Ghost yards

May 20, 2011

Have you ever seen a ghost town?

More appropriately, have you ever seen a ghost yard?  I did, while on the road to the Oklahoma and Texas panhandles.

I mean a feedyard, that is…….which has turned into a ghost yard! I went by a feedyard in the panhandle of Oklahoma on recent travels, and it was just one of those experiences that was a tad bit eerie.  This feedlot is a 30,000 head capacity yard;  in existence since the late 1960’s;  smack dab in the heart of the high plains feeding region.  I had been to it several times for visits.  I knew the manager, the assistant manager, and the office professionals.  I had visited the yard with a livestock judging team in college in the early 1980’s.  And now, it’s a ghost yard.  I’d even applied for a job there once in college.   Adding to that “eerieness” was a dead, denuded skunk carcass along the side of the road.  Whew!

It was inevitable; not so much for this particular yard, but rather for the feeding industry.  We all know that cattle numbers are down; we’ve been told that an overcapacity situation exists in the feedlot industry and in the packing industry.  We’re at a low in cow numbers.  Why is that so?

One reason for fewer feedlots is that cattle are simply larger now.  We don’t need as many head when final finished weights have increased to the extent they have.  The industry used to see finished weights for heifers push down the scales from 900-1050 lbs and steers from 1100-1250 lbs.  Now, heifer weights are 1050-1300 lbs and steers from 1250 – 1450 lbs.  Selection for growth genetics,improved growth enhancing technologies,more sophisticated nutrition programs, and improved efficiencies have all led to this.  Cattle feeding, like most of agriculture, has been a victim of its own success.  The industry has shrunk in numbers of cattle; but we are producing as much or more beef now with fewer head (note what’s happened in the dairy industry).

But wait a minute………are all feedlots “ghost yards”?  Heck no!  I’ve got yards that are plumb full of cattle.  Others are struggling to keep numbers in, to be certain, but they’re operating and cattle feeders are the biggest optimists in the country.  Things will get better.

But for some, things don’t get better.  Why?  Possible reasons could include: the loss of a packer within close proximity; inability to compete on a cost of gain basis with other feedyards; environmental issues that may be too expensive to fix; a lack of focus on customer service and customer cattle by management; financial backing dried up…….the list can be quite varied and extensive.  One thing to be sure: when a large yard is at 10% capacity for an extended period of time and never seems to fill pens back up, there’s an issue, or issues.  And that situation feeds off of itself, whether justified or not.  Rumors abound; something’s wrong, etc.  People lose faith in a yard.

I see more competition among feedlots for customers now.  In the past, a feedlot may have had the luxury of turning away some cattle when numbers were plentiful.  Now it seems the ante has been raised: fewer cattle and fewer producers have made for a very tight market.  Add the increased cost of corn, and we have a formula for $ 1.20  to $ 1.30 breakevens on cattle coming out in late summer and early fall.  Who would have ever thought we’d be penciling in those kinds of breakevens?

It is going to be a wild ride for the next several months, perhaps a year.  Those that survive will focus on efficiencies, primarily growth-enhancing technologies; alternative feedstuffs; pre-feedlot grazing programs that will cheapen overall cost of gains with fewer days on feed, and feeding cattle that have a history of performance and grade.  High-quality, grid-sold cattle that perform will often bring $4- $6 over the base price and another $ 2 to $ 3 for age-and-source verification.  In the current environment, more returns, more premiums, and improved efficiencies will enhance profitability or decrease losses of capital.

With all of this, high value cattle will hold their value, while poorer quality cattle may lose value.  Certainly, cattle that have that history of performance and grade will continue to be worth more at the front end and back end.  Poor cattle will be worth less at both points.  If we’re not a in a two-tier pricing system now, it is my belief that we will be in the near future.  You say it’s all in the margin, and you’re right to be sure.  But: your margin will be larger on the good cattle when things are good; enhancing profitability when sold on a grid.  Poor cattle are usually sold in the cash market.  There’s no premiums there.

Increased financing is going to be needed.  We aren’t buying feeder cattle for  $500 to $600 bucks any more.  It’s $850 plus.  We don’t have $1.50 corn anymore, its $7.00.   Fortunately, interest rates are relatively low, but don’t count on that continuing for much longer.  This poses a challenge for operators, lenders, and everyone involved in the chain.  Debt limits will have to be raised, but with that, equity at feedlot placement time will also need to be raised or the risk will become so great that in the case of a huge drop, we’ll see more people go out of the business than ever before.

Summary: Feedlot operators are going to need to focus more on customer service and increase efficiency; cow-calf producers are going to need to know more about how their cattle perform in the feedlot and on the rail (means targeting genetics!); and packers will be competing for a smaller pool of fed cattle to purchase and process.

There’s going to be more ghost yards.  You can bet on it.  Till next time………I’m on the road!

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