By just about every measure, 2014 is shaping up to be a year that your grandchildren will talk about with their grandchildren. Tight cattle supplies and surprisingly strong beef demand continue to come to confluence, making the profitability stream one for the ages.

And 2015 looks to be a repeat performance, says Glynn Tonsor, Kansas State University ag economist.

Speaking last week during his quarterly economics webinar, co-sponsored by BEEF and Merck Animal Health, Tonsor said the second quarter of 2014 was the strongest quarter for retail beef demand since the fourth quarter of 2004. Moreover, he says, the all-fresh beef demand index has gone up 14 of the last 16 quarters.

That’s important, Tonsor told webinar listeners, because we can’t lose sight of the role of consumer demand and consumers’ willingness to spend more and more money for a pound of beef. “Both supply and demand underpin what are historically high prices in our industry,” he says.

The combination of surprisingly strong consumer demand and the tightest cattle inventory in seven or eight decades has pushed cattle prices to record levels. Showing data from the Livestock Marketing Information Center (LMIC) in Denver, Tonsor says 2014 and 2015 are projected to be record-setting years for profitability in the cow-calf sector, by a wide margin. LMIC projections call for an average $450/cow return over cash costs this year and next. That compares with $120-$130 in the past.

“That reflects historically high calf prices as well as reduced costs,” Tonsor says. “That is what is setting the stage for pending herd expansion, I would argue.”

Fed cattle market

The same factors that have pushed calf and feeder prices higher have also helped fed cattle prices stay stronger for much longer than analysts expected. With feedlots having a better-than-expected 2014, the price push for feeder cattle remains unabated.

For 2014, LMIC is projecting a 19% increase in fed cattle prices compared with 2013, Tonsor says. However, that projection may be conservative, given the unexpected strength in fed cattle. “So it’s possible that the average for the year of 19% will be understated and be higher than that.”

While feedyards have enjoyed profitability, fundamentals may turn against them as 2014 winds down, Tonsor says.  Closeouts for Kansas feedyards were $130 to the plus side in May, he says, the fifth month in a row that fed cattle made $125/head or more in profit. “That’s the first time we’ve had that in 10 years,” he says. And projections through September call for continued profitability.

Projected closeouts for the last three months of the year are cause for concern, however. “If you look at projections for November closeouts, the story flips pretty quickly,” Tonsor says. Then, projections call for a negative $109/head return. “The turn is driven by the fact that we have flat projections for fed cattle prices, yet notably higher feeder prices,” he says.

Feeder, calf projections

How high can calf and feeder prices go? “I don’t want to say the sky’s the limit, but there are a lot of reasons that those historically high prices are pretty sound,” he says.

Depending on the timeframe, prices for 750-lb. feeder steers are projected to range from $210 to $220. LMIC projects Southern Plains 5-6 weight calves to average $225-$229. “That might be a little bit conservative, given the price environment for the third and fourth quarter,” Tonsor says.

 

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For 2015, LMIC projects steady fed cattle prices and more wind beneath the wings of calf and feeder prices. Projections for 5-6 weight calves jump to $238-$244 for next year, a $10 to $20 run-up from this year.

“Embedded in that optimism is the tight cattle supply situation,” Tonsor says. “And as long as we have some form of stable beef demand, we’ll have an upward demand pull for feeder calves that will continue to break records in 2015. Short of a macro-economic hiccup in the story, there are a lot of reasons to remain optimistic about calf prices in 2015.”

To view a recorded presentation of Tonsor’s webinar, click here. A registration fee applies.

 

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