Managing margin is challenging for any type of business. However, when it comes to commodity industries – those entities that operate strictly off the buy-sell margin – the challenges can be especially brutal from year to year. And that principle certainly exists in the beef complex, particularly the feedlot sector.
That’s best illustrated by a comparison of gross margin vs. cattle investment trends over time. The ongoing liquidation of cows, coupled with ongoing expansion of feeding capacity since the mid-’90s, has intensified business rivalry among feedyards. That ultimately means receiving smaller returns while paying more for cattle.
Feedyard gross margin (fed steer less yearling steer) in 1996 averaged about $350/head; meanwhile, total yearling steer investment was just slightly over $450/head. That gap has consistently (and unfavorably) widened substantially ever since. Comparatively, gross margin in 2012 was only about $60-65 more (~$415/head) vs. the 1996 mark. However, investment required to obtain that margin has surged nearly 10 times that amount: yearling steer costs have jumped $665 to average $1,125/head in 2012!
That trend is demanding on those who remain in the business. It represents incrementally greater capital at risk chasing smaller returns. That consideration is increasingly important and will influence the cattle feeding sector going forward. That’s especially true considering the potential for any type of sustained heifer retention in the year(s) to come, which will make feeder cattle that much harder to source into feedyards.
How do you perceive this long-term trend shaping the feedlot sector going forward? Will this trend reverse, or does it portend even more change to come? Leave your thoughts in the comments section below.
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