NEWS for North Dakotans
Agriculture Communication, North Dakota
State University
7 Morrill Hall, Fargo, ND 58105-5665
June 11, 1998
Harlan Hughes, Extension Livestock Economist
NDSU Extension Service
Most of the year-to-year variations in beef prices are supply driven. As beef supply goes up, beef prices go down. As beef supply goes down, beef prices go up. It is almost that simple.
The cattle cycle is the single-most important force determining beef supply. Many beef cow producers are driven out of business during a cattle cycle's years of high supply and low prices, only to find a return to low supply and high prices in subsequent years. This Market Advisor will focus on the supply implications of cattle cycles.
If we can predict cattle cycles, we should be able to predict beef supply. If we can predict beef supply, we should be able to develop financial management strategies that can profit from cattle cycles and the resulting beef price cycles. But first, we have to understand cattle cycles.
A cow-calf producer at a recent workshop said that he became interested in the financial management of his beef cow herd during boom years and not during the bust years. He encouraged the other participating producers to also become interested in the financial aspects of their beef cow businesses during the next boom years.
Since I am predicting some boom years just ahead, this producer's comments stimulated me to publish this market advisor now. Maybe—just maybe—I can convince more beef cow operators to focus on the financial aspects of their beef cow businesses during the next few years of favorable calf prices.
My intensive work with individual beef cow producers during the last several years convinced me that fewer and fewer beef cow operators can successfully produce their way through today's cattle cycles. The long-run decrease in overall cattle prices tells me that surviving under today's ever-decreasing long-term beef cow profit margins necessitates more and more attention to financial management.
Similar to its effect or supply, the cattle cycle is the single most important force affecting beef cow operators' financial performance. The beef cow sector's alternative financial booms and busts are primarily associated with the cattle cycle and its resulting beef price cycle. Always, the question arises as to why the beef industry can not attain a sustainable animal growth number that would prevent the market-price gyrations associated with the beef cow's cyclical financial performance.
Cattle cycles, and the resulting beef price cycles, tend to last about 9 to 11 years. As one cattleman said, "You talk about 10-year cattle cycles and beef price cycles but our memories only go back seven years." The repetitiveness of the cattle cycles and associated beef price cycles is not well understood by cattlemen.
Why the cattle cycle has traditionally corresponded to a decade is not at all clear but it has. Cattle numbers typically start out the decade at a low level, increase to a peak in the middle of the decade and then decrease back to a low at the end of the decade. Nominal beef prices, on the other hand, start out the decade at a relatively high level, decrease to a low by the middle of that decade and then return to a cycle high at the end of the decade. Price changes during a beef price cycle are greatest for feeder calves and least dramatic for slaughter cattle.
The underlying force behind cattle cycles is the biological lag between the time that cattlemen get the price signal to expand beef production and the time that they actually do expand beef production—by which time prices have turned downward, giving a new price signal to reduce beef cattle numbers. The biological lag to price signals tends to run two to three years behind the price signals. This biological lag between the price signal to expand and the actual beef expansion is what causes cattle cycles. Since we can not change the biology of the beef cow, I believe that we will continue to have cattle cycles.
The effect of this decade's cattle cycle on North Dakota's beef cow profits is best illustrated by North Dakota's Farm Business Management Record Summaries. We began this decade with relatively high average net returns from beef cows, running in the $150 to $190 per cow range. North Dakota's 72-percent drop in average net returns per cow in 1994—down to a plus $49 per cow—certainly got the attention of the state's beef cow producers.
Average net returns deteriorated even more in 1995 to a minus $29 per cow and then dropped to a minus $51 per cow in 1996. The three low-profit years—1994, 1995, and 1996—were right in the middle of the decade. The turnaround year was 1997, with a positive $30 per cow average net returns. Current projections are that average net returns per beef cow will go up again in 1998, 1999 and year 2000.
The Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University and the University Of Missouri annually publishes a set of 10-year price projections for Oklahoma 600- to 700-pound feeder steers. FAPRI projects that feeder cattle prices will trend upward through year 2000, turn around in year 2001, and then trend downward into the middle of the next decade. The two driving forces behind these price projections are the cattle cycle and consumer demand for beef. For an expanded set of these price projections, click the "price analysis" button on my Web Page at www.ag.ndsu.nodak.edu/cow. The key point that beef cow producers should particularly note here is that these price projections suggest that the cow-calf sector is now entering the upward portion of a new beef price cycle.
I used these FAPRI projections to build estimates of projections for North Dakota calf prices, and I am projecting that North Dakota's feeder calf prices will trend upward into year 2000. These increased feeder calf prices will be driven primarily by smaller annual feeder calf numbers. If this projection proves true, this upward pressure on feeder calf prices will last approximately four years (1997-2000). By that time, beef cow producers will have again responded biologically by producing considerably more feeder calves.
The early phase of this biological expansion will divert heifers from feeding to breeding. Just as the major diversion of 1996/97 heifers to feeders amplified the problem of low slaughter cattle prices, the switch to breeding additional heifers in 1998 and beyond is projected to amplify the reduced feeder cattle supply over the next couple of years. This, in turn, will drive feeder calf prices up even higher.
This continued feeder-calf expansion will eventually trigger a downturn in feeder calf prices. Feeder calf prices are projected to trend downward from year 2001 through 2005—completing the current beef price cycle in mid-decade—and on schedule. Based on historical trends, beef cattle numbers will turn downward two years after beef prices turn downward.
My recommendation is that beef cow producers should gain a thorough understanding of cattle cycles and then make cattle cycles work for them financially. This bears repeating: don't fight cattle cycles, make cattle cycles work for you.
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Source: Harlan Hughes (701) 231-7380
Editor: Tom Jirik (701) 231-6926
Click here for a pdf version of this graphic.