Beef discussions: Tonsor looks at factors affecting the beef market
With downward trends in cattle numbers, weather adversely affecting pasture conditions and excess bunk space in feedlots, Kansas State University Livestock Economist Glynn Tonsor analyzed the impacts of recent USDA reports and looked toward the future of the beef industry during a May 14 webinar.
“Using USDA data for January beginning each year from 1973 to 2012, I have charted the estimate of how many animals are in the feedlots and how many are outside the feedyards,” Tonsor said. “There has been a downward trend over 40 years. Over the long run story, we have fewer and fewer animals outside the feedlot.”
Putting numbers to his statement, Tonsor noted that for every animal placed in a feedlot in 1973, 3.41 animals were outside feedyards. However, moving to January 2012, there were only 2.43 animals outside feedlots for every one in the yards.
“We are turning animals more quickly, and our excess capacity is directly related to this trend,” he said. “It begs the question, will that trend end and will we see the expansion of the breeding herd?”
In predicting whether the herd is building, USDA inventory reports are used. However, since USDA has suspended their July Cattle Inventory report, he noted that predictions will be limited in the future.
“In January this year, there was actually increase in heifer retention, which could signal expansion,” he said. “It was an increase, but compared to the past, we have to go back to 1990 to find years where we held back fewer.”
At this point, Tonsor said economists will have to wait until the January 2014 report is released to get a clearer picture for signals of expansion.
However, other indicators show that producers are still being cautious.
Pasture conditions have also diminished signals for expansion.
Data compiled by the Livestock Marketing Information Center (LMIC) from USDA data showed that in early May, a high percentage of ranges were scored as poor or very poor.
“In the first week of May, 53 percent of the cows in the U.S. resided in states with at least 40 percent of their range and pasture in poor or very poor condition,” Tonsor explained. “That is a lot higher than the 20 percent equivalent number we saw last year.”
“There are 2.5 times as many cows in poor range this year compared to last year,” he continued. “This number highlights the ongoing challenges in forage.”
Looking regionally, Tonsor noted that the picture only becomes clearer.
“The Great Plains Region contains a lot of cows – about 30 percent of the herd resides in these states,” he said. “Also, 34.3 percent of the heifers that were retained are in this region. It is a very important region to watch.”
Tonsor marked the Great Plains, which includes Colorado, Kansas, Montana, Nebraska, North Dakota, South Dakota and Wyoming, as a region to watch, as it has seen the most signals for expansion. However, the same region has also seen the most deterioration of pasture.
“In 2013, 58 percent of the acres were in poor or very poor condition,” he said. “This is also the sector that has previously signaled willingness to expand, and that is one more reason I am saying that we won’t see expansion this year.”
Similar trends can be seen in other regions. Though the southeast has seen improvement in pasture and range condition this year, Tonsor noted that the smallest likelihood of expansion can be found there; largely because of managerial reasons.
The potential, or lack thereof, for expansion this year sets the tone for all cattle marketing going forward. Tonsor utilized data provided by the Economic Research Service (ERS) in their Commodity Costs and Return report for the cow/calf sector, released May 1.
“We continue to increase value of production, and revenues are increasing,” he said. “Also indicated, we can see operating costs are increasing. We have higher revenue and costs, but it is more germane to look at the difference.”
In comparing the difference in the value of production and operating costs, Tonsor remarked that the Rocky Mountain States and Western States had a better than average experience, meaning they have more potential to see positive economic returns and are better positioned to expand in the future.
At the same time, Tonsor said, “There has also been an eight to 10 dollar pullback in the market. That reflects the fed cattle market that also pulled back.”
For the future of the beef markets, Tonsor commented that looking at demand is also important.
“The demand index went up by 1.5 percent,” Tonsor explained. “Demand was stronger than expected, and the consumers who remained in the market were willing to pay more.”
“As a result,” said Tonsor. “I have evidence that the demand is shifting positive – that has happened in 10 of the last 11 quarters.”
“The whole viability of the beef complex is tied to the value that people see and the demand strength,” he further commented.
Positive demand strength further indicates futures expansion of the cattle herd.
USDA shows projects for the breeding herd to expand to 33.4 million by 2022, and while Tonsor notes that expansion will occur in the future, he commented that he would predict a number in the low 30 millions.
“Expansion is anticipated, and per capita beef supplies are expected to bottom out,” Tonsor added. “We will have a pull-down in per capita supplies. The discussion is on how high prices can and will go.”