Feeding capacity in the Corn Belt may gain share by merely staying the same, while feeding in the Southern Plains contracts.
Every week, it seems I receive an email advertising the sale of another feedyard. Of course, over-capacity in the feeding industry, the heavy loss of equity, and the promise of continuing tight cattle supplies are all contributing factors. But feeding seems to be shrinking in the Southern Plains and treading water farther north.
Experts have speculated for quite some time now that our industry would see a shift in cattle feeding away from the Southern Plains and back toward the Corn Belt where the sector began. As they say, “cattle follow the feed and feed follows the water.” In this case, ethanol byproducts are the feed, which make for a more favorable basis in feed costs, and the Ogallala Aquifer is the water.
But it looked like the experts might be proven wrong, as poorer access to packing capacity, environmental concerns, corporate farming laws, etc., seemed to hinder a shift of feeding capacity toward the north. However, the removal of excess feeding capacity currently underway is fairly one-sided. Thus, the feeding capacity in the Corn Belt may gain sector share by merely staying the same, while feeding in the Southern Plains contracts.
The regulatory environment in the Corn Belt was supposed to be unfavorable to CAFOs (confined animal feeding operations). Ironically, however, we’re seeing government actually subsidize new cattle feeding barns in the Corn Belt, and these subsidies are as much as 25% or more of the cost of the facilities.
The subsidies were created to make possible a transfer from non-permitted yards to permitted ones, but it’s interesting that we are seeing subsidized feeding barns being built at costs that usually exceed $1,000/head. At the same time, we are seeing existing feedyards being offered for sale at a tenth of the cost.
Is it the subsidies, or is there that much difference in variable costs that is responsible for the move north? Will packing capacity begin to shift, too? Those are some of the interesting questions revolving around the cattle feeding business today.
Meanwhile, what were smaller finishing yards are actually being converted to backgrounding yards, heifer development facilities, or simply part-time feeding facilities for larger cow-calf operations. Certainly, the drought increased demand for such enterprises from the cow-calf side. Unlike the cow-calf side of the business, where fixed costs overwhelm the economic model, in the feeding business, it is the variation in variable costs that dominates.
Initially, the decline in capacity was centered in the small farmer-feeder segment; today, it’s moved into the large-to-midsize feeding yards. It’s a trend that bears watching.
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