Planning from the cattle cycle’s front end

The cattle cycle is dead. Long live the cattle cycle.

“For many years, cattle producers experienced a somewhat predictable cattle cycle approximately 10 years in length,” says Tim Petry, Extension livestock economist at North Dakota State University. “However, during the last 15 years, an abnormal number of outside events have caused the cycle to be less predictable and left producers wondering if the cattle cycle is relevant for planning purposes. The likely answer to that is yes, with particular emphasis on the next several years.”

In fact, it’s been easy to ignore the cycle, given the seemingly endless liquidation phase of the recent one (2004-2014) and the flea-flat nature of the past couple.

So far, though, the early end of this new cattle cycle appears to be aggressive.

Glynn Tonsor, agricultural economist at Kansas State University (KSU) explained at the recent KSU Beef Stocker Field Day that along with 1992, heifers retained for breeding, as a percentage of the breeding herd July 1, this year and last were the most since 1974.

“History says when we expand the herd, we tend to do it for three to five years before we hit the peak of the cycle and start coming back down,” Tonsor explains.

“Prices for all market classes of cattle were record-high in 2014 and likely reached the cyclical high for this cattle cycle,” says Petry in his recent Spotlight on Economics: The Cattle Cycle Revisited. “Prices were bolstered by the historical short cattle and beef supply, coupled with beef herd building that caused more heifers to be kept for breeding purposes, and the low beef cow harvest. Furthermore, lower-than-expected pork and chicken production and strong export demand for beef and byproducts aided the record high cyclical peak in prices.”

Notwithstanding the recent and brutal price slide stemming from a market front-loaded with over-fed cattle, Petry explains, “A number of headwinds have developed in 2015 that could cause cattle prices to decline cyclically for the next several years.”

One factor is the expectation for increased beef production in tandem with the record total red meat and chicken production forecast by USDA for this year and next.

“Another key driver behind calf and yearling prices in recent years has been declining feed costs, a trend that largely has run its course,” Petry says. “Generally good moisture conditions should cause continued herd rebuilding but also will be the wild card for how much and where the herd will increase.”

With the cycle in mind, Petry points out, “During the increasing phase of the cattle price cycle, pre-pricing tools in risk management strategies for cattle to be sold in the future may be less effective. That has been the case the last several years, especially for producers selling calves and yearlings.

“But during the decreasing phase of the price cycle, those strategies tend to work better. Of course, seasonal price patterns are very important in developing marketing plans. And the worldwide market environment that the entire livestock industry now operates in likely will continue to cause more price volatility than in past cycles.”

 

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