The key to surviving the price roller coaster of the cattle cycle is to increase economic efficiency and build a financial reserve in the good years to carry you through the bad years. Given where beef prices are today, the time to build that financial reserve is now.
The typical cattle cycle is 9-11 years. It's what causes the beef price cycle, and we can count on these two cycles repeating about every 10 years. For example, the beef price cycles of the 1980s and 1990s were very similar, and the beef price cycle for the decade of 2000 will be much the same.
Fig. 1 depicts the impact that the 1990s cattle cycle, and its resulting beef price cycle, had on profits in North Dakota beef cowherds. Beef cow operators started out the 1990s with high profits/cow as the 1990-1993 period completed a seven-year period (1987-1993) of favorable beef prices and a record seven-year period of high beef cow profits.
Profits then went down for three years, beginning with a dramatic 74% drop in profit in 1994. In 1995, profits dropped to -$29/cow, then dropped to -$51/cow in 1996.
Fig. 2 depicts profitability in the last downturn. In 1993, 72% of herds were profitable. Profits fell in 1994-1995 to where only 21% were profitable in 1995. The price bottom year was 1996 (not shown in Fig. 2) when less than 15% of all beef cowherds were profitable.
Profit is “earned returns to unpaid family and operator labor, management and equity capital.” Average profits turned up dramatically in 1997, averaging +$30/cow. This rapid upturn in calf prices didn't last, and profits fell slightly in 1998 (+$14/cow.)
North Dakota's beef cow producers earned a $97 average return/beef cow in 1999. Year 2000 profits/cow are not yet available but are projected in the +$140 to +$165 area.
Expect profits to trend up through 2003, providing six of seven years of upward trending beef prices during the 1997-2003 period. Current projections are for three years of down prices in 2004-2007, with the decade low expected in 2007.
In the last cattle cycle, calf prices were strong for seven years (1987-1993) before turning down three years. The downturn was delayed by the 1988-1989 droughts in cow country, a severe 1992 snowstorm in Central Plains feeding country and frosted food grains in the Northern U.S. and Canada in 1993.
My Northern Plains Integrated Resource Management (IRM) cooperator database indicates profits in the last decade dropped the fastest in high-cost herds. Herds that survived the last downturn the best were those with high economic efficiency and a financial reserve. Current projections suggest a similar economic performance for both these groups in the 2004-2007 time period.
The current beef price cycle high is projected to last into 2003 — suggesting three more favorable calf crops. The projected price peak (2003) is again seven years after the last low (1996). It now appears the 2000 Western drought delayed this decade's downturn from 2003 to 2004.
As the current beef price cycle continues its projected seven-year high, beef cow operators should have several years of high profits. This should be enough time to increase economic efficiency and build a substantial financial reserve.
Make The Move Now
Now's the time to be proactive and implement a management action plan to take advantage of the cattle cycle. This isn't the time to continue things as usual.
When calf prices are high, improvements in economic efficiency can lead to huge increases in profits. The economic rewards from increased economic efficiency is reaped during the good times — much more so than during the tough times.
In good times, many producers drop their guard and economic efficiency slips. When prices again drop, they increase economic efficiency. By that time, however, there typically isn't enough time. Gaining economic efficiency is not a one-year phenomenon.
My final year in North Dakota's IRM Program, I worked only with IRM cooperators with at least one year (and as many as seven years) of work toward improving economic efficiency. This group managed to generate the lowest average annual unit cost of production (UCOP)/cwt. of calf for any year in this Northern Plains IRM cooperator database. Even so, 33% of the herds still had considerable room to improve economic efficiency.
When ranked by the UCOP/cwt. of calf, the low-cost ⅓ of these Northern Plains IRM herds netted $145/cow with their 1999 calves. This is $84 more than the high-cost ⅓ of the herds, which averaged only $61 profit/cow. Economic efficiency makes a difference in the high-priced years — even on intensively managed herds.
The first step in your action plan should be to conduct an IRM standardized performance analysis of your herd. Give me a call.
Harlan Hughes is a Professor Emeritus at North Dakota State University. Retired last spring, he is currently based in Mankato, MN. He can be reached at 701/238-9607 or firstname.lastname@example.org .
Evaluating Market Alternatives For 2000 Calves
These planning price projections (Table 1) are based on both the futures market price and Western North Dakota sale barn prices for the current week. The price projections in Table 1 were used to evaluate five marketing alternatives for year 2000 calves shown in Table 2.
The “buy/sell margin” in Table 2 is the buying price of animals going into a lot subtracted from the selling price of animals coming out of the lot. Since selling price is normally less than purchase price, the buy/sell margin is normally negative. The negative buy/sell margin represents the marketing loss/cwt. on the purchase weight of the animals. The cost of gain (COG) represents the cost of the added weight while in the lot. Profit/head represents the combined marketing losses and profits from gain.
|Lbs.||Fall 00||Wk Feb 28||Mar 01*||Spring 01*||Fall 01*|
|1. Sell at weaning||N/A||$0.70||$148|
|2. Bck high ADG||-$17||$0.49||-$15|
|3. Fin bckg. steer||-$15||$0.46||$47|
|4. Grow and finish||-$9||$0.42||$84|
|5. Steers on grass||-$12||$0.45||-$4|
|6. Fin grass steer||-$9.08||$0.46||$65|
|The five marketing alternatives evaluated here are: 1) selling 565 lb. calves at weaning, 2) backgrounding 565 to 800 lbs. sold after first of the year, 3) finishing backgrounded steers 800 to 1,200 lbs., 4) growing and finishing 565 to 1,175 lbs., 5) steers on grass 625-800 lbs., and 6) finishing grass steers 800-1,250 lbs.|