Yard sale: The Sale of Cargill Feedyards in KS, CO
May 5, 2017
In the wake of the sale of Cargill's beef cattle feedyards in Leoti, Kan., and Yuma, Colo., the future of packer-owned beef cattle feedyards has been in question. But, in the end, the motivation appears to be all about business.
Even given this likely strategic juggling of capitol, Steve Gabel, owner of Wiggins, Colo., based Magnum Feedyard, does not anticipate the sale will be indicative of the future of packer-owned feed lots. The motivation behind packer-owned lots is to, in part, manage a steady and ongoing supply of cattle into their processing plants despite any outside factors that traditionally disrupt supply and translate to a loss in efficiency at the plant and product out of the plant.
"At the core of Cargill is a desire to be first in the protein world," Gabel said. "If they can sell $37 million or $38 million of feedyards and put that money elsewhere in the system and it doesn't affect their operations because they enter into long-term supply agreements with the buyer of those feed yards, then it's win-win for them."
Gabel doubts that Cargill's decision to sell the feedyards was motivated by the GIPSA rule currently awaiting the U.S. Department of Agriculture's review and possible removal. He said it's more likely about the most efficient use of capital.
“The volatility and the dynamics we’ve had in the fed cattle markets, feeder cattle markets and feed markets really since 2008 through 2013 have created lots of profitability problems for feedlots. ”
"Cargill has always been a long-term planning company, which doesn't always happen in this sector," said Jim Robb, director of the Livestock Marketing Information Center and senior agricultural economist. "From their perspective, it's focusing on where they think they can deploy their capital better."
The sale of the feedyards comes at a time of some of the best cattle feeding returns in recent years, Robb explained.
"The cattle feeding business has always been what I call a homerun hitting business," Robb said. "You can make a lot of money and you can lose a lot of money. It's through marketing arrangements you can achieve some of the same things."
AT THE MAX
Over the past 10 years, the U.S. has experienced excess capacity of feeding cattle, explained Stephen Koontz, professor in Colorado State University's Department of Agricultural and Resource Economics. Koontz anticipates that the market will become more predictable in the coming months.
"The volatility and the dynamics we've had in the fed cattle markets, feeder cattle markets, and feed markets really since 2008 through 2013 have created lots of profitability problems for feedlots," he said. "In those corporate operations, cattle feeding is no different from anything else; they need to make money."
In addition to the income generated from the sale of the two facilities, Gabel estimates Cargill's decision may have freed $250 million in operating expense and inventory while maintaining the supply of cattle into their facilities.
"(Cargill) was the first to shut down a packing plant in the tight cattle supply era and make strategic decisions," Robb said. "They have a history of being strategic planners and rather bold at times. It's hard to argue with success."
Green Plains, a vertically integrated ethanol producer, owns two other feedlots near existing ethanol plants, making the purchase of the Yuma and Leoti yards, also near ethanol plants, attractive.
China, the biggest importer of ethanol byproducts, such as dry distillers grains (DDGs) has placed strict restrictions making domestic use more beneficial.
"We've had a difficult time with their standards, rules and trade barriers," Robb said. "It has come back and been a factor in the pricing of DDGs. This gives them some flexibility and ability to manage that overseas risk in terms of marketing to our biggest foreign customer."
Integration is not new to American agriculture, ranging historically from feeding cotton gin trash to cattle to potato king J.R. Simplot's use of potato byproducts in cattle feedyards.
"This isn't anything new in a long-term context," Robb said. "This is an animal in an industry that could very well be positioned to use byproduct waste."
In terms of packer-owned feedyards and the GIPSA rule, Gabel admits that while consolidation and integration have occurred in the beef industry, a model that mirrors the poultry industry is unlikely.
"One thing that makes our industry very different from the poultry world or the pork world is the fact that we have a mature cow with a 9-month gestation and she eats roughage and converts that roughage into protein. Those other animals can't do that and so because of her size and her 9-month gestation, I don't think the integration can get much further down the line."
Gabel said the integration stops at the feet of the cow calf operator, due in part to the tremendous amount of management required to operate a cow calf herd. While pork and poultry producers are able to raise individuals within buildings to control the environment, this lacks plausibility within beef production. ❖
— Spencer is a freelance writer from Wiggins, Colo., She and her family raise cattle and show goats. Reach her at email@example.com or on Facebook at Rachel Spencer Media.