Tonsor sees strength in the beef industryWritten by Saige Albert
Record level prices in the beef cattle industry have been met with record costs of gain, said Glynn Tonsor, Kansas State University agricultural economist, during a Nov. 10 Beef Economics webinar.
“We don’t necessarily have the highest margins, but there are a lot of positive things going on right now,” Tonsor added.
The cow/calf producer has realized higher returns than seen historically, with projections for over $500 per head returns.
“This sets the stage for excitement,” Tonsor said, noting that it also increases potential for demand.
He also sees some signals for expansion of the cowherd in the U.S.
In the stocker segment, Tonsor commented, “This is the type of year where we are trailing cattle out. We are going into backgrounding and stocking enterprises.”
He further encouraged producers to look at the value of gain before deciding whether or not to retain ownership.
“In this scenario, we could buy a 550-pound steer, kick it out and put 200 pounds on the steer,” Tonsor explained. “The market is projecting strong value gain.”
The value of gain was marked at $145, with returns of at least $110 per head.
“This is a high number, but it might be artificially high,” he said. “The cost of gain on that 200 pounds is over $1,500.”
Tonsor added, “From a return on investment standpoint, it might now be attractive.”
He further encouraged producers to use resources at beefbasis.com to analyze the potential profitability.
The feedyard segment also shows profitability and a positive story, he comments.
“The feedyard segment continues to be a very positive story in 2014,” Tonsor remarked. “It is much better than 2013.”
Tonsor said the main reason for the increase is an increase in fed cattle prices, as well an ongoing increase in fed cattle break-evens, which are embedded in the total costs of running feedyard.
“We needed to have an increase to have returns,” Tonsor noted. “They have been realized, but if that story is going to continue into 2015 is yet to be seen.”
Tonsor also noted that 2014 has been the best year for steer returns since 2003.
“For the rest of 2014, we are projecting returns over $100, and those are expected to decline pretty quickly starting in January, mainly because we have flat projections over the next six months,” he explained.
In looking back to 2002, steer returns were marked as top, with returns of $308 per head.
“In 2014, we broke that record twice, with returns of $310 in July and $321 in September,” Tonsor said.
He further noted, however, that increases in total costs were also seen.
“October 2003 total costs were $957 per head,” he said. “In 2014, record breaking observations were seen of $1,880 in July and $1,947 in September.”
Tonsor continued, “It takes a lot more cash to have those returns, and from a return on investment perspective, these are not record breaking. It takes more money to operate no matter where we are in the beef cattle supply chain.”
A host of structural concerns exist in the feedlot sector. Tonsor said that excess capacity continues to plague feedlot operators, as do the concern surrounding mandatory country of origin labeling.
With some positives, Tonsor also noted that there are some challenges facing the feedlot sector related to mandatory country of origin labeling, or mCOOL.
“The World Trade Organization ruling from Oct. 20 reiterates that amended COOL measures continue to necessitate segregation of products,” he explained. “As an economist, costs exist when we increase segregation.”
With the ruling released, Tonsor noted that the U.S. has several options.
“We could appeal the ruling, or we could accept it,” he said. “If we appeal, we could lose the appeal, in which case retaliatory tariffs might be in place in late 2015 or early 2016.”
“Even if that did occur, it wouldn’t surprise me if we have more tweaking of the rules,” Tonsor continued. “As an alternative, we could appeal the ruling, and it could be reversed, in which case, one could envision a current mCOOL.”
However, if the ruling isn’t appealed, Tonsor said the U.S. could opt to abolish the rule entirely.
“I don’t anticipate that happening,” he added. “Lastly, if we don’t appeal the ruling, we could keep mCOOL the way it is and accept the trade ramifications.”
Tonsor noted that, while he doesn’t have a crystal ball, he anticipates that the U.S. will appeal the ruling.
Supply and demand
With record high returns, Tonsor noted that a pullback is expected in commercial slaughter for 2015, according to the Livestock Marketing Information Center (LMIC).
“We will offset a reduction in commercial slaughter with a little bit of dressed weight, but we will pull down beef production,” he said.
“LMIC predicted that in 2015, we will have additional increases, and the industry will hold its own in 2016,” Tonsor continued, adding that weights are expected to go up in 2016, as well.
Prices in 2015 are expected in the $270s, and they may increase to the low $280s in 2016.
“We have expectations that 2015 is going to be strong,” he said.
Tonsor noted that, when considered together, supply and demand are both pulling the beef industry in the right direction, leading to historic prices.
The third quarter of 2014 continued a trend seen every quarter since 2008, with the exception of the first quarter of 2014.
“We have had a very strong beef demand environment nearly every quarter, and we have also seen year-over-year increases in demand,” Tonsor said. “The third quarter we had an almost four percent increase in demand.”
A 4.6 percent reduction in per capita consumption, primarily as a result of less production, coupled with an 11.3 percent increase in the all-fresh beef price produced the demand increase.
Tonsor commented, “Demand improved, and that is a strong story.”
The results of the current beef market situation are very positive, and outlook is strong for the industry.
“The take home point is we have a tight supply situation,” Tonsor said. “Couple that with a strong beef demand and improving production sets the stage to expand the herd.”
Read more on herd expansion potential on page B2 on this week’s Roundup. This webinar was sponsored by Drovers CattleNetwork, Meatingplace, BEEF, Kansas State University Research and Extension and Merck Animal Health.