Expect major and accelerated consolidation in the U.S. cattle-feeding sector in the next 5-10 years, says economist and consultant Bill Helming of Olathe, KS. Most at risk, he says, are middle-sized feedyards (5,000- to 25,000-head capacity), which will find it difficult to compete for capital and against the efficiencies of larger feedyards (50,000 to 100,000 head) in the wake of rising input costs driven by the ethanol-production surge and over-capacity in the feeding sector.
Cattle-Fax estimates that in 2005, the largest 2% of feedlot operators in the U.S. controlled 85% of the market. Helming estimates the largest 1% could control 75% of the market within the next 10 years due to accelerating consolidation.
The livestock industry has always had to contend with surges in corn price, but it was always weather-related issues that temporarily drove grain prices higher, Helming says. This time, the grain-price situation is demand-driven by the ethanol juggernaut and there will be no reprieve in the short term. The result, Helming tells BEEF, is the consolidation will largely be at the expense of mid-sized (5,000- to 25,000-head capacity) feedyards forced to merge, quit or sell out in the face of intense competition for cattle, capital and efficiency.
Helming says he's facilitated -- in a business consulting and financial advisory capacity -- the sale, purchase or merger of more than 50 large feedyards in the past 33 years. To underscore his contention regarding consolidation in the feeding industry, he reports 10 different operators in just the first three weeks of June sought his advice on selling their feeding operations. "That's never happened before," he says.
Helming says the cattle-feeding sector is currently running an annual capacity utilization rate of 70-75%. With a national cattle inventory that Helming expects to remain flat -- perhaps even shrink -- over the next 3-5 years, competition for available cattle will be intense.
"It's sad to say, but 5,000- to 25,000-head capacity feedyards are dinosaurs in today's economic real world. Just the hotel cost of operating at 75% capacity a 60,000-head feedyard is 8-12¢/head/day less than a typical 5,000- to 20,000-head feed yard," Helming says.
What's more, he says the well of outside capital in the feeding sector has changed. Where "customer" cattle made up 75-80% of feedyard populations in the 1960s through mid 1980s, the money has fled to other investments.
"Those customers have dramatically declined and continue to do so," Helming says. "Their exit places a major financial burden on feed yards formerly dependent on custom feeding, and the access to more working capital and bank financing is easier for larger operations.
"With elevated inputs for energy, labor costs and grain, and underutilized capacity, there's a real onus on feedyard operators to try of figure out how to become more efficient. The problem is that the excess-capacity situation in U.S. cattle feeding, if anything, will only get worse, given the grain situation and where we are in the cattle cycle. That further accentuates the driving force to consolidate. Someone has to go out of business," Helming says.