Economic Recovery

To paraphrase President Gerald R. Ford as he watched "Tricky Dick" ride into the Watergate sunset, "My fellow beef producers, our long cattle-feeding nightmare is over."

Pardon the picking of old political scabs, but somehow, only the magnitude of that famous historical pivot adequately describes the financial sea change cattle feeders are set to experience in 2017. In short, the feedlot business has finally emerged from its own constitutional crisis (read multibillion-dollar equity drain). More importantly, it now seems set to generally enjoy a prolonged period of economic recovery.

When the fed cattle market topped in late 2014, (five-area steer average $171.28 per cwt), feedlot ledgers were absolutely frothy with the most expensive feeder cattle ever to be penned for finish. So when packer bids steadily imploded during the following 23 months (cratering close to $70 per cwt), feedlot red ink naturally swelled like a destructive tsunami.

But given enough economic hurt and stern looks from bankers, impossible feedlot breakevens eventually corrected themselves, adjusting to new realities of beef supply and demand, and resetting the cattle-feeding table for significant profit potential.

When the feeding year of 2015 began, lofty breakevens covering the first six months ranged from $160 to $175 per cwt, a disaster in the making if there ever was one. On the other hand, the much-chastened breakevens currently scattered over the first two quarters of 2017 are no more demanding than $97 to $105 per cwt. Talk about a seismic shift in margin potential.

It's no wonder that closeouts generated in the first quarter of 2017 already read like an inventory at Fort Knox with per-head profits ranging from $200 to $300. While such a feedlot bonanza is unlikely to extend through the entire year, this initial profit surge reliably signals the beginning of a very solid year for the long-suffering feedlot world.

Based on outlook and conditions at press time, I anticipate the following fed price ranges on a per-cwt basis: January through March, $120 to $125; April through June, $115 to $120; July through September, $100 to $105; October through December, $105 to $110. And should unforeseen events force the foundation of the ballpark to be moved a bit here or a bit there, I think there's still plenty of reasonable room for cattle-feeding optimism.

Keep in mind that the feeding game is essentially one of middle-margin management. Unlike ranchers and farmers who really have little control over variable costs, feedlot managers can exercise considerable control over breakevens and practical margins, affording them the possibility of scoring profits even in the face of less-than-optimal market conditions.

The twin realities of plentiful feed supplies (corn prices could be as much as 10% cheaper through 2017) and growing feeder cattle numbers (this year will mark the third consecutively larger calf crop to hit the ground) should lend feeding companies plenty of leverage in managing workable breakevens.

(SK)

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