Tonsor sees bullish cow/calf markets in futureWritten by Saige Albert
In an Aug. 7 webinar, Agriculture Economist at Kansas State University Glynn Tonsor looked what effect the drought and market ambiguity have on the cattle industry.
“This year the drought is more severe in terms of the number of states and the number of cows affected than the Southern Plains drought,” he said. “This is much more of a national drought.”
In looking at data even compared to the beginning of the year, Tonsor said, “We had two dollar calves the first quarter of the year, and we are down into the $1.50 to $1.60 range. It has taken a lot of revenue out of the cow/calf producer’s ledger.”
However, he remains optimistic about the cow/calf sector of the industry and the potential for future profitability.
Tight supply situations historically provide for the benefit of the cow/calf sector of the industry, according to Tonsor, who said, “In a discussion of if and when – and I think it is a question of when – we expand the national herd, this is the segment that will benefit.”
When the industry decides to begin holding back heifers to expand the national herd, Tonsor said supplies will only tighten further, supporting calf prices.
“Obviously, we haven’t seen that in 2012,” he added. “We probably won’t see much of it in 2013, but for longer run decision making, it is important to recognize that the cow/calf sector will benefit the most.”
While forecasts showed that 2012 cow/calf returns would be among the best on record, recent drops tell a different story, and Tonsor moved his projections for peak returns to 2015.
“We were looking at 2013 being the peak year,” he explained. “The drought has pushed that out a couple of years, and we might be looking at 2015 as our peak return year.”
Compared with projections from the beginning of the year, Tonsor added that cow/calf return won’t be as high for 2012.
“I still think there are lot of reasons to be bullish a couple years out,” he remarked, “if the drought turns out to be a one year event.”
Tonsor noted that, with fallen calf prices, margins for stockers have improved, but consideration should be taken based on the ability of the producer to put on gain.
“Not everyone has the ability to put on weight,” Tonsor said. “It will vary a lot regionally or within states.”
He also added that the value of gain has increased notably, but by taking advantage of alternative feed options, Tonsor realized the potential for opportunity.
“Those that have forage and the ability to manage a new forage base signals opportunity,” he explained. “There are also cases where there are available silage or alternative feed grain resources that cattle producers are not used to using that might be available for those able and willing to manage it.”
Using higher value grains may provide potential if producers take the time to learn to feed new feedstuffs. However, Tonsor also cautioned that, in period of high stress, certain feeds may be less valuable.
“There is not a lot of new news in the feedlot sector,” continued Tonsor. “We continue to have excess capacity concerns.”
In the short run, he noted that potential relief could come for the feedlot sector, but that temporary relief exacerbates the situation down the road.
“As we pull animals forward, we are altering the timing, so there will be calves and cows showing up in the feedlot market sooner,” he explained. “The longer we delay rebuilding the herd, the bigger issue this is going to be.”
Current projections show that animals coming out of feedlots will see severe losses, with some exceeding two dollars per head, said Tonsor.
“We have a fixed amount of concrete bunk space, a dwindling calf crop and associated feeder supply, and that particular mismatch continues to be a pinch-point for the feedlot industry,” Tonsor commented. “The feedlot sector in general is under a lot of stress. How that segment of the industry will resolve the excess capacity continues to be a big question mark.”
The uncertainty factor
Taking a step back and looking at the overall cattle industry, Tonsor said that the drought and its immediate implications are only one item on a long list of factors driving uncertainty of the industry.
“We have lots of policy uncertainties,” he noted. “Whether we talk about Farm Bill policy, country of origin labeling policy or discussion on GIPSA and fair markets, there is a long list of unknowns.”
Feedlot capacity concerns also create uncertainty, along with social pressures.
“The discussion around animal welfare, sustainability and those types of concerns continue to make discussion about beef demand more complicated,” Tonsor added.
Additionally, the future of the industry in terms of potential growth raises concern, with many analysts predicting that future growth will occur in the global markets, rather than on a domestic front.
“The global market wants different products than the domestic consumer does, and that raises new risk,” explained Tonsor. “All these issues point to a need for the industry to meet and respond to challenges.”
Tonsor commented, “The new normal is lots of uncertainty for the beef industry, and not everyone is going to be comfortable with that.”
Pasture condition deteriorates
“It is important to recognize that, at this point in time, corn is more expensive, but I think we are getting closer to a comfort level with where corn is at,” said Kansas State University Agriculture Economist Glynn Tonsor in an Aug. 7 webinar.
Tonsor continued, adding that despite uncertainty in corn markets, pasture conditions provide a higher level of concern.
“As cattlemen, you are getting insight into the corn market,” he said. “You get a lot less information as it relates to pasture condition.”
Using a comparison of the pasture condition report provided by USDA, Tonsor said that in 2011, 12 million cows resided in states where 40 percent or more of pasture acreage was rated poor to very poor, representing about 40 percent of the herd.
“This year, over 22 million head fit that same criteria, and basically three-fourths of the U.S. beef cow herd is in states where 40 percent of the pasture acreage is poor or very poor,” he explained. “Three-fourths of cows reside in areas of notable pasture distress – that is what is showing up in the market, leading to the notable pull back in calf prices.”