Farm Talk

February 21, 2013

Big “ifs” for 2013 beef profitability prospects

by Mark Parker

Parsons, Kansas — Profitability prospects for beef producers in 2013 will be impacted by some mighty big “ifs” looming large just over the horizon.

Speaking to farmers and ranchers in Iola, Kan., last week, Kansas State University Economist Glynn Tonsor said demand and drought recovery are two of the most important unknowns that will affect profitability.

On the supply-side, however, the numbers are clear. The January USDA cattle inventory report reaffirmed what the industry already knew. At 89.3 million head, the total number of cattle in the U.S. is at its lowest point since 1952 with the number of cows and heifers calving last year the fewest since 1941.

Although contemporary cows are far more efficient at producing beef these days, extremely tight beef supplies remain a certainty supporting the market.

What is far less certain, Tonsor said, is the level of demand strength and the degree of drought recovery. He expects low supply to drive meat prices still higher with the potential for record highs in 2013 and 2014.

Public acceptance of those prices, though, is one of the “ifs” that will affect prices beef producers receive going forward.

“The good news is, in 2012, the public did pay a high enough price to lead to an aggregate beef demand increase,” Tonsor said. “Most people didn’t think that would happen.”

He cautioned, however, that as the public pays higher prices for beef, cattlemen should expect increased scrutiny regarding how it is produced.

Tonsor said it’s important to differentiate between demand and consumption. Demand, he noted, is strictly a volume calculation that indicates availability while demand concerns the public’s perceived value of the product — what consumers are willing to pay.

While demand was up in 2012, per capita consumption was down slightly from the previous year and is expected to drop 4-5 percent in 2013 and again by the same amount in 2014 as availability continues to drop.

“It’s almost a mathematical certainty that we’re going to pull down per capita consumption,” Tonsor explained, “What isn’t known is what the public will pay for that smaller amount of beef that’s available.”

Despite stronger beef demand in 2012, retail prices were not high enough to support feedlot profits with closeouts at historically high losses — a 12-month rolling average of -$132 per head through December 12, 2012.

With an excess of both bunk space and processor hook space, dramatically reduced feeder supplies will force feedyards and processors to choose between downsizing, closing or riding out the economic storm.

For cow-calf producers, cost control will be critical in a volatile market, Tonsor said, noting that the profit gap is widening between top-third and bottom-third producers.

Three-quarters of the difference in the profitability of those two groups is due to lower costs with only a quarter driven by increased revenue — such as that attained through higher weaning weights.

“Cost management drives the majority of differences in returns and is likely even more critical in a period of drought response,” Tonsor asserted.

The wild card for calf producers is weather impact on forage conditions. In previous regional droughts, the U.S. cow herd was shuffled from one region to another in search of forage.

Last year’s widespread drought prevented redistribution of cows and, as a result, cooled a red-hot calf market and stalled expected herd expansion.

“If grass and water conditions improve in 2013 it could be a record-setting year and that could trigger expansion,” Tonsor said. “But, we have a lot of ground to make up. About 70 percent of all beef cows were in areas where range and pasture conditions were rated poor or very poor on October 1.”

Additionally, hay stocks are at their lowest point since 1957 and hay acres are also at a low point.

The only significant calf-producing portion of the country with decent forage conditions is the Southeast and Tonsor is skeptical that area will lead an expansion due to a dominance of small herds and lower-value, lighter calves.

With the potential for strong calf prices and positive cow-calf returns, expansion is very likely if forage conditions improve.

Producers should take care in examining herd expansion costs, however, Tonsor advised. He noted that K-State’s web site features tools to evaluate heifer retention and/or female purchases.

In the stocker cattle sector, operators are taking advantage of historically high gain values.

“We don’t have $2.50 corn anymore so pre-feedyard gain is more important than ever,” Tonsor noted.

The caveat, however, is that stocker feed costs are also higher as is the amount of money operators have tied up in their calves.

“So, if we have a hiccup, there’s more risk,” Tonsor pointed out. “There is more upside but more downside, too.”

On the export side, Tonsor said developing nations represent the biggest beef consumption increase potential as their economies and populations grow. With projected GDP increases of 3.8 to 4.9 percent per year, Africa and the Middle East account for  nearly 50 percent of the increase in meat trade over the next 10 years. The challenge, he said, is that the industry knows very little about marketing to those cultures.

Although Tonsor sees Japan’s loosening of age restrictions on beef imports as a very positive development, he cautions that Japan, like many other developed nations, is not a growth market for beef due to an aging population and very slow economic growth.

Regardless of where U.S. beef goes, Tonsor expects exports to become increasingly important to the industry.

With the vast majority of U.S. beef consumed right here at home, though, consumer demand will be a huge factor to watch. £