Economics: March 2000

Landowners commonly use cattle to merchandise the forage or grass they grow. Once they decide to sell the grass that way, they must also decide what class of cattle to use and what time of year sales will bring the most profit. A few of the cattle-class choices include (1) a mature cow herd, (2) stocker cows, (3) winter stockers, either steers or heifers, (4) summer stockers, either steers or heifers, and (5) thin breeding bulls. Add weight options to the stocker cattle categories and the list becomes even longer. All these classes may not be available to every landowner because of management expertise or location. We are not going to analyze the profitability of each enterprise. However, if you have questions concerning the potential profitability of a particular cattle enterprise, any of the economists at the Noble Foundation can help you.

This article discusses a little about the history of the beef industry and a little about the cattle best suited as a vehicle for grass sales. For the last 130 years, cattle production cycles have been predictable. A production cycle usually lasts from nine to eleven years. In the first half of the cycle, the liquidation phase, numbers decline. Producers sell cattle because of general unprofitability at the cow-calf level. Once enough cows-and I cannot say what number is enough-have been sold for slaughter, calf prices rebound, profitability returns to the cow-calf sector, and cow numbers start increasing because cow-calf producers start holding heifers for breeding rather than selling them. This phenomenon is referred to as the building phase of the cycle. During this time, cow-calf producers profit most because calf prices are higher. They sell fewer calves and keep more heifer calves for cow stock. If the producer raises too many calves for cows, the calf supply increases in the long run, calf prices drop, and the cattle cycle continues to be alive and well.

Where are we in the current cattle cycle? On January 28, 2000, the United States Department of Agriculture (USDA) published their estimate of the U.S. cattle population as of January 1. Beef cows numbered 33,546 million head, a 1 percent drop from the year before, and the fourth consecutive decline. Popular opinion by outlook economists indicates this will be the last year for declining numbers. If so, the liquidation phase of the cattle cycle has ended, triggering the building phase. Remember, the building phase is usually the most profitable for cow-calf producers. The profitability, however, depends somewhat on when the cow-calf producer chooses to purchase cows. If higher calf prices or their anticipation causes landowners to pay so much for replacement cows that some profit cannot be generated before the next downturn in calf prices, then the window of opportunity for this cycle may have closed. However, replacement cows are still available at reasonable prices.

There are two major components to price discovery-supply and demand. The USDA estimate of current cattle population indicates the supply has been reduced, which increases prices. The other component, demand, is an estimate of how much beef will be eaten at various price levels. For approximately twenty years, beef demand has been declining. In 1999, beef demand increased, and consumers bought more beef at higher prices. Therefore, both components of price support higher cattle prices for the next two to four years. Costs still matter, but better cattle prices are expected.

Higher prices for calves are not necessarily perceived as a blessing if you plan to sell your grass through yearlings. However, a closer look indicates that the profit potential for yearlings when prices are higher can also be better. Table 1 depicts two situations, one with low cattle prices and one with high. If you follow the numbers across, you will notice the expected margin is greater for yearlings when prices are higher if buy-sell margins and the cost of gain stay the same. The two examples assume the 300 pounds of gain cost a producer $80 whether cattle prices are high or low. The buy-sell margin is also held constant at $20 per hundredweight (cwt). When cattle prices are high, a producer might expect $60 more per head. Please keep in mind, however, that the margin between calves and feeders does not always stay constant as depicted in the graph at right.

Landowners and grass growers have several good animal-class options. Not often do we have these opportunities.