Submitted by: agcomm,  Thu May 15 09:25:26 1997


THE MARKET ADVISOR: 
Maybe Just Accept That Cattle Cycles Exist And Get On With It
 Harlan Hughes, Extension Livestock Marketing Economist
 North Dakota State University
 
Graphic accompanies this story in hard copy and
on the World Wide Web.
 
     Two economic forces are strongly impacting your beef cow
herd's profits. The first is your unit cost of producing a
hundredweight of calf and the second is the beef price cycle.
Let's take a brief look at these two economic factors and see
if I can convince you of their economic importance to your
beef cow herd's profits.
 
     Producers seem to thrive on ratios and do I have a good
ratio for you. It called unit cost of production. The unit
cost of production ratio is your total production cost per cow
divided by your total pounds of calf produced per cow. It's
all...in this ratio. 
 
     Unit cost of production for North Dakota's IRM
Cooperators has averaged from $66 to $76 per hundredweight of
calf produced over the last three years. The variation in
individual producers' unit costs of production is extremely
wide, ranging from the high $40s to well over $100 per
hundredweight of calf produced. That's a 250 percent
variation.
 
     I wonder where the beef industry would be today if every
beef cow producer knew the answer to two cost of production
questions. First, what does it cost you to produce a
hundredweight of calf? Second, are you a low-cost or high-cost
producer? I contend that beef cow industry profits would be
considerably higher, even in today's tough times, if all beef
cow producers knew the answers to those two questions.
 
     Most IRM initiates don't have any idea as to their unit
costs of production; but that changes as we analyze their beef
cow herds. One young IRM Cooperator summarized it best when he
said, "Harlan, after a couple of years with you on IRM, you
have me thinking about the cost impact of everything I do!" I
just said, "Thank you! You just made my day!" I truly believe
that the name of the game in today's tough times is "knowing
your unit cost of producing a hundredweight of calf."
 
     Now for the beef price cycle. It behooves each and every
beef cow producer to be cognizant of the impact that cattle
cycles, and the resulting beef price cycles, have on their
beef cow herd's profitability. If you look at the net returns
from beef cows in the decade of the '90s, you gain
considerable appreciation of how the beef price cycle of the
'90s has impacted commercial beef cow operators.
 
     "Net returns" is defined as the earned returns to the
three resources that ranch and farm families contribute to
their beef cow businesses--their unpaid family and operator
labor, their management, and their equity capital. These North
Dakota earned returns should be indicative of the earned
returns in the whole U.S. beef cow industry.
 
     Average net returns for North Dakota ranchers and beef
farmers went from a high of $192 per cow in 1990 to a low of a
minus $51 per cow in 1996. The primary cause of this dramatic
change was the "cattle cycle" of the '90s and its resulting
"beef price cycle."
 
     History traces beef cattle cycles back to the mid-1880s.
The typical cattle cycle goes for nine to 11 years and can be
broken into three stages--the deceleration stage where beef
cow numbers decrease, the turnaround stage that we are now in,
and the acceleration stage where beef cow numbers increase. A
complete 10-year cattle cycle goes from the low cattle numbers
at the beginning of a decade to high cattle numbers in the
middle of the decade and back to the low cattle numbers at the
end of the decade--it is typically "n" shaped. The peak in
cattle numbers tends to be around the midpoint of each decade
(1996 in the current cycle). Projections are that U.S. all-cattle 
numbers will now decrease through year 2000.
 
     Cattle numbers cause beef price cycles. As cattle numbers
increase, leading to more beef supply, cattle prices go down.
As cattle numbers decrease, leading to less beef supply,
cattle prices go up. Beef price cycles, and the resulting
changing beef supply, are the single most dominant factors
determining beef cow profits. As a result, beef cow production
practices and production recommendations typically need to
change with the stage of the beef cattle cycle.
 
     The Food And Agricultural Research Institute (FAPRI), at
Iowa State University and University of Missouri, provides
annual long-run projections for the beef cattle industry. Its
latest set of projections presents this decade's U.S. January
1 all-cattle inventory for 1991 through 1996 with projections
for 1997 through year 2006. The U.S. all-cattle number is
projected to go from the 104 million cattle in 1996 to a low
of 97 million cattle by the end of the current decade. All-cattle 
numbers are projected to increase to 101 million in the
middle of the next decade. 
 
     Two points need to be made about the projected current
cattle cycle. First, there will be an n-shaped U.S. all-cattle
inventory numbers over the next eight to 10 years. Second,
beef numbers in the next decade are projected to peak at 101
million head--3 million head less than the 104-million-head
peak in 1996. This is three times the number of beef cows
currently in North Dakota. If this projected 
3-million-head-decrease in peak cattle numbers comes true, 
one has to wonder, who is "not" going to be running cows 
in 2005? Economic theory suggests that it will be the 
high-cost producers and high-cost region or regions that will 
reduce cattle numbers. As the national IRM database develops, 
it will provide some clues as to where the high-cost and 
low-cost regions are.
 
     The relatively new IRM-Standardized Performance Analysis
guidelines suggest how beef cow producers can integrate
production measures into a financial and economic costs-and-return 
analysis for the total beef cow herd. Given where we are in the 
current beef price cycle, I encourage each and every beef cow 
producer to seriously consider using his state's IRM educational 
program to enhance beef cow profitability. It was designed around 
these IRM-SPA guidelines. 
 
     In summary, every rancher and beef farmer should keep
unit costs of production and the beef price cycle always in
mind. They determine your beef cow profits.
 
NDSU Agriculture Communication
Barry Brissman
Departmental Editor
(701) 231-7866
Hughes: (701) 231-7380