Can the cattle cycle return?

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We used to talk about a 10-year cattle cycle, and the trend was pretty clear. When cattle numbers reached a level high enough to depress prices, producers would begin scaling back, culling cows and selling more heifers rather than retaining them for breeding. After about five years of liquidation, prices would improve enough to encourage expansion, and numbers would trend upward for about five years, creating the familiar cycle.

Using selection tools for bulls and heifers, producers have an opportunity to ensure their replacement heifers are the best females in the herd and work toward long-term genetic progress. So far, the 21st century has brought a different pattern, with U.S. beef cow numbers in decline since 2001. What began as a rather typical cyclical phase morphed into long-term liquidation as outside forces, including BSE and related trade restrictions, growth in ethanol production, rapidly rising grain prices, associated inflation of land prices, recession and, most notably, drought, sti_ ed any e_ orts to rebuild herds.

Early in 2012, many analysts expected to see a reversal of the liquidation trend, based on an outlook for strong cattle prices. Farmers were planting record corn acreage, and it appeared the Southern Plains area could be emerging from a devastating multi-year drought. But as the season progressed, drought spread across cattle country and into the Corn Belt, devastating pasture and range production, driving corn prices to record levels and leading to another year of contraction.

Drivers of expansion
So will the trend reverse in the near future? University of Missouri livestock economist Scott Brown, PhD, thinks so. He says cattle producers can expect corn prices to dip to 2010 levels, easing the heavy burden of high feed costs producers have had to carry through consecutive years of drought. In addition to lower feed costs, which he expects to drop to $4.50, Brown says market fundamentals suggest 2014 calf prices $50 per hundredweight higher than four years ago, with fed-cattle prices also increasing significantly. “The outlook for 2014 is a lot different from anything we’ve seen in a long time,” Brown says. “It’s an exciting time to be in the cattle business.”

Oklahoma State University livestock marketing specialist Darrell Peel agrees, saying the 3.4 million-head decline in the beef cow herd since 2001 was not due to typical cattle-cycle factors. He points out that since 2007, the number of heifers entering the cow herd has remained above average even while the very high rate of cow culling has resulted in net reduction in cow numbers. In a more typical cattle cycle, the rate of heifer placement decreases at the same time as increased cow culling, with both contributing to herd liquidation. The fact that the industry has simultaneously increased cow culling and heifer placements in recent years means the current beef cow herd is not only the smallest in 60 years but likely one of the youngest and most productive ever.

Peel says beef cow slaughter had been running about even with last year but recently dropped o_ , suggesting that the industry is moving toward decreasing cow slaughter, a necessary component of herd expansion. But even sharply decreased beef cow slaughter in the range of 8 to 2 percent for the remainder of the year will result in annual beef cow slaughter down a modest 4 to 5 percent. Peel adds there are indications replacement heifers were diverted into feeder markets in the first half of the year, due to residual effects of drought, reduced hay supplies and extended winter impacts. He expects a year-to-year decrease of 0.75 to 1.25 percent in the beef cow herd as of Jan. 1, 2014. He also expects an acceleration of heifer retention this fall.

Most past herd expansions have included one to two years of minimal or modest herd growth before accelerating for two to three years, but Peel says this expansion could gain steam faster than usual. The young and productive base herd suggests the potential for one or two years of very minimal cow culling which would contribute to faster growth. A year-over-year drop in beef cow slaughter of roughly 20 percent in 2014 would correspond to a culling rate of less than 9 percent, a low rate typical of herd expansion. With such a young herd, an even bigger decrease in cow culling is possible, which could result in significant disruption in lean beef supplies.

As long as drought conditions continue to moderate, Peel says, beef cow-herd growth of 2 percent is possible in 2014 with another 2 to 3 percent in 2015. Faster growth is unlikely, and a slower rate is certainly possible.

It is important to note that even as herds expand, the nature of the bovine animal prevents rapid increases in beef production. If a rancher this fall decides to keep 20 percent more heifer calves for breeding, it will be the summer of 2014 when those heifers are bred and the spring of 2015 when they deliver their first calves. Not until the fall of 2015 at soonest will those calves go to feedyards, and they won’t become beef until sometime in 2016. In the meantime, those heifers remaining in breeding herds reduce the available supply of feeder cattle and further limit beef production. Peel says the projected level of reduction in cow and heifer slaughter will lead to a roughly 7 percent decrease in total cattle slaughter in 2014.

The drop off in supplies of feeder and fed cattle should support considerable strength in prices, providing continued incentive to increase production.

Roadblocks to expansion
While the stars seem aligned for herd growth, several significant factors could discourage individual producers from adding females back to their herds.

One of these is the tradeoff between short-term profits and long-term investments. Heifer calves likely will have considerable value as feeder animals over the coming years, and some producers will capitalize on that value. That could be especially true among older producers. Peel says the average age among U.S. cattle producers is among the highest across the farm sector. These producers are more likely to scale back than to initiate new investment in cow herds regardless of potential opportunities.

There will inevitably be significant turnover in production assets in the cattle industry in the coming years, but the challenges for young producers entering the cattle business have arguably never been greater, Peel says. High asset values make the capital requirements unreachable for many young producers, especially with today’s tighter lending requirements.

Market volatility and risk also influence expansion decisions, says Kansas State University economist Glynn Tonsor. “A point that often gets missed in these discussions is that not only does ‘expected profit per cow’ have a role in producer decisions but so do variability of profits over time and uncertainty on what profits in the future may be,” he says. “If one considers most producers as being adverse to risk and uncertainty, for a given level of expected profit economists anticipate fewer investments to be made in settings viewed as more variable.”

Peel says he believes markets work, and if the opportunities offered in the cattle business are great enough, a new generation of producers will emerge. The business model, however, likely will change. Leasing, contracting and managerial arrangements may play a much bigger role in the future of the cattle business. Older producers who hold most of the equity need to facilitate the transition to the younger generation. There may be tax and other policy changes that would provide better incentives and opportunities simultaneously for older producers and new producers, he adds.

Changes in land values and land use will influence how and where expansion takes place. Peel points out that high crop prices have made forage relatively less competitive for land use and resulted in a loss of pasture and hay production in crop production areas. The greatest impact has been in the Midwest, with less change in drier areas of the Great Plains. High crop prices imply a long-term shift of cow-calf production into the drier areas where crop production competes less with forage production.

However, the lingering effects of drought limit the rate at which beef production can expand in the arid West. Peel notes the native range areas of the western Great Plains and Rocky Mountain regions have endured significant stress and damage to the native forage base during the drought and will require several years of careful management to return to full production. In the Southern Plains, he says, herds will recover fastest to the east, with more introduced forages and higher rainfall.

How many cows do we need?
Peel says the industry needs to add about 1.75 million cows to return to pre-drought levels and another 1.7 million head to get back to the 2004 level, which seems a reasonable target. Once expansion begins, it probably will take about three years to add the first 1.75 million head and another two to three years to reach the second goal. If we enter 2014 with about 29 million head of beef cows, which Peel projects, we’ll need to add 3.5 million head over five to six years to reach the goal of 32.5 million. He believes the industry could sustain that level of expansion, since recent shocks caused the industry to contract more than it intended or needed to. Domestic and international beef demand ultimately will determine cow numbers.

“2014 will be the time to rebuild the cow herd,” says Brown at the University of Missouri. “If you rebuild, replace with quality genetics. Use genetics that convert feed more efficiently and produce high-quality beef that consumers want.”


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