Are Feedlots Making a Killing?

[farmers_son]

Feeder prices are around $1 per pound. Fat prices were 95 cents this week. Barley is $3-3.25 a bushel around here. So are the feedlot guys making as much money as it looks?

Should we be retaining ownership of our calves?

[smcgrath76]

I hope they are making a killing as they tend to reinvest heavily in the calf market after making a couple of profitable turns.
We keep our calves post weaning and the tradeoff for finishing vs. only backgrounding is strictly risk at this point.
The math looks good, but the futures market is extremely volatile at the moment and even hedging your bets could take some significant cash for margin calls. Playing the cash market and assuming you have your feed in place already (cost incurred) then you are really looking forward to the price of fats mid 2009. I don't honestly have a clue where they will be at by then with the dollar changing 5 cents a day, fuel dropping like a stone to recover when?, reduced consumer demand and MCOOL. Pretty risky business at the moment.
In other words we haven't made our decision yet.

[grassfarmer]

I think "will feedlots make a killing?" is a more apt question. Comparing the fat price they are receiving for cattle now with the buying price of cattle to be slaughtered next summer is an over simplification. What you are not factoring in is risk - how many, if any, of the calves they buy now will be allowed into your "greatest market on earth" - the US, due to COOL? This is a question that must weigh heavily on feedlot owners minds. You don't factor in the risk introduced by having increasing numbers held under captive supply contracts by the packers - not all feedlots are the same, if prices rise or fall dramatically some will lose substantially, some not at all because they are custom feeding for Cargill. As well where will the grain price be next May? What will the freight on it be? What will the US dollar be worth? On top of that there are the fixed costs of power and wages etc.
If they do make a killing on this year's calves it will go to offset losses incurred in recent years. Historically feeding cattle is a very high risk/low return business. If you want to do it go right ahead - there is nothing stopping producers retaining ownership of their calves either at home or in a custom lot.
Your friends at the ABP were spouting off about how the feedlots were paying a very generous price for calves a year ago when calf prices were on the floor and that was the time producers should have held their calves. Now you are recommending that feedlots are going to make so much money producers should hold onto calves this time around - maybe you are wrong this time?
End of the day it's up to everyone to make their own decisions based on their willingness to manage/ take on risk.
I certainly don't envy their business or their chance to make money if things go their way. They work with too many factors outwith their control for me to ever be happy filling their shoes.

[smcgrath76]

I agree with you GF about the risk. I think the farmer/feeder sometimes has an advantage in that his cost for home grown feed (not opportunity cost) may be lower than the cash or market cost.
If you are buying feed, then last winter was an example of pretty good timing not to feed your calves as the cost of gain in many cases was higher than the increased revenue. This obviously changes hugely with differing marketing strategies and between operations. But the risks can be huge.

[farmers_son]

Assuming the feedlots have made enough money in the past five years to build up a CAIS reference margin they have really very little risk. Plus they received million dollar plus AFRP cheques last June (a few would have got cheques in excess of $10 million) and they will be getting another cheque just as big this January. But there is no sign that money is being reinvested in this falls calf crop. Weaned calves are about 20 cents a pound cheaper than they should be.

Is it just me or does it seem like the packers are not the only ones to benefit from MCOOL. Without U.S. feedlots in our market to keep the price of feeders honest our 100 Alberta feedlots are not above keeping a little extra back for themselves.

[blackjack]

surprise...surprise...where was the abp stance when they were sitting with shirley...the trickle down effect was going to save the industry...i think maybe your starting to see the picture f_s...

[smcgrath76]

$500 a calf x 30,000 calves is a lot of risk, even with CAIS. It is also a lot of risk coverage and potential margin calls. I am not so sure that feedlots make a grand fortune over the last 2 turns of cattle.

[farmers_son]

They are not risking the entire calf, only the basis. The buying price is known, the barley price can be fixed, even the futures price can be fixed leaving the basis as the only unknown. And that could be a big unknown. But CAIS will cover it, easy.

If the feedlots are making a killing then maybe I should be thinking of feeding instead of selling. Why give the calves away and let someone else make all the profit? There have not been many times when even a small feeder could pencil out $100 or more per calf profit.

Speaking of risk, the cow calf guy has way more on the line. Goodness knows what is going to happen to our land, machinery, cows. And none of that is covered by CAIS even if I had any reference margin. Our risk to profit ratio is off the map.

[smcgrath76]

you've got me there. Since cow/calf guys are willing to take on the risk levels they are, it is understandable why beef has not followed the same model as pork and chicken (at least not as quickly). As i understand it, some of the pricing by feedlots is also currently being driven by access to credit.
The farmer/feeder has a lot of options but unless they have a risk management strategy going forward, feeding calves does expose them to a lot of potential cash market risk.

[grassfarmer]

Why beat up on the feedlots farmers_son? last year at this time they were being hailed the heroes for bidding our calves so high, lol!
Yes CAIS is a crap system but I thought all the free spirited ranchers didn't want any Government involvement or subsidies anyway? Seems you complain either way. You said earlier in the thread "Assuming the feedlots have made enough money in the past five years to build up a CAIS reference margin they have really very little risk" and why should they have built up their margins when cow/calf guys haven't? 2003 is within the last 5 years - I think the guys that held onto fats for 6 or 8 months extra and then sold as low as 20c/lb eventually would rack up some fair losses too.
Just a reminder of feedlot profitabilty (source: Can Fax Trends as quoted by Cam Ostercamp in "behind the veil of science")
"Western Canada feedlots from 1979 - 2002 showed a net loss over that period of $4.85....."
Want to feedlot fatten cattle as a business? go for it - I much prefer the security and predictability of a low input, cow herd that produces a calf crop every year.

[BFW]

Farmers Son, 3 words, Fill your boots!!!

[BFW]

Farmers Son I actually agree that despite everything that is going on in the world, that calves placed on feed this fall look like a reasonable proposition. But please show me the math that says they are $20/cwt undervalued or are you just trying to be inflammatory.

[kato]

We are some of those crazy people who still buy calves to background, as well as having a cow herd. What we're finding is that our own are too cheap to sell, and the backgrounders are too expensive to buy.

We get to see and have the joy of experiencing both sides of this debate. The thing keeping us from paying more for calves is the risk factor. I'm sure there are lots more out there like us that just don't have the resources or the nerve left to take a big chance on much of anything any more. We've been told things are going to turn around this batch, only to find that they didn't, so many times that we've just quit listening to the optimists. We now go into every batch we buy with the assumption that something is going to blow up in our faces before those calves are gone.

"The border will open, and then things will be good". No they weren't.
"Once the border opens, we'll get new export markets." No. Didn't happen.
"Now the border is open, so things will be good." No, now we have world record feed prices.
"Now the border is open, cattle numbers are down, feed and fuel are down, and the U.S. is looking for cattle." No. Now we have MCOOL.

What next? Oh yea, Alberta and their go it alone subsidies. Are we going to be able to sell cattle from Manitoba into Alberta? When will we wake up some morning and find that the hundred non age verified calves in the yard have nowhere to go? Auction marts in this province don't seem to think anyone needs age verified calves, so there's no such thing as a supply to buy. We want them, but can't find them anywhere in decent numbers, especially the small ones that we buy.

We're getting tired. Very tired. Not ready to give up yet, but we're sure seeing lots around here who are. Never ending uncertainty will be looked back as one of the biggest causes of the end of the cattle industry in Canada.

And I agree with you guys, CAIS and it's replacements aren't doing a thing for us any more.

[farmers_son]

BFW: I was using a 67 cent cost of gain. Penciling in a $50 profit for the feedlot and 95 cent fats that worked back to a 600 pound steer purchase price of $700 or $1.17 a pound. The best price in the local auction is $1.00 a pound leaving $17 cwt on the table. Not $20 but close.

If my numbers are wrong you would be doing me a favour to steer me right. I was using $3.25 barley and silage per ton priced 12 times barley per bushel. These were home raised calves so I had no relevant buying or selling costs. Health problems are minor although I used a 2% death loss. Most often I do not lose any calves.

[grassfarmer]

OK farmers_son here is my take. The charge you are making is that the feedlots are going to make $150 instead of the $50 a head you deem appropriate. That's based on assumptions that may not be correct.
1. you price silage on 12x current barley price rather than 12x the higher barley price in August when it was actually bought.
2. You assume all the grain fed will be at the price you quote which may very well be the low point in the market.
3. You assume you will sell the steer you buy today for 95c/lb - you might or you might sell him for 85c/lb - its all a risk.
Its easy to paint a best guess scenario but the feedlot is not going to risk its financial future on such wildly optimistic guesses.

Taking about making a killing - here are some figures of my own for packer/retailer profits, perhaps you would like to turn your sleuthing abilities on them?
As I've outlined before using figures for my own beef retailing business fed cattle prices are well short of where they should be. An average 600lb carcase of mine retails for $1620, I pay $420 to the processor plus delivery costs. Leaves me with $1200. Now the commercial fed cattle price in October when I shipped my steers would have been around $920 and we know that I only charge 75% of the average beef retail price. So the enhanced retail price of my 600lb carcase if i'd sold him to the packer would have been $2160. Now I am paying a very high price to get my cattle processed but even using that high figure ($420) and assuming the packer pays me $920 for my live steer he is $820 ahead!
The packer and retailer are taking this much between them on every steer!! - and you accuse the feedlots of making a killing?? if they only took $500 profit between them it would still enhance the live cattle price by over $300 a head!!
You reckon feedlots should take all that risk for $50 a head yet are happy to see the packer/retailer make nearly as much on each animal as they are paying the producer for the animal in the first place.