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Feedlot profitability turns negative

Contributed by Josh Maples Published on 30 August 2017

Current and expected fed cattle prices have declined by approximately $10 per hundredweight (cwt) over the past five weeks. This decline has eroded the projected profitability for feedlots through the rest of 2017.

According to K-State’s Kansas Feedlot Net Return series, the projected net return for steers in Kansas feedyards was $136 per head for July closeouts. In fact, each month in 2017 has seen positive returns with some months in the late spring showing more than $300-per-head returns. The projections for the next nine months, however, are negative. August closeouts show projected losses of $31 per head, while the projected loss for November is $169 per head.

Feedlot returns are volatile as they rely on both feeder and fed market prices, feed cost of gain and a relatively long production lag. The K-State report provides historical and projected return information and was last released on Aug. 14. The K-State series reflects a cash market situation without price risk management strategies being implemented. Many feedlots do engage in some type of price risk management. However, few can fully offset price risks, and most feedlots are at least partially exposed to price risks at placement.

The positive feedlot returns seen during the first half of 2017 helped encourage feedlots to bid aggressively to replace boosted marketings. The shift toward negative returns means feedlot operators will have to make tough decisions about replenishing inventory with cattle that are projected to lose money. The historically large losses of 2015-2016 are certainly still fresh on operators’ and lenders’ minds. In any case, it is likely that feedlots will be forced to continue to bid less aggressively on feeder cattle than during the past few months as they closely monitor the profitability of their operations.  end mark

Josh Maples is an assistant professor for the Mississippi State University Department of Agricultural Economics. This originally appeared in the Ohio State University Ohio Beef Cattle Letter.

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