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Excess Capacity and its Impact on the Beef Industry

Excess Capacity and its Impact on the Beef Industry Source: Ross Pruitt, Department of Agricultural Economics and Agribusiness LSU AgCenter
Excess capacity in the U.S. beef industry is not an issue that gets much attention compared to consumer demand for beef, drought, high feed costs, declining beef cattle numbers, and the increased average age of producers. However, excess capacity will be one of the factors that shape the beef cattle industry over the next few years as structural change continues. The recent announcement of Cargill idling a plant in Texas won’t be the last of similar decisions made in the packing and feedlot sectors which have not downsized as the U.S. beef herd has contracted since the mid 1990s.
Fed and feeder cattle futures did tumble on the day of the announcement as there will be less demand for cattle in the short run. This doesn’t change the longer term view of higher prices for the industry as supplies at the cow-calf level remain tight and will not get significantly more abundant for several years. Reduced packing capacity will improve the margins for packers which will transfer additional margin pressure to feedlots. Any consolidation at the packer level will place feedlots under additional pressure at a time when feedlots are already under pressure from high grain costs and tight supplies of cattle.
Over the past couple of years, U.S. feedlot capacity of yards with at least 1,000 head capacity was 17 million head. This implies the U.S. has the ability to finish at least 34 million head of cattle annually, with feedlots less than 1,000 contributing additional capacity. Estimated supplies of feeder cattle have been well below 30 million since 2000 with total annual placements being below 25 million during this time period. As U.S. supplies of feeder cattle have diminished, imports of Canadian and Mexican feeder cattle have offset the decline in U.S. cattle, but herd declines have been occurring in both countries and will contribute to a decline in North American feeder cattle supplies.
Given the dynamics of the past few years, it’s hard to envision potential U.S. feeder cattle supplies exceeding 25 million head on January 1, 2013 when the USDA inventory report is released the first week of February. Total U.S. feeder cattle placements were down 1.49 million head in 2012 even though Canadian and Mexican feeder cattle imports were 7% higher (approximately 108,000 head) in 2012 than 2011. Declines in imports of feeder cattle is also expected due to a decline in the Canadian beef herd over the past few years and drought in Mexico leading to at least a forecasted 400,000 head drop in imports for 2013.
As happened during 2012, feedlots will likely be aggressive in placing cattle to minimize the impact of excess capacity on their bottom line this year. High feed costs and skittish beef demand combined with excess capacity contributed to feedlot returns being the worst ever according to the Livestock Marketing Information Center during 2012. If weather conditions allow for expansion in the second half of the year, feeder cattle supplies will be even tighter than already expected. If you are retaining cattle until they would normally enter the feedlot, you stand to gain more than someone that sells at weaning, but cost should be considered before making any retained ownership decisions.
Longer term, as excess capacity is removed in the packing and feedlot sectors, there will be the chance for all sectors to be profitable. Currently the tight supplies of cattle make it difficult for margin operators to be profitable. Removal of excess capacity will be a slow process due to the investment involved. A better sense of the long term size of the U.S. beef industry is needed to know how much excess capacity needs to be removed. For the time being, there is still too much capacity present in the industry.