Developing demand, Future of the beef industry depends on supply, demand
It’s no secret that the beef industry is experiencing historically tight supplies and, as a result, reduced throughput commented Kansas State University Livestock Economist Glynn Tonsor.
“Moreover, there is less certainty in the industry,” Tonsor commented during a May 6 webinar. “We are offsetting fewer hooves with higher dressed weights, but we haven’t been able to totally offset the smaller calf crop.”
The result is higher prices, but uncertainty as to whether or not expansion of the beef industry is occurring, as well as how high prices will go and if consumers will pay those prices, leaves producers with many questions.
Tonsor said, “Most analysts are talking about record expected returns in the cow/calf segment. I’m comfortable saying that in aggregate.”
However, Tonsor cautioned producers across the country that there are pockets where profitability will be less.
“Estimates for 2014-15 are both hovering around returns over cash costs at $350,” he said. “The other reason we have positive expected returns are the historically high feeder steer prices.”
The feeder cattle market has seen increases in the beginning of 2014, which Tonsor said may continue.
“The first of February, August feeder cattle contracts were trading at $171,” he said. “They are currently trading at $190.”
“One of the reasons the cow/calf industry is doing well is that outputs – the feeder calves – are worth more than expected,” Tonsor commented.
“That leads to the second question – and probably the most frequently asked question – have we pulled the trigger on expansion?” Tonsor asked. “I think we have started that process, but the exact magnitude is uncertain.”
Tonsor looks at several factors – including feedyard placements and slaughter data – to determine whether expansion is occurring.
“We have to hold back heifers to expand,” he said.
In 1996 and 2005-06, the percentage of heifers on feed was about 35 percent. These coincide with two periods of expansion attempts and low numbers of heifers on feed.
“As these numbers come down, we see them roughly on par with what we experienced in 2006,” said Tonsor.
Another important number to look at is cow slaughter data, which can be misleading based on the size of the overall cattle herd.
“Even if we had a percentage of cow slaughter that was the same, the number of head going to slaughter would be smaller because of the smaller herd size,” he said. “We have basically the same number of steers that went to slaughter this year as compared to 2013 levels. Heifer slaughter numbers are well below what we had last year.”
“This tells me that we are trying to maintain and expand the herd,” he said. “In aggregate, I do think we have put the wheels in place to try to expand the herd.”
At the same time that cattle producers are making moves to expand, USDA’s Economic Research Service (ERS) has shown that there is room for profitability across the country.
“ERS tries to depict different production areas following moisture conditions and crop and livestock conditions,” Tonsor explains. “This gives us a better feel for who might be positioned to pull the trigger on expansion.”
The report showed that, in 2013, the value of production less operating costs was estimated at about $110 per cow across the U.S.
Tonsor noted that the Basin and Range region, of which western Wyoming falls into, is one of the most productive and profitable regions, and 2013 represented a bounce-back year for the Northern Great Plains, which eastern Wyoming fits into.
“We can see increases in the value of production and operating costs,” he said. “However, not everyone is comfortable with total costs increasing, which could hold back investment.”
Range in operating
The large range in operating costs across the country, as well as the wide range in the gross value of production, creates opportunity for some producers.
“Anyone who can do a better job managing costs is going to do better,” Tonsor said. “Producers who are not effective managers are leaving more and more money on the table.”
“When we look at the value of returns, there is notable variation across the eight regions in the U.S.,” Tonsor says. “If we look at the Basin and Range region, ERS estimated the value of production at $210 per cow.”
In comparison, the Mississippi Portal showed only an $88 margin, and the Corn Belt, or Heartland Region, posted negative values.
Tonsor commented that some areas are better poised to expand than others.
“The second leg of the equation is beef demand,” said Tonsor. “Demand is very confusing and very important. We have to recognize the importance of demand strength.”
For the first time since coming out of the recession in 2010, Tonsor estimated a decline in the all fresh beef demand index in the first quarter of 2014.
“Demand is less certain than tight supplies,” he said.
Consumption and price
In the first quarter of 2014, per capita beef consumption fell by 5.6 percent, Tonsor said.
At the same time, however, inflation adjusted prices were up five percent in the first quarter, at $5.23 per pound.
“That increase in price was not enough to offset the notable declines in volume,” Tonsor noted. “We needed a 6.8 percent increase in price for demand to stay flat. Because prices only went up 4.9 percent, demand fell.”
Neither per capita consumption nor price alone constitutes demand. Rather, it is the combination of the two that influences the growth or decline of demand.
To maintain demand for beef, Tonsor estimated that beef prices will have to see a seven percent increase, provided that USDA’s projection of 53 pounds per capita consumption stays level.
“We are going to have historically high prices,” he said. “The question that remains is just how high they will be.”
This webinar was the second in the “Beef Cattle Economics” series, sponsored by Merck Animal Health and Kansas State University Department of Agricultural Economics and with media partners Meatingplace, Beef, Drovers Cattle Network.
Kansas State University Livestock Economist Glynn Tonsor commented that the stock and backgrounder segment of the cattle industry shows some promise during a May 6 webinar.
“The value of gain to put 25 pounds on a steer through backgrounding is $109 to $110,” Tonsor said. “If a producer is a cow/calf or stocker producer and they are thinking about retaining or purchasing in September and selling at Christmas, the value of gain is $127.61.”
Looking at the feedlot sector, he is less optimistic.
“2013 started off with notably better returns,” he explained. “The issue of having too much bunk space has to get worse in the short term before it gets better, and I suspect we will be talking more about that.”
February projections showed an estimated $172 profit per steer – the largest profit since November 2003, and he predicts better returns for March.
“The next eight quarters, commercial slaughter numbers are going to decline,” he said. “We are expecting five percent declines in commercial slaughter in 2014 and almost a three percent decline in 2015.”