Thirty years ago a fundamental concept cattlemen needed to understand about beef production was the cattle cycle, that somewhat predictable expansion and contraction of America’s cattle herd that produced high prices, then low prices, then high prices, etc., over a period of 10 or 11 years.
Recent years, however, have failed to produce the cyclic expansion of our cattle herd that might be expected from historically high prices. Many factors have played a role in reducing ranchers’ desires to expand their herds, including: rising production costs, widespread drought, harsh winter weather in the Great Plains, an economic recession that reduced consumer demand and tightened the availability of credit, the increasing average age of ranchers and producers, and the desire to capitalize on good profits to reduce debt and limit financial risk.
A generation ago the liquidation phase of the cattle cycle was viewed as a good thing. The majority of industry stakeholders were profitable, and mistakes or bad management were whitewashed with higher prices.
The current liquidation phase, however, has produced some legitimate concerns about the future of your business. Indeed, a better description of the current phase might be “contraction of a mature industry.” America’s cattle herd has declined at an unprecedented rate, threatening much of the industry’s infrastructure.
The U.S. Department of Agriculture’s Jan. 1 cattle inventory report released late last month reported 90.8 million cattle and calves, the lowest total since 1952. In the short term, tight supplies will continue to support excellent prices and profits, but there are legitimate concerns the good times can’t last. That’s because the dramatically reduced numbers of cattle pose a threat to feedyards, packers and even to the ability of retailers to sell beef.
Feedyards and packing companies are historically low-margin businesses, and their success often hinges on operating at near-capacity levels. Prolonged periods of empty feeding pens and reduced shifts at packing plants will force closures in both industries. That, in turn, will reduce demand for your cattle which will drive prices lower despite the fact supplies are lower.
And — maybe most important — ever-shrinking supplies of beef drive retail prices higher, which makes pork and poultry more attractive to consumers. If that scenario continues for an extended period of time, a new generation of consumers will become conditioned to looking down the pork and poultry aisles first. Over time, the diminished demand for beef at retail will mean lower prices for your cattle, despite the fact supplies are lower.