NEWS for North Dakotans
Agriculture Communication, North Dakota State
University
7 Morrill Hall, Fargo, ND 58105-5665
July 23, 1998
Harlan Hughes, Extension Livestock Economist
NDSU Extension Service
Beef cattle cycles are typically described in terms of price or cattle numbers. The real key to profiting from cattle cycles is to understand 1 the cyclical nature of beef cow profits and 2 that beef cow profits are what trigger the expansion and liquidation phases of cattle cycles. The inability of cow-calf producers to foresee the future with certainty, coupled with a two- to four-year time lag between the price signal to increase production and the actual completed production, causes the cyclical prices and the cyclical profits in cattle cycles.
Most of the year-to-year beef price variation during a cattle cycle is supply driven. As cattle numbers go up, beef prices go down. As cattle numbers go down, beef prices go up. The cattle cycle is the single most important force determining the supply of beef. If we can predict cattle cycles, we can predict beef supply. If we can predict beef supply, we should be able to develop management strategies that profit from the resulting beef price cycles.
The USDA all-cattle inventory as of Jan. 1, 1998, confirmed that the current cattle cycle is firmly into its liquidation phase. It set the all-cattle number at 99.5 million head—down 2 percent from a year earlier and down for the second year in a row. The 1998 beef cow inventory was set at 33.7 million head, also down 2 percent from a year earlier. The 1997 calf crop was down 3 percent, suggesting that there could be fewer cattle on feed in the last half of 1998 unless we continue to feed a large percentage of heifers. As cattle numbers continue to decrease over the next two to three years, some feedlots are simply not going to have cattle to feed. This also happened during the last cattle cycle of the 1980s.
The most striking number in the Jan. 1 inventory was the 5 percent fewer beef heifers held for replacements. Instead of breeding 1996 heifers, we fed them. The diversion of 1997 heifer calves to feedlots confirms that the current liquidation will continue into year 2000. The current drought in the Southern Plains and also in western Canadian provinces may well accelerate the current liquidation phase. When these drought-stricken areas repopulate after the rains return, we will see heifers diverted from feedlots to breeding which, in turn, will further amplify the shortage of feeder cattle. The primary implication of all of this is that cow-calf producers are now in the driver's seat with respect to feeder calf prices. Barring no below-average corn crops in the U.S. Corn Belt, good times are returning for beef cow producers.
Projections of the Food & Agricultural Policy Research Institute at Iowa State University and University Of Missouri—projections before the drought in the Southern Plains—were that the U.S. all-cattle inventory will bottom out in year 2000 and peak again in year 2004, only to again trend downward toward the end of that decade. Beef cows, on the other hand, were projected to bottom out in 1999 at 33.3 million cows and to peak again in year 2004 at 35.9 million cows. At this point, I project that the drought in the Southern Plains will amplify the current cow slaughter, resulting in a lower number of cows at the end of this decade and a higher number of cows at the peak in the next decade.
Why do I predict a low cattle number by the end of this decade, and a new peak by the middle of the next decade? Let's take a more in-depth look at cattle cycles. Historically, there has been a cattle cycle during each decade. Cattle numbers are recorded back to the mid-1800s, but for this discussion we will only look back to the decade of the 1940s.
We had a cattle cycle in the 1940s, another in the 1950s, one in the 1960s, and another in the 1970s. Producers need to note three things about these four cattle cycles. First, each cattle cycle peaked at a higher number than the previous one. Second, each peaked in the middle of the decade, only to drop again by the end of that same decade. Third, in 1975 the U.S. cattle numbers peaked at an all-time high of 132 million head. Something changed and we probably will never see that number again.
We had another cycle in the 1980s. This cycle had the shortest expansion phase on record. (We break cattle cycles into expansion, contraction, and turnaround phases.) After the short expansion phase in the early 1980s, cattle numbers again trended downward through 1989. From 1990 through 1996, the all-cattle number increased. Since the 1996 peak, cattle numbers have turned downward. The cattle cycle of the 1990s is again coming to its true projected form: numbers low at the beginning of the decade, peaking in the middle of the decade, again going lower at the end of the decade. Projections are that the all-cattle numbers for year 2000 will be approximately 35 million less than the 1975 peak of 132 million head. We simply do not need as many beef cows today as we needed in the 1970s.
The key point here is that cattle producers need to understand how we have increased the productivity of the beef cow since 1975. Many beef cow producers have increased their beef cow weights by 200 to 400 pounds per cow. A few have increased their beef cow weights substantially more. I have some Integrated Resource Management cooperators with 1,700- to 1,800-pound beef cows. Big cows produce big calves, and big calves produce big carcasses. Carcass weights have steadily increased since the 1970s and the modern beef cow produces considerably more beef. Unless we increase the demand for beef, we simply do not need as many beef cows now, and we are going to need even fewer in the future.
In all of the beef discussions that I have sat through, I never heard one discussion on how improved genetics is decreasing the number of beef cows needed. Somehow, the beef industry elects to ignore the primary economic impact of output-increasing technologies. Yes, we will consume all the increased production from these technologies, but (and this is the significant economic issue) at what price? Current projections are that the all-cattle number (not just beef cows) will peak at 3 million less in the next cattle cycle than in the last. For this there is an economic price to be paid. Who is not going to have cattle this next decade?
Cattle cycles cause beef price cycles. Nominal beef prices start out the decade at a relatively high level, decrease to a low by the middle of the decade, then return to a relatively high level at the end of the decade. Price changes during a beef price cycle are greatest for feeder calves and least for slaughter cattle.
The next beef price cycle is in the making. Some analysts are attributing the 1997 summer run-up in calf prices to the publicity given to the 1996/97 snowstorm losses in the Northern Plains. The Jan. 1, 1998, feeder cattle supply outside of feedlots was down 1.239 million head (-3.8 percent) compared to Jan. 1, 1997. This confirmed the perception that feeder supply was indeed lower. The drop in numbers, however, was caused by the cattle cycle, not by the Northern Plains snowstorms.
Over the next few years the cattle cycle will result in a big cost to feedlots in unused feedlot capacity. Feedlots will first move to more ownership of light-weight calves outside of feedlots to ensure a supply of replacement feeders. It is my understanding that this is already being done this summer. Feedlots will even move to more calf feeding in an attempt to keep feedlot utilization rates as high as possible. I suggest that this will happen with 1998 calves. Strong feeder cattle prices will cause beef cow producers to divert 1998 and 1999 heifers from feeding to breeding. When this happens, we will see an even smaller feeder calf supply, resulting in ever more aggressive feeder calf bidding. The net result of all of this will be some feedlots will shut down in 1999 and year 2000 and others will run substantially under capacity. At this time, feeder calf prices are projected to peak around year 2001.
###
Source: Harlan Hughes (701) 231-7380 hhughes@ndsuext.nodak.edu
Editor: Barry Brissman (701) 231-7866
Click here for a pdf version of this graphic.
Click here for a pdf version of this graphic.