Cattle industry adjusts to higher feed costs: Who are the losers?

US - Over the past eight crop years from 1998 to 2005, U.S. corn prices averaged just $2.05 per bushel. Historically, the cattle industry has been the animal segment that makes the biggest adjustments to high priced feed and that will likely be the case this time as well.
calendar icon 30 October 2006
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The recent decline in calf prices represents a potential for $1.9 billion in lower annual returns for cow-calf operations. Excess capacity in feedlots will be costly as well. However, learning to feed distillers grains at much higher inclusion rates remains the opportunity.

In addition, there are lots of cattle in feedlots. The October 1, 2006 inventory is the largest since the current records began in 1996. Feedlot managers placed large numbers of calves this summer and early fall, and paid high prices for the privilege of ownership. Now, feed prices have moved much higher, raising costs of production and breakeven levels.

Industry response
How will the cattle feeding industry respond to much higher feed prices? The latest USDA Cattle on Feed report gives just a few clues. Placements were down five percent, indicating less willingness to put cattle in the feedlot with such an uncertain feed price situation. Younger cattle were the preference for placements in September with calves under 600 pounds up 28%, while placements of cattle over 600 pounds were down 16%.

In reality, however, the October report is still not current enough to reflect the direction of feedlots yet. It is for the month of September and much of the corn price increase came in October. For example, December corn futures traded in a range from about $2.37 per bushel to $2.50 per bushel from September 1 to September 20. Even by the end of September, December futures had reached only $2.625.

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