There's a good reason the new cattle cycle is behaving so irrationally: it may still be the old one.
“The cyclical character of inventory dynamics characterizing the cattle industry from 2005 to 2007 is difficult to explain, but some industry analysts think it may be a continuation of the previous liquidation phase,” say analysts with the USDA Economic Research Service (ERS) in the latest Livestock,
Dairy and Poultry Outlook.
Between January of 2005 and January 2007 national cattle inventory numbers increased slightly (1.6 percent). In the past higher numbers always meant the front end of expansion. This time around it appears more likely the slight increase was merely a blip amid continuing contraction.
According to the July 25 mid-year Cattle Inventory report from the National Agricultural Statistics Service (NASS), beef cow numbers are one percent lower than a year ago (33.2 million) and beef replacement heifers are two percent fewer (4.6 million head). The inventory of all cattle and calves July 1 is estimated at 104.3 million head, down slightly from a year earlier—milk cow inventory is one percent higher—and one percent fewer than 2006.
Keep in mind, the combined cow numbers of the U.S. and Canada also continue to decline, one percent lower than a year earlier as of August 19. According to the report from NASS and Statistics Canada, all cattle and calves in Canada have declined four percent during the past year, five percent from two years ago. For Canada, beef cow numbers are down five percent
“July 1, 2008, U.S. cow inventories are at or below cyclical lows reached on July 1, 2004. This follows the January 1, 2008, inventory, which was the lowest January 1 inventory since 1952,” say ERS analysts. “A major reason for this decline is that grain prices have persisted at relatively high levels, suggesting a new livestock feeding paradigm. Cattle prices, while at historically high levels for all but feeder cattle, are below costs of production for most cattle sectors.”
The most recent Cattle on Feed reports continue to confirm liquidation as well. For example, Derrell Peel, a livestock marketing specialist at Oklahoma State University, explains, “The August 1 feedlot inventory of 9.689 million head is the lowest monthly feedlot total since August, 2004… The July placements number of 102 percent of a year earlier was below most analysts' estimates and below the average estimate of 106 percent last year. This likely is partly due to continued shifts in seasonal cattle production patterns. The high cost of feedlot finishing and the resulting forage production incentives appear to be keeping more cattle in the country through the summer.”
Reflecting on the U.S. situation, Peel says, “The numbers are another sign that the industry is returning again to a more yearling based production system and more dominated by the annual forage cycle. This might suggest a relatively large run of yearling feeders in the fall but there is also increased incentive for retained ownership of calves and likely smaller runs of calves in the traditional fall weaning period. In general it appears that the beef industry is adding three to five months of age to most cattle in order to utilize more forage in beef production.”
It's a safe bet that no two cattle cycles have been identical. However, they have followed a more predictable pattern than what's been seen this time around.
“Cattle inventory dynamics have been dominated by cycles—10 of them since 1867 when cattle inventory records began. Only four of these cycles have lasted the oft-touted 10-12 year average during which inventories increase from an inventory low in an expansion phase, then decline in a liquidation phase to the next low,” explain the ERS analysts. “A short review of historical cattle cycles demonstrates the complex nature of cattle cycles and the difficulty of characterizing a normal cycle, and raises the possibility that the 1996-2004 liquidation phase is continuing rather than being part of a new cycle.”
• The first recorded cycle lasted 29 years, with a 24-year expansion phase followed by a 5-year liquidation phase.
• The shortest expansion phase in any cycle was from 1980 through 1982 (3 years) during which inventories increased 3.8 percent from low to peak inventory.
• Through 2004, the shortest liquidation was from 1966 through 1967 (2 years) during which inventories declined by 0.2 percent.
• The longest liquidation last from 1919 through 1928 (10 years), during which inventories declined by 27.4 percent.
• The average duration of the 10 completed cycles is 13.8 years. If the 29-year cycle from 1867 through 1895 is excluded, the average duration of the remaining 9 cycles is 12.1 years.
“Drought often triggers the liquidation phase of a cattle cycle, as happened at the cyclical peak in 1996, which was also the last time corn/feed prices set record highs,” explain the folks at ERS. “By late summer/early fall 1996, grain prices were dropping. In 1996, contrary to 2008, energy prices were low, the dollar was strong and increasing in strength, and feeder cattle prices were low enough that cattle feeding was profitable, despite the temporarily high grain prices. Drought also extended the liquidation phase that followed the 1996 peak until it reached a low in 2004.
“…By January 1, 2006, total U.S. cow inventories had begun to slowly increase and had climbed to just under 2003 levels. Grain prices also began increasing in early 2006 as demand for corn for ethanol production began ramping up in response to a series of Federal Renewable Fuel Standard mandates for increasing annual minimum ethanol contributions to domestic fuel supplies. By July 1, 2008, U.S. cow inventories had declined to 42.4 million head, a level achieved only twice since sometime well before the July series began in 1973.”
The New Cycle?
Some industry analysts have rightfully suggested during the last year that while a cattle cycle is still in play, perhaps today and in the future it will be best characterized in terms of beef production rather than cattle numbers.
That's more than possible, perhaps even probable. Whether it's cattle numbers or beef tonnage, though, the cycle will continue to be driven by supply and demand fundamentals because it's a commodity. All kinds of static can disrupt the economic signals—such as artificial input prices constructed with a Renewable Fuels policy and subsidy—but ultimately the traditional fundamentals will take the reins again.
Of the July Cattle inventory numbers, ERS analysts say, “Possibly the most surprising was that the number of beef heifers kept for replacements was down only two percent, compared with average industry analysts' expectations of being down almost twice as much. This number, and an estimate of heifers entering the herd during the first half of the year that was up 8.5 percent over 2007's first-half entrants, suggest the possibility that some producers kept heifers and sold cows, heifers being relatively cheaper to feed. It also suggests that liquidation may not be as severe as originally thought, and may suggest that the 2009 calf crop could be larger than previous cow and heifer inventory expectations suggested.”
Whether it's a new cycle or the continuation of the last one, cattle numbers are down, which means supply will continue to be supportive to price. That's why record high fed cattle prices are predicted for the next year.
Ron Plain, agricultural economist at the University of Missouri is forecasting average fed cattle prices next year to average from $95-$102, compared to a forecast average of $91-$94 this year. He was offering his outlook at the recent TriState Stocker Conference in Abingdon, Virginia. He estimates calf prices (500-550 lbs.) the third quarter this year to average in the $110-$115 range, compared to an estimated $112-$120 in the third quarter next year. For feeders (750-800 lbs.) he's predicting and average of $104-$109 the third quarter this year; $100-$110 the third quarter next year.
There's plenty of uncertainty surrounding those forecasts. Among them, Plain cites corn prices and the cost of gain, pasture conditions and fertilizer prices, beef exports, domestic demand and the impact of Country of Origin Labeling.
Still, given the economic shocks, supply continues to cushion the industry.
“All in all it appears that the fundamental cattle supply situation in North America will remain tight and supportive of prices for the next couple of years at least and likely longer,” says Peel.