In the November issue, we discussed the cattle cycle and its 10- to 12-year cyclical nature. I suggested that if a rancher fights the cattle cycle, it will beat him every time.
Last month, I illustrated the cyclical interrelationships of cattle numbers, slaughter numbers and beef prices. The key point was that the cattle cycle, and its resulting beef price cycle, are predictable. Once a rancher understands the cattle cycle, he can begin to predict it, which helps him predict the associated beef price cycle.
And, predicting the beef price cycle will enable a rancher to identify management strategies to make the cycle work for him.
I learned most of these management strategies from individual ranchers during kitchen-table sessions in the 1990s. I've packaged the strategies into a video on CD (see end of story for ordering information). The goal of that CD, and this multiple-part series, is to help readers make the cattle cycle work for them.
Let's begin this study of beef price cycles with a look at my 500- to 600-lb. steer-calf planning prices for this current cattle cycle (Figure 1). These prices are fall weaning prices, not annual averages.
The current cycle started in 1997 and will end around 2012. The first half of Figure 1 is history; the second half is my projection for the rest of the current cattle cycle.
My key question for ranchers is: “Do you manage your herd up the beef price cycle the same as you do down the beef price cycle? The answer should be “no,” but I find ranchers, in general, do just that.
While most ranchers can survive the first beef price cycle, they usually lack the reserves to weather the next one, which is the one that often takes the business down.
Let's review the first half of the current beef price cycle. After the 1996 feeder calf low, feeder calf prices made a dramatic comeback in 1997. It was so dramatic, I worried at the time how the cattle industry could sustain that turnaround. My concern proved correct, as calf prices turned down in 1998 but regained their up trend in 1999.
We were on target for a typical price-cycle peak in 2003, until Sept. 11, 2001. The terrorism attacks decimated beef demand, as airline travel and dining-out plummeted. Instead, consumers stayed home, opting for low-valued hamburger, which drove the average carcass value down.
Just as travelers returned to the skies, the 2002 drought hit central Nebraska and continued through the western half of the U.S. Instead of retaining heifers and driving calf prices up, the drought caused massive culling, which increased harvest numbers and again drove prices down.
In 2003, BSE was discovered in North America — first in Canada, then the U.S. The U.S. banned Canadian beef exports in May; Japan closed its market to U.S. beef in December. Fortunately, U.S. cattle market prices continued to respond to the lower domestic supply and stronger domestic demand, which resulted in relatively strong 2003 cattle prices despite BSE.
Increasing calf prices in 2003 triggered the diversion of heifer calves from feedlots to breeding. That increased heifer retention pushed calf prices higher in 2004 and still higher in 2005.
Last month, we discussed the biological lag of cattle, which leads to calf prices peaking ahead of actual cattle numbers. I project calf prices peaked for this beef price cycle in 2005, and cattle numbers will peak in 2007.
Figure 1 suggests feeder calf prices will start a long downward trend as early as 2006, and could well bottom out at the end of this decade.
Figure 2 presents the long-run annual planning prices for 700- to 800-lb. feeder steers. Note these prices tend to follow the same general cyclical nature of the feeder prices in Figure 1.
Figure 3 is my long-run annual slaughter cattle planning prices. These prices reflect the overall supply/demand relationship for beef, and basically drive feeder cattle and feeder calf prices. Once again, the cyclical nature of slaughter cattle prices is evident.
The implication of this current set of planning prices is that beef cow profits will trend down through the end of this decade. Note, however, that 2006 calf prices are still projected to be the fourth highest in history. I project we should have five years (2003-2007) where calf prices exceed $100/cwt. Five years of record-high calf prices is about all we can expect in any one cattle cycle.
Figure 4 presents my long-run beef cow profit projections for Northern Plains high-profit herds. The herds averaged $110/cow over the five-year period of 1999-2003. Meanwhile, 2004 will be remembered as a year of record profits, as will 2005, which will likely be the cycle high for the current beef price cycle.
Northern Plains profits per cow through the rest of this decade are projected to go from a record-high $280/cow in 2005 down to $60 by decade's end. Thus, I advise my clients to build a financial reserve now to ensure they're in business when the beef price cycle again brings record-high prices.
Figure 5 presents my profit projections for the average Northern Plains herd through the current beef price cycle. Producers must develop a management system to take advantage of that next run-up. Next month, I'll focus on management strategies to do just that.
To order Harlan Hughes' management strategies CD, send $25 to 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.