All indications are that several years of good economic times have returned to the cow-calf sector. Feeder cattle prices, driven by record-high slaughter prices and feedlot profits, are also showing strength.
The 2003 run-up in feeder cattle prices since April (Figure 1) has been impressive and atypical for this time of the year. Given the roller-coaster market price ride of the last six years, the question on most cow-calf producer minds is: “Will it last?”
I updated my cattle cycle analysis and long-run planning prices for insight into where the industry's headed. Beef cow-calf producers will like the results.
A Unique Cattle Cycle
The current cattle cycle is sufficiently different from historical cattle cycles that it will require good business planning by cow-calf producers to take advantage of its potential. Given that many western U.S. cow-calf producers are coming out of prolonged drought, such folks could easily end up on the wrong side of the cattle cycle. That is, selling cattle when they should buy, and buying when they should sell.
Figure 2 illustrates the USDA All-Cattle beef and dairy inventory numbers for 1940-2003 divided into our traditional 10-year cattle cycles. Each 10-year cycle from 1940-1979 started out the decade with low cattle numbers, which peaked at mid-decade, then decreased again by decade's end. U.S. all-cattle numbers peaked in the mid '70s at 132 million head, albeit these were much smaller-framed cows than today.
Since 1975 we've spent more years decreasing the nation's beef cow herd than increasing it. Yet, beef production hit a record level in 2002. Clearly, bigger cows produce more beef per cow. Thus, it takes fewer cows to meet beef demand.
This extended downside of the current cattle cycle is the one big difference from previous cattle cycles. We currently have no indication that producers are holding back added heifers to reverse this trend. I believe, however, that we've reached that favorable price outlook needed for herd expansion. I expect to see additional 2003 heifer calves held back for breeding.
Beef Price Cycles
Cattle cycles cause beef price cycles, so beef price cycles mirror cattle cycles. When the cattle cycle goes up, the beef price cycle goes down and vise versa. While cattle cycles tend to start at the beginning of each decade, beef price cycles tend to start in the middle. Figure 3 presents the last two U.S. beef price cycles.
The previous beef price cycle started in 1986 and went to 1996. The current price cycle began in 1996, peaked in 2000, and nose-dived in fall of 2001 due to the terrorist attacks and discovery of bovine spongiform encephalopathy in Japan.
Cattle prices continued to fall in 2002 due to drought-induced cattle sales in the western U.S. and Canada. In fact, many western ranchers sold all 2002 heifer calves, substantially adding to feeder cattle supplies and reducing herd expansion.
Cattle prices in 2003 quickly recovered. Eight years of smaller U.S. calf crops (1996-2003), stronger beef demand (1998 to present), and no feeder cattle from Canada (May 20 to present), all suggest a projected double top in the current beef price cycle. The current beef price cycle first peaked in 2000 and is projected to peak again in 2005.
Strong calf prices in 2003-2005 are projected to stimulate holding of heifers for breeding (Figure 4). That herd expansion, in turn, will lead to an over-production of feeder calves, and lower calf prices the last few years of this decade. That will complete the current beef price cycle — four or five years later than originally projected.
Holding Back Heifers
My analysis suggests we'll see additional heifers diverted from feeding to breeding the next three years. The short feeder cattle supplies will weigh heavy on cattle feeders, who will have to scurry to find feeder cattle over these 3+ years. In an effort to ensure individual feedlots have enough replacement feeder cattle, contract backgrounding will again flourish as feedlots take earlier ownership of weaned calves.
My analysis also suggests we've again reached that phase of the cycle where we could see some feedlots balk at purchasing feeder calves. In the last cattle cycle, Midwest farmer-feeders gave up feeding first. Then, as feeder cattle numbers decreased even more, some central and southern plains feedlots quit feeding.
Some feedlots switched to 100% dairy steers to stay in cattle feeding. Meanwhile, companies with multiple feedlot locations closed some locations and consolidated their remaining feeders to their remaining lots.
An interesting element of the current cattle cycle is that the U.S. cattle feeding sector has added considerably more bunk space since the last cycle's shortage of feeder cattle. Will we continue to import Canadian and Mexican calves to keep the existing feedlot sector filled, or will commercial feedlots shut down? This will be central to the country-of-origin labeling debate.
Astute cattlemen will be well rewarded for studying and strategizing how to make the cattle cycle work for them. “Managing as usual” may not lead to the same good economic times.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or [email protected].