that came out last Friday (Dec. 18) there’s an obvious reduction in the placements and an obvious reduction in on feed numbers,” says Hackney. He notes an increase in marketing in what he says was a bullish report that gave cattle feeders optimism that 85 dollar markets were on the horizon for cash cattle in 2010.
USDA’s monthly cattle on feed report, released Dec. 18, stated: Cattle and calves on feed for slaughter market in the United States for feedlots with capacity of 1,000 or more head totaled 11.3 million head on Dec. 1, 2009. The inventory was one percent below Dec. 1, 2008. Placements in feedlots during November totaled 1.85 million, eight percent below 2008. For the month of November, placements were the second lowest since the series began in 1996. Net placements were 1.78 million head. During November, placements of cattle and calves weighing less than 600 pounds were 510,000; 600-699 pounds were 565,000; 700-799 pounds were 395,000; and 800 pounds and greater were 375,000. Marketings of fed cattle during November totaled 1.63 million, four percent above 2008. For the month of November, fed cattle marketings were the third lowest since the series began in 1996. Other disappearance totaled 66,000 during November, one percent below 2008.
“Most are going to feed for around 70 cents a pound including interest, the current price of corn and so forth,” says Hackney. “We have overstepped our boundaries on the price of feeder cattle because of the prospects or emotion that got passed around the last two weeks to ten days about the 2010 market being an 85 to 90 cash market.”
Hackney adds, “Cattle feeders sort of made their own bed.” He says the overarching question for 2010 isn’t a matter of cattle availability or the current feedlot situation, but a matter of beef demand. “It is the demand for beef and whether the consumer will pay higher prices when they’ve been slow to buy at the price we’ve been selling them cattle for the past six to eight months.” Hackney says the demand for beef needs to increase in proportion with feeder cattle prices.
“It’s not an extremely friendly outlook,” says Hackney. “While we can anticipate a better market than today’s 81-82.5, those cattle are not going to make money. It’s just a continuation of what we’ve been going through the last several months. Dressed beef Friday (Dec. 18) was a good example. It only dropped 18 cents on choice beef cutout. The fact is we needed that to go up a dollar or two. It just wouldn’t do it as a result of slow demand at the retail level.”
Some analysts see beef demand growing in the year ahead. Analysts at Goldman Sachs Group, Inc., according to recent news post by the Livestock Marketing Association, “are predicting that live cattle futures will increase over the next year by the most since 1978, according to Bloomberg News. These analysts see cattle futures jumping 32 percent from current levels, to reach $110 cwt. by next December.”
The same news report quotes Michael Swanson, a senior economist at Wells Fargo & Co. He said that demand for meat and dairy products will increase with the recovering economy. Short supplies of meat and dairy products, he said, will lead to retail prices jumping as much as six percent, which could double the overall pace of food inflation next year.
In the meantime, Hackney says feeders continue to live with the aftereffects of recent losses. “It’s needless to say, I think the cattle losses for cattle feeding have been significant enough for the past two years to put a real cramp in cash flow and ability to borrow money and lender attitudes toward cattle lending. I think in general there’s a feeling that there’s extreme risk in the cattle feeding business simply because of those extreme losses we’ve had and really not much luck in recovering any of that loss in our assets because the demand for beef has so been so low, or sluggish if you will.”
Hackney responded to rumors that nearly 100 feedlots are “for sale” throughout Nebraska. “If there are feedlots for sale, I don’t think it would be your major feedlots,” says Hackney. “It might be 2,500 to 5,000 head yards that simply have lost their customer base and are finding it difficult to borrow money.”
“There have been some mergers and there have been some changes in ownership in some feedlots because of the takeover by some of the more corporate feeding interests,” says Hackney. Corporate feeders, in need of more space, are finding it more economical to purchase struggling feedyards rather than expanding their existing yards, he explains “I don’t think there’s been a net loss in cattle feeding capacity,” he says.
Jennifer Womack can be reached at jennifer@wylr.net.