NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665
March 16, 2000
Harlan Hughes, Extension Livestock Economist
NDSU Extension Service
Given the U-shaped beef price cycle we are experiencing in the cattle industry, should a producer cull his beef cows the same way up the beef price cycle as he did on the way down?
North Dakota's Cow Herd Analysis and Performance System (CHAPS) data suggest that ranchers cull 14 to 15 percent of their cows, on the average, on both sides of the price cycle. I suggest that changing a beef herd's culling rate as the herd progresses through a 10-year cattle cycle can result in an overall higher average net income for the complete cycle.
A cattle cycle can be broken into three phases: expansion, contraction and turn-around. Each phase has unique economic price relationships and unique profit opportunities, suggesting that the optimum beef cow herd production strategy changes with the changing phases. Clearly, using a single herd production strategy for the complete cattle cycle can cost a beef cow manager substantially in lost profits.
The key to developing profitable heifer retention strategies lies in the U-shaped price cycle. The 10-year cattle cycle causes 10-year beef price cycles. As cattle numbers go down, beef prices go up. Then, as cattle numbers go up, beef prices go down. We typically spend approximately five years building beef cow numbers -- for example, 1990 through 1995. We also spend approximately five years reducing cattle numbers -- for example,1996 through 2000.
Cattle cycles are caused by the biology of the beef cow. Once a producer gets the price signal to expand, it takes three years from the time he holds back additional heifers to produce more calves until those calves are finally slaughtered as added beef. By that time the price signal is to contract. I jokingly say, but it is absolutely true, that I do not hear anyone talking about changing the biology of the cow. Therefore, I argue that the cattle cycle is alive and well.
Now back to my original question. Should you cull cows the same on the upward side of that U-shaped price cycle as on the downward side? I suggest that on the downward side of the beef price cycle, when beef cows are netting very little profit or are even losing money (as in 1994 through 1996), you cull and cull deep. I suggest you remove the cows that are losing money and replace them with low-priced replacement heifers. Perhaps you've been thinking about changing the genetics of your herd. This low-price phase might be just the time to do so. Even the new genetics will be reasonably priced during the low-price phase of the beef price cycle. This is the time to get your cow herd up to maximum production potential -- however you define that for your herd. On the upward part of the beef price cycle (1999 through 2002), do not hold back any heifers for replacement and sell every calf born.
Since 1990, I have spent my spring months going from kitchen table to kitchen table analyzing the cost and returns from Integrated Resource Management (IRM) cooperators' beef cow herds. In 1990 through 1993, every cow I analyzed that had a calf, regardless of when the calf was born, made a profit. My economic analyses did not validate the standard recommendation to cull all cows with late-born calves. My economic analyses suggested that there is a time in a cattle cycle to cull and there is a time not to cull. I concluded that the high-price time of the beef price cycle is not the time to cull cows with late-born calves.
A better time to cull cows with late-born calves is during the decreasing portion of the beef price cycle. For example, from 1994 to 1996 calf prices went down dramatically. My kitchen table analyses suggested that while some high-producing cows generated a profit from 1994 through 1996, many of the low- and middle-producing cows did not.
I used to ask producers: "Why do you run cows that lose money? Is it that you don't know which cows are losing money, or is it that you don't care? Why do you do that? Why not cull the cows that lose money and replace them with younger, better heifers? Then, when the beef industry returns to strong cattle prices (now through 2003), you can sell all calves born. Yes, I understand that you will probably need to cull some cows from 1999 through 2003. So, reduce culling to an absolute minimum and just sell as many calves as possible during the high prices. Use the high-price time to build up a cash reserve preparing for the tough times that are projected to return again from 2005 to 2007."
Let me suggest what the typical beef cow producer will do. When the producer gets the price signal to expand, and I do not know if he got that signal with 1999 calves or not, he will begin holding back additional heifers for his herd. The typical beef cow producer will wait to confirm the price signal with his 2000 calves, will hold back 2000 heifers, breed them in 2001, and calve them in 2002, 2003, 2004, 2005, 2006 etc. He may even hold back some 2001 heifers, breed them in 2002, and calve them in 2003, 2004, 2005, 2006, 2007 etc. right down the price-decreasing phase of the beef price cycle. Heifer retention in 2000 and 2001 will drive beef production down in 2000 and 2001, and beef production will finally start increasing in 2002 and 2003 and will continue increasing through 2006 or until a strong liquidation signal is received. This is what causes the cattle cycle.
Due to the nature of the 10-year beef price cycle, heifers born during the low-price period produce calves during the next high-price period. Heifers born during the high-price period produce calves during the next low-price period. For example, do any of you have your 1997 heifer calves? Let's see .... born in 1997, bred in 1998, and calve in 1999, 2000, 2001, 2002, 2003 etc. right over the top of the calf price cycle.
My data analysis suggests that 1997 born heifer calves were the second-most profitable replacement heifers held back. My data further suggest that the most profitable bred heifer started producing calves in 1987. If you did not hold back any 1997 heifer calves, no problem. You can hold back heifers again in year 2007. That is how the 10-year cattle cycle works.
Let's look at 1996 heifer calves. Remember how you had to give them away because nobody wanted 1996 heifer calves? Steer calves sold in the low $60s and heifers were discounted $10 to $12 from steers. Let's see ... born in 1996, bred in 1997 and calve in 1998, 1999, 2001, 2002, 2003 etc. Again, right over the top of the calf price cycle.
My recommendation is to develop a counter-cyclical culling strategy to enhance net income over the total cattle cycle. Cull deep when calf prices are low, generate cash flow from cull sales, and hold back low-priced heifer calves. Then, reduce culling when cattle prices are high, and sell all calves born. Use the high-price times to build a financial reserve for the next price low in the beef cow business.
Source: Harlan Hughes (701) 231-7380
Editor: Tom Jirik (701) 231-9629
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