Feedlot Profitability
K-State professor addresses the current cattle market and the positive returns this year.
Substantial discussion within the industry and corresponding media coverage has focused on the “sticker shock” some consumers may have at the beef retail counter, as well as profitability of cow-calf producers and corresponding prospects for herd expansion. What has received comparatively less attention “in the middle” of the industry supply chain is recent and upcoming profitability prospects of the feedlot sector.
Glynn Tonsor
The feedlot sector has long been noted to be in an unfavorable position of having excess capacity in the face of tight and dwindling feeder-cattle supplies reflective of the multi-year decline in the U.S. breeding herd. Given this backdrop, many analysts (including yours truly) were not anticipating 2014 to be anything feedlot producers would be excited about. Counter to these expectations, feedlot returns so far in 2014 have been very positive.
The most recent estimates of closeouts offered in Kansas State University’s (K-State’s) Kansas Feedlot Net Return series indicate steers sold in June at a profit of $197.44 per head (see Table 2). This marks the sixth consecutive month of closeouts with profits exceeding $125 per steer, which is something that has never previously occurred going back to 1993 when the current K-State analysis starts. Moreover, current projections for closeouts during the July-September period are all over $200 per steer. These positive returns essentially reflect the substantial increase in fed-cattle prices relative to expectations when feeder cattle were purchased at levels much lower than today’s prices.
While this positive start to 2014 is certainly welcomed by feedlot operators, a word of caution follows current projections for animals scheduled to be sold later in the year. As shown in Table 1, net returns are expected to turn much lower and to actually be negative in the fourth quarter. This sharp reversal reflects the notable increase in feeder-cattle prices and the corresponding lack of further increases in expected fed-cattle prices.
It is important to recognize the Kansas Feedlot Net Return series assumes a “hand-to-mouth” cash-based process of procuring feeder cattle and corn, as well as selling fed cattle. That is, the calculations purposely assume no risk management, forward pricing or other strategies are in place for feedyards. While this approach is used to provide a benchmark over time for profitability trends, it fails to capture notable variability in feedlot-specific situations and managerial approaches. This firm-specific variation is noteworthy as many operations likely have not realized the full magnitude of positive returns so far this year (e.g., they may have hedged fed-cattle sales) or may have implemented some protection on upcoming closeouts (e.g., they may have hedged upcoming feeder-cattle placements).
| Table 1: Projected values for finishing steers in Kansas feedyards* | |||||||
| Closeout Mo.-Yr. | Net return | FCOG** | Fed price | Feeder price | Break-even FCOG |
Break- even fed price |
Break- even feeder price |
| July 14 | 364.86 | 87.04 | 157.54 | 164.05 | 145.29 | 131.61 | 210.78 |
| Aug. 14 | 258.09 | 87.75 | 156.33 | 169.66 | 132.23 | 138.35 | 199.83 |
| Sept. 14 | 230.09 | 87.47 | 155.67 | 173.24 | 126.40 | 139.47 | 200.99 |
| Oct. 14 | 63.99 | 86.83 | 156.76 | 191.26 | 98.26 | 152.26 | 198.67 |
| Nov. 14 | -55.85 | 85.08 | 157.01 | 206.94 | 75.03 | 160.98 | 200.38 |
| Dec. 14 | -72.98 | 84.23 | 155.09 | 211.35 | 72.41 | 160.08 | 202.72 |
| *Net return is $ per head and all other values are $ per cwt.
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| **FCOG = Feeding cost of gain.
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| Table 2: Market information | ||||
| Week of 8/8/14 | Week of 8/1/14 | Week of 8/9/13 | ||
| Five-area fed steer | ||||
| all grades, live weight, $/cwt. | $159.92 | $162.70 | $122.45 | |
| all grades, dressed weight, $/cwt. | $251.03 | $255.68 | $195.95 | |
| Boxed beef | ||||
| Choice Price, 600-900 lb., $/cwt. | $262.26 | $262.06 | $187.92 | |
| Choice-Select Spread, $/cwt. | $6.50 | $3.11 | $6.49 | |
| 700-800-lb. feeder steer | ||||
| Nebraska 7-market average, $/cwt. | $246.00 | $246.45 | $162.82 | |
| Oklahoma 8-market average, $/cwt. | $227.72 | $226.56 | $153.52 | |
| 500-600-lb. feeder steer | ||||
| Nebraska 7-market average, $/cwt. | $287.50 | $288.97 | $178.10 | |
| Oklahoma 8-market average, $/cwt. | $261.54 | $255.49 | $167.70 | |
| Feedgrains | ||||
| Corn, Omaha, NE, $/bu. (Thursday) | $3.46 | $3.41 | $5.87 | |
| DDGS Price, Nebraska, $/ton | $101.10 | $109.80 | $216.80 | |
| Data Source: USDA-AMS Market News
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Editor’s Note: Glynn Tonsor is an associate professor in the Department of Agricultural Economics at Kansas State University.