Since many beef cow producers don't sell their calves at weaning, a common question to me is how can backgrounders and/or stocker operators make the cattle cycle work for them? For the benefit of producers who don't sell at weaning and want to operate post-weaning profit centers, I'll devote the next few “Market Advisor” columns to feeder cattle price cycles.
Feeder cattle prices follow a fairly pronounced cyclical pattern. In Figure 1, the top line represents annualized prices for 500- to 600-lb. feeder steer calves, while the middle line represents 700- to 800-lb. feeder steers, and the bottom line depicts annualized prices for slaughter steers.
Cattle cycles tend to execute within a decade and run from the beginning of one decade to the end of that same decade. But beef price cycles tend to go from the middle of one decade to the middle of the next decade.
The cattle cycle causes beef price cycles. The two are highly correlated, but they run in opposite directions. When cattle numbers trend upward, beef prices trend downward and vice versa.
Buy/sell margins and costs of gain are the two key economic components that determine profitability in a post-weaning profit center. Buy/sell margins are impacted by the feeder cattle price cycle, while costs of gain generally are not.
Buy/sell margins for backgrounding are represented in Figure 1 by the distance between the feeder calf price line and the feeder cattle price line. The buy/sell margin for finishing feeders is the distance between feeder cattle and slaughter cattle price lines. The buy/sell margin for calf feds is the distance between the feeder calf and slaughter price lines.
The Cycle And Buy/Sell Margins
Let's focus on the 1986-1996 feeder price cycle patterns in Figure 1. (I believe we will closely duplicate this price pattern in the 1997-2008 price cycle). Study the annual buy/sell margin for the first half of the beef price cycle from 1987-1991, and you'll see they continued to increase as slaughter cattle prices trended upward.
Two economic forces drove the widening negative buy/sell margins:
larger profits from the feedlot weight gained and
fewer feeder cattle, which led to aggressive bidding by feedlots.
As we moved toward 1991, the buy/sell margins for feeder calves increased to the point that feeder calves were overvalued. Then as calf numbers went down, feedlots turned to calf feds to keep their feedlot full.
The continued decline in calf numbers forced some feedlots out of the market. Others knowingly overvalued their purchased feeder calves to ensure the continued use of their feedlots. Even though these feedlots knew they would lose money, they minimized overall losses by feeding for a loss rather than shutting down the feedlot.
My recommendation to beef cow producers during this time of over-valued feeder calves was to sell at weaning.
During the top of the beef price cycle, it seemed everyone wanted to own beef cows. Thus, ranchers switched their management energies from marketing weaned calves to developing heifers.
This diversion of heifers from the feedlot to breeding herds drove feeder cattle supplies down even more. This, in turn, drove feeder calf prices up even more. (This heifer diversion should occur again whenever the current drought ends.)
At the 1993 top of the beef price cycle, we had very large buy/sell margins leading to feedlot losses in 1994 (Figure 2). Clearly, the marketing loss on the initial weight of cattle going into feedlots and pastures was a record high for the decade.
When slaughter cattle prices started down in 1993-1994 and cattle feeders experienced substantial losses generated by record negative buy/sell margins (Figure 2), the buy/sell margins quickly closed in the 1994-1996 period (Figure 1). My assessment during the 1994-1995 time period was that feeder calves tended to become undervalued.
Feedlot profits returned in early 1995 but didn't last long (Figure 2). I was only partially right. The longer you own cattle in a down trending market, the lower the final sale price. But if weaned calves are undervalued enough, my thinking was that some post-weaning profit was still possible. Year 1996 calves were clearly undervalued.
During the 1994-1996 period, many ranchers decided the only way to obtain fair market value for their calves was to retain ownership through slaughter. During this period, all kinds of retained ownership and beef cattle alliances sprung up trying to generate a fair market value for weaned calves. It's interesting and positive that this newfound interest in alliances didn't vanish when cattle prices turned up again in 1997.
Cattle numbers continued to increase reaching the decade's record high in 1995 and driving cattle prices ever lower. Finally, record corn prices drove the price of feeder calves in 1996 below the price of feeder cattle — the first time since the 1970s.
Whole-herd liquidations became common, and the beef price cycle was now complete. Increasing beef prices in 1997 signaled the start of a new, and now current, beef price cycle.
The Current Cycle
I provide this discussion on the last feeder cattle price cycle because I believe we will duplicate many of these cyclical relationships during this current beef price cycle. If more beef cow producers retain their calves this fall in some form of a post-weaning profit center (as projected in last month's column), the current beef price cycle and its buy/sell margins will directly impact their post-weaning profits.
In any discussion of the current feeder price cycle, we need to impose the Sept. 11 attacks, the BSE outbreak in Japan, reduced U.S. poultry exports to Russia, the current short-term increase in carcass weights, as well as the long-term genetic increase in carcass weights, and a prolonged drought into what appears to be an extended 1997-2008 beef price cycle. I will do that in next month's discussion of my 1997-2008 beef price cycle analysis.
Cattle Cycle Seminars
The last several years, I have conducted many producer seminars in the U.S. and Canada on cattle cycles and my updated set of long-run feeder calf planning prices. We use these long-run feeder calf planning prices to evaluate five management strategies that a beef cow producer might implement to generate added profit from the cattle cycle.
I've now incorporated this cattle price seminar, my post-Sept. 11 long-run calf planning prices and the five profit making management strategies into a computer CD video that can be purchased directly from me. E-mail me at [email protected] or call 701/238-9607 for details.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or [email protected].