Beef Economics: Tonsor addresses economic factors in beef marketsWritten by Saige Albert
“Most of us are well aware that 2012 was setting up to be a record-setting year for profitability,” said Tonsor. “We were looking at returns over $200 possibly, and then the drought developed.”
For cow/calf producers, Tonsor noted that expanded national drought resulted in huge impacts for the industry and the future of the cattle market.
“The 2012 national drought impacted a lot more land and a lot more cows than the 2011 regional drought,” explained Tonsor, who noted that the nation was more able to absorb the impact of last year’s Southern Plains drought. “The immediate impact of the 2012 drought was a higher cost of production, as well as lower revenues, because the calf price market too a hit.”
However, he encouraged producers to maintain a long-term focus, noting that there are many of the same fundamental reasons for expansion still present.
“The cow/calf segment stand to benefit the most if and when the herd expands,” explained Tonsor. “When we pull heifers off the supply chain to expand, that will reinforce an already tight supply situation and support the calf market.”
He added that he expects the cowherd to expand on a national scale, with 2015 as the likely peak year for returns. Tonsor holds off on predicting a sooner herd expansion because of the overall conservative nature of ranchers, noting that many will likely wait until at least one year of good rain, pasture growth and a good corn crop until deciding to expand.
“As we look forward for the next four months, I’ll highlight that the market is expecting a notable increase,” Tonsor continued. “Some of this is seasonal and some of it is an indication of tight supplies going forward.”
Opportunities for stockers
Tonsor also highlighted that the stocker segment provides opportunities for producers, but it also adds an increased risk.
“We have historically high values of gain, but we also have a historically high cost of gain,” he commented. “This maps out renewed and magnified opportunity for those that have the ability to manage costs.”
Because of decreased availability of familiar feedstuffs, Tonsor noted that producer adjustments will be required, but the opportunities for stockers or cow/calf producers who are interested in retaining ownership are available.
“There is also increased risk,” he explained. “There are increased impacts if there is a hiccup.”
Value of gain projections are in the $120 to $130 range, says Tonsor – levels which are notably higher than in the 1990s and 2000s. He said, however, that the higher cost of gain also has to be appreciated.
The drought has also negatively impacted feed yards, said Tonsor, who noted that excess capacity woes remain at the top of concerns.
“I think it will get worse before it gets better,” he added. “We haven’t resolved a lot of concrete bunk space, and our current situation will get worse over the next couple of years. If we expand the herd, it will also get worse in the short term.”
Tonsor also mentioned that losses for feedlots came close to record breaking in July and August, as the sector wasn’t able to absorb increased costs.
“Those large losses were driven by the high cost of gain,” he explained. “Also, feeders were purchased in the spring before the summer fullback, so feed yards paid more for animals and a higher cost of gain that weren’t supposed by the fed cattle markets, resulting in higher losses.”
He commented, however, that the near future looks better for cattle markets.
“We have a long way to go, but it is getting better,” Tonsor explained. “The September closeouts are still hovering around negative $200, but as we get into the early months of 2013, we are much closer to a breakeven situation.”
Because feeder purchase prices are projected to drop at the same time fed cattle prices are expected to increase, Tonsor noted that break may come for feeders.
“This is notable improvement from the negative $200, although feeders would like to see more positive values in terms of returns,” he said. “This segment is the one of the three that has the most pressure on it currently.”
For the next several year, while Tonsor noted that expansion is likely beginning near 2015, commercial slaughter in the beef industry is expected to drop, with reduction of four percent in 2013 and as high as six percent in 2014, according to the Livestock Marketing Information Center.
“We will also likely see a reduction in commercial beef production of four to five percent,” he said. “The story is, we will continue to downsize production over the next couple of years. That is fairly well set because of the biological lag in cattle.”
As for prices, Tonsor also noted that we will expect to see increases in yearling and calf prices, if demand improves or is near flat.
Kansas State University Livestock Economist Glynn Tonsor noted in a recent webinar that the gap between the upper third and bottom third of producers and their profitability is growing in light of recent drought.
“Producers that are willing and able to more actively manage coming out of the drought are more likely to be in the top third,” he said of their profitability. “There is a widening gap between the more profitable and the less profitable.
Producers are profitable based on their ability to maximize revenue and minimize costs, he explained, and they have more control over costs. As a result, producers who more actively manage their operation and are willing to make changes to address a changing situation frequently come out on top.
“Feed and labor costs per cow are big things,” Tonsor added. “Profitability is more diverse coming out of drought. The returns for active management have increased.”