Drought, Economy Have Affected Cattle Cycle
In a News and Views, I wrote about heifer retention strategies for cow-calf producers. As you might remember, I discussed how a cattle cycle can be broken into three phases: expansion, contraction and turn-around. Each phase has unique economic price relationships and profit opportunities, suggesting that an optimum beef cow herd production strategy changes with the changing phases. 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.
As we near the end of 2002, the projected cattle inventory at Jan. 1, 2003, is expected to be 96.5 million head. This makes the sixth year in a row for cattle numbers to decline. Why? Typically, 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.
What has caused this cycle to be extended?
Drought: Over the past three to four years, different parts of the country have seen dry conditions during the growing season. So, instead of expansion of cow herds, we have seen continued reduction of cattle numbers due to the lack of grass.
Economy: Since 9/11/01, we have had severe problems with the overall economy. We have seen corresponding declines in demand for beef, causing significant losses in several sectors of the cattle market.
What do we do now? With fed cattle prices expected to average $70 to $72, feeder cattle $80 to $82, and calf prices $90 to $93 over
the next two years, overall price stability should return to the cattle market. When the beef industry has strong calf prices, you continue to sell calves (not retain them for heifers). You will probably need to cull some cows, but reduce culling to an absolute minimum and sell as many calves as possible during this time of high prices.
So what will the typical beef cow producer do? When the typical producer gets the price signal to expand, he will begin holding back additional heifers for his herd. The typical beef cow producer will wait to confirm the price signal with his calves, will hold back heifers, breed them in year one and calve them in year two. He will continue to retain heifers each year, right down the price-decreasing phase of the beef price cycle. Heifer retention will then drive beef production up, and beef production will increase until a strong liquidation signal is received. This is one of the important signals during the cattle cycle.
Due to the typical nature of the 10-year beef price cycle, heifers born during the low-price period of the cycle produce calves during the next high-price period. Heifers born during the high-price period produce calves during the next low-price period. Do you remember 1996, when nobody wanted your calves? Steer calves sold in the low $60s and heifers were discounted $10 to $12 from steers. Those heifers were born in 1996, bred in 1997 and calved in 1998, 1999, 2001, 2002, 2003, etc. Again, right over the top of the calf price cycle. Data suggests that 1997-born heifer calves were the second-most profitable replacement heifers held back.
So the drought has delayed the cattle cycle (see figure).
Cow-calf producers should have at least another two or three years of good calf prices, provided corn price doesn't become an issue. If you need replacements for your cow herd consider bred cows, bred heifers or pairs, because heifers kept during this period should still be producing calves at the low point of the cattle cycle.