As the beef industry continues its evolution into a two-segment industry — a commodity beef segment and a value-based beef segment, today's ranchers and beef farmers have a key decision to make. In which direction will they target their beef cowherd's production?
Before they can decide, producers must have a clear understanding of six key production, economic and financial components that underpin today's beef marketing system. These are:
The cattle cycle and its resulting beef price cycle.
The economic hurt of the mid-1990s.
The increase in beef production per cow.
The long-term decrease in beef demand.
The recent turn-around in beef demand.
The fact that ranchers are currently marketing on an up-market.
In August BEEF (page 22), I provided an overview of this changing market. Over the coming months, I will discuss the points listed above in detail. This month, I'll begin with the first component — the cattle cycle and its resulting beef price cycle. This is the single most important economic underpinning of the beef marketing system.
Cattle cycles cause beef price cycles. History has demonstrated that we can expect a U- or V-shaped beef price cycle each decade. Cattle prices typically start the decade with high prices, move to low prices at mid-decade and increase again toward the end of the decade.
An old-timer from North Dakota once approached me after a producer meeting and told me that years ending in five are the toughest for beef producers. Once home, I prepared an analysis of beef calf prices from 1958 through my projections for year 2009.
I found that during the decades of the 1950s and '60s, it made little difference when producers marketed their cattle; there were no real beef price cycles. Starting in 1970s, however, and every decade since, it's been a different story. Since 1970, beef price cycles have become the norm (see Figure 1).
I found that in the decade of the '70s, the lowest calf prices came in 1974. In the 1980s, the lowest calf prices were in 1986. In the decade of the ‘90s, that year was 1996. I project the low in calf prices for this decade will be 2007.
Thus, the data indicates that the low doesn't necessarily occur in years ending in five. The lowest calf market, though, bottoms out in the mid-part of the decade. The old-timer was on to something.
The Price Spread Story
Figure 2 illustrates the V-shaped price cycle generated in the '90s. The price spreads between feeder calves, feeder cattle and slaughter cattle began the decade wide but narrowed in the mid-'90s. In fact, feeder calf prices/cwt. in 1996 even dipped below the cwt. price for slaughter steers. Since 1996, the price spreads have again been widening.
This V-shaped price pattern is typical during a cattle cycle. These changing price spreads signal that the optimum marketing strategy for beef producers is changing. Remember that no one marketing strategy remains optimal over the total cattle cycle.
Cattle cycles can be divided into three phases — contraction, expansion and turn-around. We've completed the 1996 to 2000 contraction phase. We are in the turn-around phase and about to enter expansion.
The expansion phase will last at least through 2003. It's too early to tell, but it's possible the 2000-2001 droughts may extend expansion into 2004.
Beef production peaked in 2000 and is projected to decrease during 2001-2003. Heifer retention will decrease beef supply even more. That beef supply decrease will be short lived as the calves of these retained heifers move into the feedlot.
Beef production should begin to increase again in 2004 or 2005 and will continue for three to four years. This cycle's beef prices should peak in 2003. Thus, 2004 could see calf prices turn down.
The next major downturn in market prices is projected for 2005-2007. Prices are projected to increase again towards the end of the decade (see Figure 3).
The early expansion phase is characterized first by strong prices driven by a smaller supply of feeder cattle, excess feedlot capacity, excess packer capacity and overall industry consolidation.
The final segment of the expansion phase is characterized by increased beef supply — so much increased beef supply that beef prices turn down and trigger liquidation.
Cattle-Fax reports a 15% increase in feedlot capacity in the last 15 years. Feedlots, trying to utilize excess capacity, will increase their competitive bids for feeder cattle. Price margins for feeder calves will widen, perhaps to the point that feeder calves become over-valued. Feedlots will then turn to imported Mexican feeder cattle and feeding dairy steers to utilize existing feedlot capacity.
Due to higher feeder-calf price margins, some feedlots' strategy will be to feed cattle to minimize feedlot losses rather than to maximize profits. They feel it's a better alternative than closing down the feedlot and letting the feedlot cowboys go. Laid-off help is often tough to get back.
In summary, reduced feeder cattle supplies will change how beef cow producers interact with cattle feeders.
With higher calf prices, fewer producers will retain ownership of calves, which will lead to more cattle being owned by feedlot operators. And, feedlots trying to ensure a feeder cattle supply for their feedlot will strive to develop and expand business relationships directly with beef cow producers.
Commodity beef profits are the highest for ranchers and beef farmers during the expansion phase of the cattle cycle.
Harlan Hughes is a Professor Emeritus of North Dakota State University. Retired last spring, he is currently based in Laramie, WY. He can be reached at 307/742-2364 or at [email protected].