This current turnaround phase of the cattle cycle is generating considerable uncertainty among beef cow producers. Typically, marketing factors in this phase change so quickly that the previous year's marketing experience is of little or no value in designing this year's post-weaning marketing strategy.
As a result, beef cow producers must look forward, not backward, for their market price signals. This makes formulating profitable post-weaning marketing strategies difficult.
In evaluating post-weaning marketing strategies, producers must first recognize that retaining calves in any post-weaning profit center is a margin game. Two things will determine success: your efficiency in buying and selling cattle (measured through the buy/sell margin) and your feedlot/pasture efficiency in generating added weight (measured by cost of gain). Remember that cattle cycles greatly impact buy/sell margins but have little or no impact on cost of gain.
The buy/sell margin is the price of the heavier backgrounders/stockers coming out of the feedlot/pasture, minus the price of lighter calves going into the feedlot/pasture. Under normal price relationships, the buy/sell margin is negative, meaning lighter calves going on grass are priced higher per cwt. than the heavier calves coming off grass and going to the feedyard.
A negative margin ensures a loss in marketing the initial weight of the animals coming out of a backgrounding/stocker profit center. The extent of that loss depends on the buy/sell margin.
The magnitude of the negative buy/sell margin changes as we go through the cattle cycle. In general, buy/sell margins follow a predictable cyclical pattern, which implies that marketing losses associated with the normal negative buy/sell margin also follow a cyclical pattern.
Price Cycle Projections
Figure 1 presents my current beef price cycle projections for 500- to 600-lb. and 700- to 800-lb. steer feeders, plus 1,200-lb. slaughter steers. Buy/sell margins are represented by the vertical difference between any two lines. This chart illustrates the 1986-96 beef price cycle discussed last month on page 20, but with my current 2002 projected beef price cycle added on.
I've revised these projections annually the last six years. But the management signals these projections have sent during this period really haven't changed — until 2002. The Sept. 11 terrorist attacks and the current multi-year drought caused a significant change in 2002.
Six key factors have impacted the 2002 beef price cycle projections.
Bovine spongiform encephalopathy (BSE) outbreak in Japan. The August 2001 BSE outbreak cut beef consumption in Japan by 50%. U.S. and Canadian beef exports to Japan, the number-one U.S. export customer for high-value beef cuts, fell immediately. Japanese beef consumption still hasn't recovered to levels before the BSE outbreak. In the last year, however, South Korea and Mexico have imported additional U.S. product, which made up most of this difference.
The Sept. 11 terrorist attacks. Business travel in the U.S. hasn't recovered to its pre-Sept. 11 levels. Since most travelers consume high-valued restaurant beef cuts, this represented the loss of a second high-valued beef market.
In contrast, home beef consumption of lower-value cuts went up, leading to a drop in total carcass value. Decreasing carcass values implies lower cattle prices.
Poultry exports reduced by the Russian poultry ban. Russia, the largest market for U.S. poultry exports, retaliated against a new U.S. steel trade policy by banning poultry imports. The poultry destined for export was thus dumped on the U.S. domestic market. The surplus of poultry led to retail featuring of poultry, which pressured domestic prices for pork and beef.
The down economy, which has forced a change in U.S. consumption patterns. Consumers are moving to lower-priced beef cuts, which reduces carcass values.
Western U.S. and Canadian droughts, which are forcing more heifers to feedlots, thus generating added beef production. Increased cull cow slaughter (especially in Canada) is also adding to total beef production.
Increased carcass weights, a main contributor to this year's increased beef production. At a time when beef demand is about stable, we've dramatically increased beef supply.
U.S. beef production jumped 4.6% in the first half of 2002. The additional tonnage pulls beef prices down as more beef moves under “specials,” which generate less total revenue from retail beef sales. We are awash in total pork, poultry and beef supplies.
My current beef price cycle price projections are shown in Figure 2. In many respects, these new projections suggest a beef price cycle similar to the last beef price cycle but with two main differences.
The first difference is the projected double top. The second is that the beef price cycle will extend two more years to 2008.
The double top, I believe, is due in large part to drought, which has prompted a substantial increase in beef supply.
Once the drought passes, we should see heifers retained for breeding and cow slaughter decrease. These factors will trigger a cattle cycle feeder calf price kick.
Higher feed grain prices should reduce carcass weights to more normal levels and trigger a feedlot-induced price kick. These two price kicks should strengthen feeder calf prices back to a more normal cattle cycle/beef price cycle relationship.
These projected beef price cycles share some similarities with past cycles.
First, both cycles took four years from the bottom to the cycle's first top. Second, the last feeder calf price cycle had six “better years” (1988-1993) across its top. This generated a six-year, average calf price of $90 in the Northern Plains. The projected feeder calf price cycle is projected to also have six better years across the top with a projected six-year, $92 average calf price.
Third, the past cycle took six years from its first peak to the end of the downturn. The current price cycle is projected to take eight years from the first peak in 2000 to the end of the downturn in 2008. The two-year extension in the projected beef price cycle is drought-related.
The biggest marketing challenge is figuring out when the drought will end and when drought-stressed ranchers will begin to repopulate their herds. At this point, my current projections are based on the assumption these will happen in 2003.
Harlan Hughes is a professor emeritus of North Dakota State University. Retired spring 2000, he is currently based in Laramie, WY. He can be reached at 701/238-9607 or [email protected].