This article is the last in my series on how to make the cattle cycle work for you. Readers should now understand the 10- to 12-year cattle cycle and its resulting 10- to 12-year-beef-price cycle. Once you accept that the cattle cycle exists, you can turn your management energies toward making it work for you.
Article 2 in this series (December 2005 BEEF) presented a University of Wyoming chart illustrating how cattle numbers, harvest numbers and beef prices interact as the cattle cycle progresses. You learned the cycle's four stages — rebuilding, exhaustion, sell-off and the last stage. We're currently in the rebuilding stage, moving into the exhaustion stage.
You learned that as the U.S. cattle herd liquidates (as in the 1996-2003 period), prices turn up. The 2002 drought extended the liquidation phase 2-3 additional years during this cycle. The rebuilding phase began in 2004 and continues.
There's a three-year biological lag from when ranchers get the price signal to expand to when they actually expand their herds. This lag ensures cattle numbers will continue to build even after prices peak, thus driving the beef price cycle lower. Falling prices finally force ranchers to begin liquidating (projected to occur sometime around the end of this decade).
A key tool for managing through the cattle cycle is an annual set of long-run planning prices for managers to use when making decisions. These planning prices must be reassessed each year.
The Food and Agricultural Policy Research Institute (FAPRI) annually publishes a long-run economic analysis of the total agriculture economy, including the individual sectors. FAPRI's beef-sector analysis serves as the foundation for my long-run planning prices.
Figure 1 presents my latest long-run planning prices for steer calves (500-600 lbs.) in the Northern Plains. The left side of Figure 1 depicts historical information, while the right half is my projected annual fall planning prices for these steer calves.
Figure 1 illustrates the volatile price history of the first half of this price cycle. Calf prices for the last beef price cycle bottomed in 1996, a year of heavy liquidation across the U.S. Calf prices rebounded in 1997, but fell again in 1998.
Prices started back up in 1999 and continued up in 2000. Prices were projected to continue toward the cycle top, but the Sept. 11, 2001, terrorist attacks decimated the high-value beef market as people stopped flying. Then, in 2002, drought in the western U.S. and Canada forced ranchers to cull heavily, driving calf prices down even more.
In 2003, 2004 and 2005, calf prices hit record highs, sending ranchers the price signal to expand. The proof is in the price of bred heifers in 2005 and early 2006.
The continued expansion will pressure calf prices in 2006 and beyond. Still, the $115 projected fall 2006 calf price is the fourth highest ever.
Calf prices are projected to trend down into the end of this decade or slightly thereafter. Still, 2003-08 calf prices are projected to be above $100/cwt.
Figure 2 (page 16) presents my updated long-run annual planning prices (annual average prices) for feeder steers (700-800 lbs.).
The feeder-steer price pattern over the complete beef-price cycle is similar to the price-cycle pattern for calves. The first half also has been quite volatile due to shocks outside the beef industry.
Feeder-cattle prices peaked in 2005; they're projected to be the second highest in 2006. The continuing diversion of heifers to breeding means fewer feeder cattle, which adds to feeder cattle's current price strength. As the added heifer calves begin producing calves, feeder-cattle prices will continue down. Prices are projected to continue responding to the increased feeder numbers for the rest of the current decade.
Figure 3 (page 16) presents my long-run planning prices for slaughter cattle — Nebraska direct market price. This is the annual price series driving U.S. feeder cattle and calf prices. Again, a similar price cycle is presented. The left-hand side is history; the right-hand side is my price projections.
Figure 3 suggests slaughter-cattle prices peaked in 2005. Slaughter-cattle prices are projected to average above $80/cwt. from 2003 to 2007. Again, as cattle numbers increase toward decade's end, slaughter-cattle prices are projected to trend down.
Figure 4 contains all three sets of planning prices — the top line is steer-calf prices, the middle line is for feeder steers, and the bottom line is slaughter-steer prices. Each set of prices tends to follow the same general cyclical pattern, with calf prices making the biggest swing.
The key point to note in Figure 4 is the buy/sell margins depicted by the vertical distance between the lines. When the price lines suggest a low buy/sell margin, cost of gain is the overall driving force for grower, stocker and finishing profits. As prices go up and the buy/sell margin gets wider, the buy/sell margin becomes the more critical profit driver, and cost of gain becomes less important.
At the beef price cycle peak (2005), note how wide the buy/sell margin is. This wide margin shifts the economics of growing feeders, running stockers and finishing slaughter cattle toward the marketing aspects. Cost of gain, while important, isn't the primary profit driver.
As cattle numbers begin to increase and the beef-price cycle trends lower, the buy/sell margin begins to close. Note how rapidly the buy/sell margin closes as slaughter cattle prices trend down. Now cost of gain becomes critical in grower, stocker and finishing profits.
In summary, the cattle cycle is alive and well, and causes beef-price cycles. As cattle cycles are somewhat predictable, beef-price cycles are somewhat predictable, as well.
Predictable beef-price cycles mean ranchers can formulate management strategies to make the cattle cycle work for them. When the cattle cycle works for individual ranchers, their beef cow profits increase over the total cattle cycle.
Editor's Note: Harlan Hughes offers a CD entitled •How To Make The Cattle Cycle Work For You.” Send $25 to Hughes at 30 Ramble A Road, Laramie, WY 82070.
Harlan Hughes is a North Dakota State University professor emeritus. Reach him at 701/238-9607 or harlan.hughes@gte.net.
Click below to see Figures 1-4.