Tonsor remains bullish for beef cattle industry moving forward

With a number of signals in the beef industry, Kansas State University Economist Glynn Tonsor noted that there are a number of reasons for concern, but he remains optimistic about the opportunities for the industry going forward.

“We still have, by historic standards, tight supplies, but that is easing,” Tonsor said during an Aug. 11 webinar. “The breeding herd is expanding, and beef demand is very strong.”

In addition, he noted that the high cost of being involved in the industry is a concern for many. Working from the cow/calf sector of the beef cattle industry to the consumer, Tonsor noted that there are many reasons to be optimistic.

Cow/calf segment

“In 2014, we had very high calf prices,” Tonsor explained. “Most of 2015 has been above a year ago. It is quite likely that we will have prices at or a little below a year ago.”

He further noted that 2014 has set new highs.

“By these standards, 2014 was an incredibly good year,” he said. “2015 is a good year still, and we can see some positive returns.”

In 1986, Tonsor said that a $150 return per calf indicated a good year.

“In 2004, 2005 and 2013, those are the marks that we hit,” he continued. “2014 blew that out of the water, with returns exceeding $500, and 2015 is expected to be the second best on record.”

Tonsor mentioned that he would suggest expansion of the breeding herd is well underway.

Other factors

The quality of range and pasture across the U.S. directly helped to keep prices high, as cattle continued to expand.

“For 2015, as well as most of 2014, the U.S. collectively has been in good range and pasture conditions,” he said, mentioning that Nevada and California are the exception. “Not only is there an economic signal for expansion, but it is actually feasible because we have improved pastures where we can add cows.”

Expanison signals

With record high returns and favorable pasture conditions in place, Tonsor said that USDA’s July Cattle Inventory report further supports expansion.

“The 2015 July number was up 6.4 percent in terms of heifers that are held back,” he commented. “That is a large jump.”

In percentage terms, he emphasized that, from a small breeding herd base in aggregate, the industry has begun the expansion process.

Tonsor further looked at expansion in terms of the cattle cycle.

“If we look at the cattle inventory cycle back to 1938, we have started the eighth cycle,” he said. “Most of the cycles last eight to 12 years. If we use that, we are just one year into the new cycle.”

Tonsor continued, “We can only add so many heifers to the herd one year at a time, and it tends to be a three to five year expansion process.”

As a result, he said that U.S. producers should expect to see continued retention of heifers over the next several years.

“There is little reason to believe that this expansion process will be different,” he commented.

Stockers and feedlots

With herd expansion in place, according to Tonsor, the stocker and feedlot sectors require careful planning.

“For the stocker side, we are getting toward fall and calf weaning,” he said. “It is important to start pondering backgrounders or stockers.”

Tonsor urged producers to carefully consider the margins when determining whether to sell or background calves this year. As part of that decision, he noted the amount of money tied up into feeding cattle is quite large.

“If we can put 200 pounds on a 500 pound calf for a cost of $90 per hundredweight, that has a profit of about $50 per steer,” he explained. “It takes almost $1,500 to purchase the animal, and that doesn’t include the costs incurred in the three-month period to put on that 200 pounds. That is a lot of money tied up with a low dollar-per-head return and a low return on investment.”

For feedlots, Tonsor noted that excess bunk space continues to hit the sector hard, and the challenge will only get worse as heifers are held back.

“When we move into the feedlot industry, 2015 has been rough,” he said. “We are in the midst of flushing out structural concerns. There is too much bunk space, and that has gotten worse in the short term. It is a necessary evil in the herd going forward.”

Future outlook

Going forward, Tonsor forecasted that commercial slaughter will continue to increase through the fourth quarter of 2015, and he sees commercial beef production increasing in 2016 after slight declines in 2015.

“Commercial slaughter has been coming down,” Tonsor said. “It is expected to come down in the third quarter of 2015. In the fourth quarter of 2015 and into 2016, we are expected to return. We will be slaughtering less than 30 million head, but we are turning the corner.”

Tonsor added that dressed weights will also continue increasing.

“We are going to start increasing supplies from here forward,” he continued.

In looking at prices, Tonsor looked at the fed cattle market, noting that year-over-year increases have continued into 2015. However, he noted that price declines are projected in the third quarter of 2015 and into 2016.

“As we move through the fourth quarter of 2016, we will see the upper $250s and low $260s,” he said. “By historic standards, that is really good, but compared to the year before, the price will likely be less.”

In next week’s Roundup, learn more about Tonsor’s take on the consumer segment of the industry.

Meatingplace and Kansas State University sponsored the Tonsor Beef Report webinar.

Saige Albert is managing editor of the Wyoming Livestock Roundup and can be reached at saige@wylr.net.