Herd expansion, Tonsor notes potential for beef cattle herd expansion
“The hot topic recently has been herd expansion,” commented Kansas State University Livestock Economist Glynn Tonsor during a Nov. 5 webinar. “Everyone is forecasting returns for 2014 as being at historic levels.”
With the beef cattle situation poised for expansion, Tonsor noted that he does not think the industry has pulled the trigger to expand yet but added that one could anticipate some impacts further down the chain when it does happen.
Projections show $300 returns over the cost of production on calves for 2014 – a level that is double returns from 2014 and far exceeds every year in history. Tonsor, however, noted that historically high returns don’t necessarily mean historically high profits.
“While positive, the return in investment is not the same as it was 10 years ago,” he commented. “The cost of operating also went up notably, and that is even with historically low interest rates.”
Most producers, he added, tend to ignore profit risk.
“It is also important to recognize price variability,” Tonsor remarked. “We are in the middle of improvement, but is this a permanent recovery or a temporary recovery?”
The concern about how long high prices are sustainable is also a topic of conversation, and Tonsor said, “As long as we continue to set record prices, we will continue to have that discussion.”
Tonsor also noted that the incredibly risky environment found surrounding cattle production today also limits potential for herd expansion.
“With record sale prices, we will probably see sky-high replacement prices,” he said, noting that high prices also add more risk.
He further noted that the risks are quantifiable to some extent. Input and output price risk is present, and resources, such as policyuncertainty.com, help in tracking political risk.
Political uncertainty exacerbates the overall picture.
“We are at an all-time non-war period high for political uncertainty,” Tonsor said. “Conservative folks are less likely to pull the trigger on investment.”
“When we talk about herd expansion, it is important to recognize how we got to where we are today,” Tonsor commented. “We used to have more cows in the breeding herd.”
However, in the 80s and 90s, he explains that demand problems resulted in a reduction of necessary cattle numbers.
“We would have realized prices that were two times higher, adjusted for inflation, in 1980 than 1998,” he said. “Therefore, cattle prices in the industry were significant enough for the industry to downsize.”
More recently, however, improvements in demand and ongoing reduction of the herd as a result of drought and higher feed costs have compiled.
“We are in a situation where both of those drivers are reversing,” Tonsor said.
“I don’t think we have pulled the trigger on expansion yet,” Tonsor marked. “National Agriculture Statistics Service data shows that the percentage of heifers in feedyards over time, and we haven’t pulled down.”
Feedyards are still comprised of 36 percent heifers, a figure that doesn’t reflect heifer retention by producers.
“One would anticipate that when we pull the trigger, those numbers will come down, and that is not showing up yet,” he emphasized.
Additionally, in times of heifer retention, the premiums for steers at the sale barn are minimized.
“We look in terms of percentage of the value of steers over heifers, and as we expand the herd, we anticipate that the heifers gain value on steers,” Tonsor continued. “We have yet to see that start to occur.”
“Both of those patterns, I anticipate, will develop and be evident after we start expanding our beef cattle herd,” Tonsor said.
“One of the things that comes up is the regional variation,” Tonsor continues.
Reduction in the cattle herd was larger in the Southeast than in the Southern Plains, and animals moved out of the Southern Plains to the Northern Great Plains from 2010 until today.
“That reflects the animals moving out of the Southern Plains and the efforts to expand in the Northern Great Plains, which was tempered by the most recent drought,” he explains.
At the same time, 34 percent of cattle in the Great Plains were heifers in 2013 – a notable increase from 2010’s 29 percent.
Additionally, higher operating costs and more profitable enterprises means the Corn Belt is unlikely to see much herd expansion.
“Operation and labor costs are notably higher in the Corn Belt, meaning the representative producers would be downsizing, if they included those full costs,” he said.
Tonsor also expects to see rebuilding in the Southern Plains following the drought. Because of the situation, Tonsor also adds that individual producers have abundant opportunity.
“I expect the Southeast, Heartland and Corn Belt to continue the trend of relative decline because of higher value uses of land,” he said. “The Great Plains are likely to continue past patterns of relative growth.”
Challenge with expansion
While cattle herd expansion is likely in the future, Kansas State University Livestock Economist Glynn Tonsor also notes that there are challenges associated with it.
“If we see a net expansion of 2.4 million cows, as forecasted, that will create tighter supplies in the feedlot sector,” he noted.
Demand also plays an important role in the discussion.
“It is important to recognize the role of consumer demand,” Tonsor added.