U.S. cattle producers are responding to recent record-high prices by expanding their herds, but Americans’ appetite for beef will play a crucial role in how the larger supply will play out for the producer’s bottom line, according to a Kansas State University agricultural economist.
Demand for beef has been strong the past two years, even in the face of those record-high prices, said Glynn Tonsor, agricultural economist with K-State Research and Extension.
“The consumer has been willing to pay more for beef and pork than we thought they would,” he said, noting that consumers are spending a smaller percent of their disposable income on red meat than they used to. “Going forward, hopefully they will continue to pay those prices.”
“The importance of demand will be clear over the next two to five years,” said Tonsor, speaking at the recent K-State Risk and Profit Conference. “Cattle futures are indicating that prices will move lower, but that doesn’t mean that the sky is falling. Prices are still good, just not as good as the record highs of last year.”
Producers are retaining heifers to rebuild their herds at “astronomical” rates, Tonsor said, adding that the 6.5 percent rate of heifer retention as beef cow replacements so far in 2015 is the third highest rate since 1974.   
“Cattle prices are lower in 2015 compared with the high prices of 2014, but I’m not as bearish as I sound,” he said.
The average price for steers coming out of feedlots in the five key U.S. cattle feeding areas in 2014 was $154.56, up almost 23 percent from a year earlier, according to data Tonsor shared that was compiled by the Livestock Marketing Information Center. The five areas are Texas-Oklahoma-New Mexico, Kansas, Nebraska, Colorado and Iowa-Minnesota.
The LMIC projected the average price of steers in the five-market area in the third quarter of 2015 at $149 to $151 per hundredweight (cwt), down 5.4 percent from the previous quarter at $158.11. The fourth quarter price is projected at $153 to $156.
Even with herd expansion underway, the average price for 2015 is projected by LMIC at $156 to $157 per cwt, up 1.3 percent from 2014. The average price for 2016 is forecast at $153 to $155, down 1.6 percent from the 2015 projected average.
Unlike the still positive outlook for cattle and beef prices, Tonsor said the outlook for cattle feedlots is rough. The industry has excess capacity, and even with the cattle herd expansion underway, the trend toward negative returns for feedlots is unlikely to change much in the near future. Taking into account the costs associated with cattle feeding, including feeder cattle prices, feed and other expenses, Tonsor said feedlots were losing about $210 per steer as of June 2015.
He posts an updated Kansas feedlot net returns chart monthly on www.agmanager.info.
Going forward, beef producers should be mindful of avian influenza’s effect in poultry production, the effect porcine epidemic diarrhea virus (PEDv) has on pork production and how these could affect the beef market. Mandatory country-of-origin labeling, beef industry infrastructure and other factors should stay on producers’ radar.
“Identifying and acting upon comparative advantage will increasingly be key,” Tonsor said.