For many years, cattle producers experienced a somewhat predictable cattle cycle approximately 10 years in length. However, during the last 15 years, an abnormal number of outside events have caused the cycle to be less predictable and left producers wondering if the cattle cycle is relevant for planning purposes. The likely answer to that is yes, with particular emphasis on the next several years.
There are actually three components of the cycle: the cattle inventory cycle, the beef production cycle and the cattle price cycle. Cattle inventory cycles experience periods of increasing numbers called accumulation phases and periods of decreasing numbers called liquidation phases. Beef production cycles lag inventory cycles by about one year because to liquidate numbers, more cattle must be harvested. To accumulate numbers, fewer cattle are harvested.
Price cycles are typified by periods of increasing prices called increasing phases and decreasing prices called decreasing phases. Cattle price cycles tend to be the opposite of beef production cycles. The two factors that most affect the length of cattle cycles are the reproductive biology of cattle and weather.
Cattle inventory cycles typically experience six-to eight year accumulation phases and three-to four-year liquidation phases. A typical cycle would be about 10 years in length. The accumulation phase for beef cattle is longer because of the relative length of time, compared with other livestock species, that it takes to rebuild herds.
A heifer calf retained in the fall for breeding purposes will be bred the following summer and have a calf the next spring. Her calf will not reach market weight and be reflected as beef production until the following year. Because reproductive biology will not change given current technology, cattle cycles likely will continue to occur, but they will be impacted more by worldwide economic and political conditions, and meat trade issues than in the past.
What happened to the cycle the last 15 years? A whole host of unexpected and unpredictable events plagued the beef industry and caused cattle producers to manage from one event to the next.
From 2000 to 2008, severe drought occurred in major cattle-producing areas of the U.S., including North Dakota. Drought surfaced again in 2010 in the southern Plains and continued to intensify and spread. By 2012, much of the U.S. was experiencing drought conditions. That led to record high corn prices, very poor pasture and range conditions, and continued beef herd liquidation in spite of record high prices for cattle.
Add to that many unforeseen beef demand shocks beginning with the terrorist attacks on Sept. 11, 2001, then the late December 2003 bovine spongiform encephalopathy (BSE) case and subsequent BSE cases, and the 2008-09 financial crisis causing the worst recession since the 1930s. Competing livestock disease issues such as the unfortunate misnaming of the H1N1 virus as the swine flu in 2009, the hog porcine epidemic diarrhea virus (PEDv) in 2014 and avian influenza outbreaks disrupted production patterns and world trade.
Federal government policies, including the Energy Policy Act of 2005, also affected the cattle industry. The act mandated a renewable fuel standard, and caused a rapid increase in the use of corn for producing ethanol with increasing and volatile corn prices.
The global market and issues related to U.S. beef and by product exports also are adding to cattle price volatility. International trade policies, weather and catastrophic events around the world quickly reverberate to prices paid for calves at auction markets throughout the U.S.
Back to the original comment concerning the relevance of the cycle for planning purposes: After eight straight years of declining U.S. beef cow numbers, an increase finally occurred in 2014. The number of beef cows on Jan. 1, 2015, at 29.7 million head, was up 2.1 percent from 29.1 million head in 2014. The number of beef replacement heifers, at 5.8 million, increased more than 4 percent from 2014. Furthermore, the number of heifers expected to calve in 2015, at 3.5 million head, was up more than 7 percent from 3.3 million in 2014.
Prices for all market classes of cattle were record high in 2014 and likely reached the cyclical high for this cattle cycle. Prices were bolstered by the historical short cattle and beef supply coupled with beef herd building that caused more heifers to be kept for breeding purposes, and the low beef cow harvest. Furthermore, lower than expected pork and chicken production and strong export demand for beef and by products aided the record high cyclical peak in prices.
A number of headwinds have developed in 2015 that could cause cattle prices to decline cyclically for the next several years. The United State Department of Agriculture (USDA) is predicting beef production to increase in 2016 and subsequent years. Furthermore, record pork, chicken and total meat production is occurring in 2015 and is predicted again in 2016.
Another key driver behind calf and yearling prices in recent years has been declining feed costs, a trend that largely has run its course. U.S. pasture and range conditions in 2015 are the best they have been in 20 years, with the exception being states west of the Continental Divide. Generally good moisture conditions should cause continued herd rebuilding but also will be the wild card for how much and where the herd will increase.
During the increasing phase of the cattle price cycle, pre-pricing tools in risk management strategies for cattle to be sold in the future may be less effective. That has been the case the last several years, especially for producers selling calves and yearlings. But during the decreasing phase of the price cycle, those strategies tend to work better. Of course, seasonal price patterns are very important in developing marketing plans. And the worldwide market environment that the entire livestock industry now operates in likely will continue to cause more price volatility than in past cycles.
Source: Tim Petry, North Dakota State University