Editor’s note: The following was written by Lee Schulz, Iowa State University Extension livestock economist, for the university’s Iowa Farm Outlook November 2018 newsletter.
One topic that often gets brought up is structural change in the cattle feeding industry and how that may impact pricing trends, especially during certain times of the year.
Historically, smaller feedlots have been associated with crop farms using cattle as another form of marketing their annual corn harvests and diversifying their operation. When corn prices were high, crops were sold for cash, and when prices were low, corn was fed to cattle and sold as beef, provided that the cattle were available.
This year is proving to be an anomaly and may be a signal of a fundamental change in the cattle industry. Calf crops have been expanding and corn prices have been supportive for feeding cattle in smaller-scale operations in each of the last three years, yet this year is not featuring a similar gain in cattle marketed from this sector.
Cattle on feed in Iowa feedlots with a capacity of 1,000 or more head on Oct. 1, 2018 was up 6 percent from Oct. 1, 2017. Iowa feedlots with a capacity of less than 1,000 head had 10 percent fewer cattle on feed than the previous year.
Looking only at the large feedlot number would suggest the availability of market-ready cattle come the end of this year and the first of next will be substantial in the state. However, in all Iowa feedlots, the Oct. 1 cattle on feed inventory was down 0.5 of a percent from last year and up only 0.6 of a percent from the 2012 through 2016 October average.
The twelve-month moving average of cattle on feed (which removes the seasonality of feedlot inventories) is currently at the highest level for 1,000 or more head capacity feedlots and lowest for less than 1,000 head capacity feedlots in the history of the data back to 1996. Even with corn being below $3.25 per bushel for the last five months, there has been no recovery in the share of cattle on feed from small operators.
On the other hand, large operators have seemingly expanded. Larger feedlots could be growing market share because of their ability to capitalize on economies of size.
September feedlot placements and marketings were both below year ago levels, in part due to one less business day in September 2018 compared to last year. This was the case for both the large and small feedlot categories in Iowa. While placements into large feedlots were 16 percent below a year ago, placements into small feedlots were down 61 percent.
Similarly, fed cattle marketings were down 21 percent and 32 percent, respectively. This could be a sign of feedlots’ unwillingness to purchase relatively expensive feeder-weight animals. The spread between feeder cattle and live cattle pricing has been a headwind regarding feedlots placing animals on feed. The larger year-over-year decreases in placements and marketings of small feedlots could be a sign that they are more price sensitive in their placement decisions.
Additionally, cow herds that typically retain ownership through finishing could alternatively be marketing calves and feeders at strong prices and providing profitable returns to the cow herd enterprise.
Delayed fed cattle marketings are driving feeders to add pounds to their existing inventory. The latest USDA report that breaks down Iowa/Minnesota steer and heifer weights showed live steer weights for the week ending Oct. 28 at 1,505 pounds, 15 lbs. higher than the previous year. Heifer weights were 16 lbs. higher.
The weight data will be closely scrutinized for any sign that feedlots are further falling behind in their marketings and potentially losing bargaining power.
Cattle on feed over 120 days on Oct. 1 in all Iowa feedlots decreased by 23,000 head from one month earlier this year. This compares to an 80,000 head decrease in 2017 and an average change of minus-77,400 between these same months during the 2012-16 interval.
Small Iowa feedlots have been the main contributor in reducing inventories of cattle on feed for more than 120 days, reducing these inventories by 25,000 head from September to October. Large feedlots increased these inventories 2,000 head in October.
Small feedlots holding fewer market-ready supplies has certainly aided in Iowa feedlot currentness. With the books for October slaughter cattle markets closed, the demand for 120-day feedlot inventories was quite impressive. Iowa/Minnesota negotiated fed cattle prices stayed close to $110 per cwt. (live weight) from mid-September until the last week in October, when prices perked up another $2-$3.
Oct. 1 inventories on hand for 90-120 days for all Iowa feedlots were up 15,000 from a year ago. Inventories on hand for 90-120 days in large Iowa feedlots were up 5,000 head compared to last year, while these inventories in small feedlots were up 10,000. These cattle should be mostly ready for slaughter in December and January.
Last year, the Choice boxed beef cutout slipped $6 per cwt. from November to the end of December based on market-ready cattle supplies that were much bigger than prior years. Iowa/Minnesota cattle prices fell $1-$2 per cwt. A supply-driven perspective on this market would suggest that the increase in 90-120 day feedlot inventories on Oct. 1 would provide a bit more bearish cattle market action locally this December.
Projecting demand for the remainder of the year and into next year is more difficult. A bountiful supply of other protein sources provides increased competition at the meat case during the holiday season. However, general prosperity in the economy will continue to support demand for beef.
Finding a market for the big supply of beef ahead will be key to market clearing prices.