Cattlemen have deck stacked against them

Tonsor has some suggestions to help producers with their strategy

Cattle producers have the deck stacked against them because of the challenges in the beef market created by COVID-19. Kansas State University Animal Sciences and Industry Department and K-State Research and Extension hosted a webinar May 14 hoping to help beef producers assess their current nutrition and management strategies during this time.

Glynn Tonsor said first and foremost, “I think it’s important to recognize that a lot of the challenges in the cattle industry right now reflect the bottleneck issue.”

That pinch point is causing numerous problems.

“We have a disruption of meat flow, and we have a pushback on livestock. That’s reflecting a bottleneck of more animals trying to get into the harvesting system,” Tonsor said. “And logistical challenges and actually doing that—the harvesting and subsequent processing of meat products.”

The bottleneck is not unique to the beef cattle sector at all. Multiple protein supply chains are going through this—including pork and poultry.

“Livestock prices are depressed compared to where they were before,” he said. “Wholesale meat prices have rallied quite strongly in the last three or four weeks and, in a way, the most recent development is consumers are seeing disruption in the mix and the volume of meat that’s coming across grocery sales.”

To put it into context, Tonsor explained how we arrived at the current economic situation. At the end of March, cattle on feed numbers were right around 120,000, but then through April there was a day after day decline in the number of animals that were able to be harvested.

“We got to a reported low point of 72,000,” Tonsor said.

Some of the numbers he used for his insights were preliminary U.S. Department of Agriculture estimates and April and May numbers have yet to be confirmed.

“But nonetheless, we pulled down the volume a lot,” he said. “About a 40% reduction in number harvested at the end of April, than the same period back in 2019.”

The good news? Over about the first 10 days of May, there was some improvement. The May 13 preliminary number was around 91 or 92,000 head Tonsor said.

“So we continue to make progress. I anticipate that to continue,” he said. “But there’s a long road ahead to get back to—not 120,000. I don’t think that’s feasible in current environment, but to get closer to a feasible total capacity in the weeks and months ahead.”

And that all depends on how much the fed cattle back up in the system. On May 1, there was probably a half million head, he thought during the webinar May 14. He predicted by June 1 there might be over a million or 1.3 million cattle that were carried over “that we wish we would have gotten to before June 1,” Tonsor said.

“The quicker and the more persistently we’re able to get these actual processing volumes up, obviously we eat through that carryover, but there’s a lot of animals that have been backed up, and that’s core to a lot of the economics we’re seeing,” he said.

Tonsor noted a few things from the Livestock Marketing Information Center, saying the commercial slaughter number LMIC is projecting for the quarter is down almost 15%.

“Again, we won’t know that until we get in July, when we look backwards,” he said. “But that’s core to the main piece of what’s going on—a 13% reduction year over year in the amount of beef being produced.”

And that reduction is certainly getting consumers’ attention. The lighter flow of cattle getting harvested is showing up in the meat cases. But how does it correspond with prices of fed cattle?

Market fed cattle prices in the southern Plains, either 7 or 8 weights or 5 to 6 weights, LMIC projects for the second quarter for these animals to be around $99 to $102 average price.

“If developments in the last week or two hold I think will be north of that, that would be a welcome development for the feedlot sector, that would also be a welcome development for those that have feeder cattle price exposure, because this will probably start easing some of the backflow,” Tonsor said.

So that would mean the heavier weights he mentioned, 700-800 pounds, could reach $121 to $123, and by the time those 700 pounders reach heavier weights in the third quarter they could be in the upper $120s or low $130s.

“I think I could build an argument that if we keep getting processing improvement will be north of $130,” he said.

The USDA numbers might have been a little misleading for cash prices during the week ending May 10, he said, and even in April they were low, with reports showing around $99. Certainly worse than beginning 2020 price projections.

“It’s also important to note that very few people actually realize those prices—because the volume of animals are actually processed, particularly the last two weeks of April, were quite low,” Tonsor said.

Going forward with the feeder cattle market, Tonsor suggests producers look at www.beefbasis.com, to use their tools to effectively project what it is they need to know in regards to their feeders.

“Effectively what it is used for is to get a forward looking projection of feeder cattle prices or basis, or value gain, if not exactly what scenario, we’re going to do,” he said.

For example, a cow-calf producer who’s interested in this falls prices for their upcoming calf crop, the tool could be used to find October’s projected calf price.

“I encourage you to use that, if you’re sitting with cattle today and you’re trying to figure out how to manage your cattle—then the value of gain for size, about what they look like, what they weigh, what we think they’re worth today—relative to what they might be worth in the future, at a different date and a different weight.”

Tonsor most often gets asked by producers if they should hold on to feeder cattle or sell them now.

“You need to ask yourself, do you think that the COVID impacts are either nearly complete or no the worst is behind us, so to speak,” he said. “If not, then you may not want to keep building, or you comfortable with extended price risk exposures part of that.”

Tonsor encourages producers again to use the tools on www.beefbasis.com, specifically the value of gain and compare it with the own cost of gain info. He also said to consider protecting yourself on price risk if ownership is extended longer. More information is available on www.agmanager.info as well. It has an Excel based tool to help with projections of price.

“But the whole point of it is to make projections of the net selling price that’s expected if you do nothing, and take the cash price versus hedge on the futures market or the options market, or use the USDA LRP insurance products and the like,” Tonsor said. “That’s the point our tool to help you make a more informed decision.”

Tonsor cautioned the use of the term shortage, and because the development about the flow of meat being disrupted.

“The mix of products is different. I don’t think the term shortage is appropriate,” he said. “We most likely are going to produce more meat in 2020 on beef and pork side of things. There’s moving pieces to that, but I think it’s misleading to use the term shortage. It’s a disruption in the timing.”

Production will obviously smaller because of the delays in harvesting during the months of May and probably June compared to 2019.

“But we need to be careful how we portray this,” Tonsor said. “Term shortage can add fuel to a fire that’s not necessary, and I encourage you to be careful.”

Because of COVID-19, most of the economic impacts have occurred in the production sector—including livestock prices. There’s a lot of efforts to currently “solve” the problems with prices, Tonsor said. But there’s other solutions too.

“We need to balance peacetime system efficiencies for a whole food system as well as our beef production system with responding to a crisis, because this pandemic is a unique, I hope once in a lifetime event,” Tonsor said. “And I have serious concern that some efforts on the political and policy front as well as individual actors may actually cost us more than they want on the long run.”

Kylene Scott can be reached at 620-227-1804 or [email protected].