Drought delays cowherd expansion; look to 2015 before any change happens.
Take away the inevitable conversations about drought anytime two or more cattlemen gather, and is there anything to talk about?
Of course there is. There’s whether or not the coffee is any good and if there’s enough whipped cream on the pie. Then, once things of immediate importance have been discussed, there’s this: will the cowherd ever expand?
The short answer is yes, says Glynn Tonsor, Kansas State University ag economist. That means the main question is when and where, he told a worldwide audience recently during his fourth and final webinar of the year, co-sponsored by BEEF.
Tonsor says that 2012 was setting up to be a record year for profitability for cow-calf producers, with the potential for returns over cash costs exceeding $200 on average. “Then this nasty thing called a drought developed.”
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That set things back a bit. “The immediate effect in 2012 was higher costs of production for cow-calf producers, as well as lower revenues because the calf market got hit,” he says.
“But I urge you to maintain a longer-run focus,” he told the online audience. “For those of you with better-than-average cost considerations, this is the segment that stands to benefit when the herd does expand. When we pull heifers off the supply chain and expand the herd, that will only reinforce an already tight supply situation and add additional support to the calf market.”
So when will that happen? “I’m now looking out to 2015,” Tonsor says. “The reason I’m pushing it forward two years instead of one is because I think a lot of cattlemen are conservative by nature and are particularly conservative coming out of a drought.” Even if it does rain in 2013, “a lot of them will want to see pastures recover before we observe an aggregate expansion,” he explains.
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The next question, then, is where will expansion occur? That’s largely up to Mother Nature, but Tonsor says if it does rain, expansion will probably be most significant in the Great Plains, which is home to about 30% of the nation’s cowherd. Other regions, such as the Corn Belt and the West, are home to fewer cows and therefore will be less of a player when expansion does ultimately begin, he says.
That leaves the Southeast, home to 25% of the nation’s cows. The Southeast fared better than the rest of the U.S. this year and pasture conditions are generally good. However, because operations there tend to be smaller and less intensively managed, “I question if they’re going to see the current environment as something to pull the trigger on expansion,” Tonsor says.
Intensity of management will be important going forward, he says, because among the many things the drought has done, it has widened the gap between the most profitable and least profitable operations.
“Research by my colleague Kevin Dhuyvetter has highlighted that controlling cost is a bigger driver in profitability differences in the cow-calf industry than maximizing revenue,” he says. “Both are obviously important, but you tend to have more control over costs.”
Therefore, he says, producers who are willing and able to more actively manage their operations – do something different, feed something different – are more likely to be in the top third than the bottom third, he says.
The same holds true for stocker operators who have historically enjoyed a higher value of gain than other segments of the industry. “That situation I think maps out magnified opportunity for those who have the ability to manage costs,” he says.
“That, of course, is even more of a challenge coming out of a drought because managing your costs will require you doing something different,” he says.