Tonsor looks at factors involved in cattle profitability, herd expansionWritten by Saige Albert
“In aggregate, both supply and demand are pulling in the right direction and leading to historic price levels,” said Kansas State University Agricultural Economist Glynn Tonsor, “but with that comes uncertainty and many questions.”
Tonsor presented during a Nov. 10 Beef Cattle Economics webinar and noted that many signals in the cattle industry are pointing toward continued expansion, but uncertainty as to how long high prices will last continues.
The Livestock Marketing Information Center (LMIC) has tracked profitability trends since 1986, pointing out that notable variations have been seen over the years.
“Until recently, we used $150 as very sound, if not the best, returns for the average, representative producer,” Tonsor commented.
Tonsor said returns for 2014 are projected at over $500.
“Those $500 returns are more than three-quarters recognized, and they are expected to hold into 2015,” he continued. “This sets the stage for excitement, and many producers are having a better year than they have recently.”
Reasons for returns
In analyzing returns, Tonsor explained that positive returns are a result of improvements in both revenue and costs.
“On the cost side, we have continued improvements in production costs,” he said. “We also have an increase in revenue driven by increases in cattle prices.”
The market has held strong since June 2014, Tonsor commented, adding that the trend is forecasted for the rest of the year.
On the cost side, he noted that corn prices have dropped, and the Range and Pasture Conditions report released by USDA is also telling.
“There is a lot better condition around the country for pasture and range,” Tonsor explained. “That in itself has reduced costs, and most importantly, for producers who might have been interested in expanding but weren’t comfortable with that, reduced uncertainty.”
“Now that pastures and ranges look better, it might facilitate expansion,” he added.
Looking forward, projections from a variety of Kansas auction markets showed 550-pound steers in the low to mid-240s for the next four months.
Tonsor, however, cautioned producers that projections can be impacted by a number of factors and can be conservative. He also commented that errors can be made the other way, as well.
“There is always projection error, but we have had more of that error during this bull market,” he said. “Fast moving markets can increase the error, and the implication is that the expected prices that are forecast are artificially conservative.”
Projections are aided by speculation that expansion has begun to occur around the country.
“As to whether expansion has been triggered or not, we have some mixed signals,” Tonsor explained.
In looking at the Cattle on Feed report, Tonsor noted that the third quarter report showed that between 34 and 35 percent of the animals in feedlots are heifers.
“When the numbers get down to that level, it is a trigger that expansion is triggered,” he commented. “We know there are more heifers staying outside the yard than are going to feedyards. In that case, they are probably staying on someone’s ranch.”
In 2014, Tonsor said that the information signals that expansion has begun.
“That doesn’t jive with the January and July Cattle Inventory Reports, though,” he said. “If we look at July, we had a decline in the amount of heifers. That is not consistent with the previous January, where we had more heifers.”
“I personally think that there is lot of evidence that we have started the process for expansion,” Tonsor said, “but I want to be clear that there are mixed signals.”
Tonsor also noted that conflicting numbers regarding how much the cattle herd might expand are available from a variety of outlets.
USDA’s predictions show the herd reaching 33.7 million head by 2023, an increase of 16 percent from the 2014 cowherd. However, the Food and Agricultural Policy Research Institute (FAPRI) forecasts a high of just over 30 million cattle in the herd, a mere four percent over 2014’s numbers.
“One forecast shows moderate growth, and one shows more substantial growth,” Tonsor said. “I tend to believe the USDA forecast more.”
Tonsor further noted that the forecasts have changed from year to year based on conditions in the markets.
For example, from their March 2013 release to March 2014 data, FAPRI increased their forecast for the 2023 cowherd by 1 million head.
“They are expecting a larger expansion than in their March 2013 numbers, and the main reason is we have had notable improvement in net returns,” he said. “As we increase net returns, we tend to increase expansion.”
Tonsor also expects FAPRI to release another report in March 2015 and urged producers to pay attention to the data as it comes forward.
With signals set for expansion, Tonsor also noted that producers should make smart decisions in deciding whether or not to expand.
“Producers need to understand what they can pay for replacements to still get a return,” he said.
Using a Net Present Value tool provided by Kansas State University, Tonsor noted that if a heifer provides seven calves and yields a rate of return of seven percent, a producer could pay $2,085 for the replacement and still make money.
“We could pay more, but we would get a lower expected rate of return,” he continued.
Tonsor also emphasized that the tool incorporates some sensitivity factors to allow for variation.
For example, if costs, calf prices or expected rate of returns vary, it dramatically impacts the price that can be paid for replacement animals.
“We can figure the numbers,” he said, emphasizing that expansion may not be a good option for all producers. “I urge producers to consider the costs.”
This webinar was sponsored by Drovers CattleNetwork, Meatingplace, BEEF, Kansas State University Research and Extension and Merck Animal Health.