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The Message Behind the Jan. 1, 2008 Cattle Inventory

Posted Mar. 1, 2008

The highly anticipated cattle inventory report has been released for 2008. The numbers reflect decisions made by individual ranchers throughout 2007 and the previous couple of years.

In 2004 and 2005, early in the current cattle cycle, the markets projected an upswing in the cattle inventory for 2007 and the next several years. However, unanticipated challenges prevented beef ranchers from expanding. In the past, the average cattle cycle expanded for approximately six years before declining. This compares to only two years of expansion in the current cycle. Figure 1 shows the Jan. 1 total cattle inventory for the United States over the last 50 years.

One challenge was drought that prevented expansion of beef cattle herds in the Midwest in 2006 and in the southeast in 2007. On the other hand, high milk prices have encouraged dairy producers to expand their herds. When the dairy herd and beef herd numbers are combined, there was a net change in the total cattle inventory over the last year of -334,000 head or -0.3 percent. On a local level, Texas and Oklahoma, the largest and third largest cow herds, respectively, experienced a change in total cattle inventory of -200,000 (-1.4 percent) and 150,000 (2.8 percent), respectively.

Table 1 shows industry analysts' predictions from the week prior to the released report in columns one and two compared to the official cattle inventory reported results in column three. Look at the number of beef cows/heifers that have calved. While the reported number, 99.09 percent, is less than the previous year's figure (less than 100 percent), more importantly it is less than the average pre-report prediction of 99.4 percent. Since market prices reflect analysts' predictions prior to the release of the cattle inventory report, the markets adjust their prices according to the discrepancy of the cattle inventory report and the analysts' predictions. That is, market prices do not respond directly to the report and the statistics of the previous year. Any market price adjustment due to the number of beef cows/heifers that have calved in 2008 caused feeder and fed prices to increase for distant contract months.

To determine if beef producers want to expand their herds, it is good to look at the number of beef replacement heifers from the report. Looking again at Table 1, the percentage of beef replacement heifers compared to 2007 for expansion of the herd is 96.3 percent. That means that producers across the United States did not hold as many replacement heifers back in 2007 as in 2006. Looking into the future, beef producers are still not ready to expand in 2008.

Looking at calves under 500 pounds, the report showed that there were 38,750 fewer than predicted by industry analysts. Therefore, any market price adjustment due to the number of calves under 500 pounds caused feeder and fed prices to increase after the release of the report.

The underlying message is that cattle producers respond to market information and conditions, some more instantaneously than others. The decrease in the total cattle inventory on Jan. 1, 2008, is a sign that weather does play a vital role in agricultural production decisions. The reduction in the herd size will perhaps support calf prices at a higher level in 2008 than if the herd had expanded in 2007.