A Few Thoughts by John Nalivka: Picking up on capacity utilization | TSLN.com

A Few Thoughts by John Nalivka: Picking up on capacity utilization

In my last article, I talked about capacity in the beef industry supply chain in the context of the packing industry. Capacity with regard to feedlots and cow-calf operations is every bit as important though often not a hot topic like packer capacity. Packer and feedlot capacity is much more cut and dried while grazing capacity is much more dynamic and changes with the weather.

While it is difficult to estimate feedlot capacity with the same degree of certainty as beef packing capacity, it probably hovers somewhere near 17 million head and has been reduced over the past 15 years – around 10 percent. Using that figure, utilization last year was about 62 percent if you average the on feed inventories at the beginning of each month. While that may not be the "best" utilization of bunk space, it may have been inconsequential in last year's record high markets. I would submit that on any other year, it would have a noticeable impact on a feedlot's economics, though likely not to the same extent as a packing plant. We saw the impact of the drought liquidation on feedlot capacity in Texas in 2011 – feedlots were closed or were listed for sale.

It may not be easy to estimate total U.S. grazing capacity with any degree of certainty, but changes in grazing capacity are critical to the direction of the beef industry just as change in grazing capacity is important to the success of an individual operation. I often compare carrying capacity on a ranch to guest capacity for a hotel – economically, they are both reliant on utilization. If you owned a hotel with 500 rooms, it wouldn't be viable if you only had 100 guests every night. By the same token, it you bought a ranch with a carrying capacity of 500 cows and was priced accordingly, it wouldn't be viable if you only ran 100 cows.

Grass is the foundation of the cow herd and the cow herd is the foundation of the beef industry. Ultimately, the size and scope of the feedlot and packing sectors are a function of the size of the cattle herd and grazing capacity is now as much a function of regulatory activity as it is of weather. Either way, think about my example of the 500 head ranch.