Friday, June 17, 2011

Cattle prices, cows, stockers and the future

There are a lot of cow calf producers that think they are in the cat bird's seat given current calf prices. It is indeed a good time to be in the cow/calf business. But I would suggest that this situation will change. The reason calf prices are so high is because there is a glut of feedlot space in the market. Feedlots have very high fixed costs given the enormous capital requirements of pen space and feed production. Business econ 101 tells us businesses will (in the short term) run at a loss so long as they can cover their variable other words they will LOSE money so long as the money they are losing is equal to the cost of NOT feeding a single animal. Obviously they can't do this in the long run. In the long run, the most inefficient businesses will go out of business until the remaining businesses can earn a profit. This is what will happen in the feedlot industry. To summarize: Feedlots are overpaying for cattle so that they can keep their feedlots operating to a point where they can cover their variable costs. They are all likely losing money. This won't continue forever. Once some capacity gets taken out of the market, feedlots will start to pay prices for cattle that will get them back to profitability. Given the high price of gain, prices will be much lower for 500# calves than for 800# calves. As long as stocker operators are dumb enough to price their grass gain at a significant discount to the cost of feedlot gain, the feedlots will buy only heavier cattle and the cow calf producer will continue to be the winner. Once stocker operators realize that they can price their grass gain commensurate with feedlot costs of gain, calf prices will feel downward pressure and the stocker operators will be the winners. How long will this take? I have no idea. I hope not long since we are moving to stockers. I will say that if you know someone who is still charging 50 cents per pound for gains, load them up with calves!

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