Beef outlook: Tonsor addresses current cattle concerns

“It is pretty well documented that there is a limited number of cattle in the U.S.,” commented Kansas State University Livestock Economist Glynn Tonsor. “January’s Cattle Inventory report simply confirmed the tight supply and is the most recent evidence of the tight supply.”

Tonsor looked at the broad economic outlook for 2013, as well as the current situation related to beef demand.

Supply concerns

Not only did the January Cattle Inventory report confirm tight cattle supplies, Tonsor cited a number of other statistics that also support the point.

“Heifer supplies are the lowest since 1941,” he commented. “We are historically low and continuing the downtrend.”
The number of calves grazing on small grain pastures in Kansas, Oklahoma and Texas also dropped 16 percent, resulting in numbers that were lower than estimated.

“In terms of supply, there is even less out there than some of us thought,” he added. “That basically confirms that tight supply and a heightened need to understand the strength of demand.”

Going forward, Tonsor noted that demand will continue to play a strong role in beef markets.

Feeder cattle

“I alluded to the fact that grazing supplies around are lower than we expected,” Tonsor noted. “This is a parallel estimate to the number of cattle outside feed yards, which continues to be historically low.”

Tonsor pointed out that looking between 2010 and 2011 showed a stark pull-down in marketing of cattle from feed yards with less than 1,000 head. The market share for smaller feed yards dropped to 12 percent.

“An increasing share of cattle are being marketed through the larger feedlots,” he said. “I suspect that will be confirmed in the Feb. 22 Cattle of Feed report.”

Cattle by state

At the same time cattle numbers are decreasing, Tonsor marked a shift in the location of the cattle herd.

“The year over year change in 826,000 cows in the national herd,” he said. “Much of that change is from Texas.”

Looking over a ten-year period, the total beef herd is 11.2 percent smaller, with 40 percent of that change coming from Texas.

“The downsizing of the cow segment is not a new thing, but it has been exacerbated by the drought,” Tonsor said.

Into 2013

For 2013, Tonsor remarked that tight supplies will continue, which will affect feedlots and packing plants.

“Because of tight supply, we have excess capacity at the feedlot and packer,” he said. “There is a lot of pressure that has likely lead to some of the announcements about cutbacks.”

Closures of packing plants that have been seen recently will likely continue though 2013 and 2014, predicted Tonsor.

Weather will continue to be an issue, and forage supplies will dictate possibilities of an expanding herd.

Cow/calf sector

“When you look at the cow/calf sector narrowly, 2012 was a historically unique year,” Tonsor said. “We had a  lot of variability.”

He noted that in the beginning of 2012, the nation was preparing to expand the cattle herd, adding that improvement in forage and water could result in a return to an expansion mindset.

“Conversely, if the weather doesn’t improve, we will have ongoing liquidation,” he said. “In many ways, weather will dictate the path, and it is important to recognize that we have quite a bit of evidence that there is a lot of variability in the cost of production and revenue, and more narrowly, profit.”

As a result of drought situations, Tonsor commented that he expects a further widening in the margin separating the top one-third and bottom one-third of earners. 

“Those that are better at managing in normal situations I suspect will be better at handling stress,” he said.

For the sector, however, the Livestock Marketing Information Center predicts that 2013 could be a record setting year.

“If 2013 proves to be a typical weather year and we have improvement in water, forage and corn, I think we might see this materialize,” Tonsor said. “A typical cow/calf producer might have higher returns, and that might put things in motion for a real national expansion.”

However, forage stocks are currently holding back the industry from expanding.

Stockers

For those stocker operations around the country, Tonsor said, “In the general context, the stocker backgrounder segment is being asked to put on more weight before the feedlot where the expensive corn comes into play.”

He also noted that higher values of gain are available, but higher costs of gain accompany the increase.

“If you have a higher value of gain, there is more opportunity and more potential return, if you can manage it properly, but the cost of gain is a lot higher,” Tonsor said. “The ability to manage the grazing resource is critical, and when things go wrong, the cost of the hiccups is higher than it used to be.”

While there is potential reward, the risks are also higher, which will further lead to a widening gap between the top and bottom one-third of earners, he added. 

“We can see some fairly positive comments,” Tonsor said. “There are challenges, but opportunities in many ways.”

Feedlots

Tonsor also mentioned that the feedlot sector will continue to have reason for concern.

“We tried to benchmark a 12-month rolling average return,” he said, “and it was a negative $132 in 2012.”

While the number doesn’t represent any one feedlot operation, Tonsor noted that 2012 was one of the worse years for the segment.

“We may not be as bad in 2013, but there is reason for concern,” he said. “Shrinking supply will put additional pressure on trying to procure the reducing number of feeder cattle.”

Projections show a five to six percent consecutive reduction in commercial slaughter, with dressed weights up more than expected in 2012.

“The expectation is that we will continue to see increased dressed weight, but we will continue to have a pull down in commercial beef production,” Tonsor said. “Prices continue to go up to the tune of five to six percent higher, but it is important to recognize that those won’t be sufficient to lock in positive returns for feedlots.”

Tonsor addressed participants in a webinar hosted by Kansas State University, Drovers CattleNetwork, Meatingplace, and BEEF. Merck Animal Health sponsored the webinar. Saige Albert is managing editor of the Wyoming Livestock Roundup and can be reached at saige@wylr.net.