The cattle cycle: a primer for beef cattle veterinarians (Proceedings)


The cattle cycle: a primer for beef cattle veterinarians (Proceedings)

Nov 01, 2009

What is the cattle cycle?

Historically cow-calf producers have been plagued by a market that is beyond their control, that is, a reasonably competitive market. Prices received by beef producers for their products are determined by consumer demand for beef, value added by the food-marketing sector and farm supply of calves. The consumer's demand can vary from year to year and sometimes on a daily basis due to changes in income, prices of substitute goods (pork and chicken), tastes and preferences (summertime barbecue season), exports, and/or health concerns (cholesterol, E. coli, and BSE). The food-marketing sector can modify prices depending on the degree of processing and their procurement strategies. This processing adds value by converting a 500 pound feeder calf to a product that the consumer can use. The annual calf supply may be affected by variations in weather, disease, or imports, but perhaps the biggest factor determining the annual supply of calves is the production decisions made by individual producers (Kohls and Uhl, 1972).

Table 1. The U.S. cattle production cycle, 1867 - 2007
This type of marketing system has led to a common mentality of maximization of production that is exhibited throughout the agricultural marketplace. Without a defined selling price, the cow-calf producer's production strategy has long been to take advantage of a market that pays for the pounds of calf produced. University and extension personnel have promoted this management strategy as a method to improve production and subsequent profitability. To that end, management practices such as growth implants, genetic selection for growth and nutritional supplementation have been promoted to the commercial cattle producer to enhance productivity. These practices have led to tremendous increases in reproduction and growth. During the late 1970's some producers shifted from maximization of production towards an optimization mind-set. Producers began to realize that weaning the maximum pounds of calf per cow exposed may not always be the most profitable strategy. Many producers, in a quest to capture the maximum production, had allowed their operating costs to outgrow their potential profits. In addition a significant number of producers had exited the cattle industry due to diminished cost-price margins. Since the 1950's, when the National Agricultural Statistics Service (NASS) began monitoring the cow-calf industry, the number of cattle producers has decreased. Some of the decrease in producer numbers is due to the displacement of small family-run operations by larger operations. In parallel there has been increased reproductive and production efficiency demonstrated by today's beef cows. As a result, fewer mother cows are needed to produce the same amount of beef. At the same time demand for beef products has fallen at the retail level due to substitution of pork and poultry as other sources of protein.

Figure 1
One outcome of this marketing situation has been the recurring cattle cycle. This phenomenon has been recorded since 1867 when NASS began recording cattle numbers. The cycle tends to encompass a span of about ten years between the beginning and end of each cycle (Table 1). The length of the cattle cycle is dependent on biological and psychological lag times. The biological lag time is defined as the amount of time between when producers decide to expand or contract production and when supplies of cattle actually change. The psychological lag is described as the length of time necessary for producers to change production levels due to higher or lower prices. A typical cycle begins when nationwide cow numbers have reached their lowest point in the current cycle. Most commonly, this occurs at or about the beginning of a decade. The low supply of cattle relative to demand results in increased prices. During a period of profitability, producers will often expand their herd size and new producers will enter the industry to take advantage of the favorable marketing situation. This expansionary process withholds females from the market, causing prices to rise and the cowherd to expand even more. By the middle of the decade cattle numbers usually approach a peak. Because of the time lag required to develop, breed and calve a heifer, two to three years elapse before additional calves reach the cash market. By this time an over supply of calves relative to demand for beef has been created and the cash prices for beef begin to decline. Of course, all producers face potential financial difficulties during a drop in the cattle price cycle. However, producers that have over-extended themselves financially during the high market may have to liquidate herds and many may be forced to exit the industry. These herd liquidations further enhance the decline in cattle numbers until shortages of calves are created and prices rebound starting the cycle over (Figure 1).

Figure 2
Production and price cycles are found in animal agriculture for many reasons. The time lapse between changes in price and changes in supply is the foundation of the cattle cycle. This time lapse allows producers to over expand their herds in response to high prices and then subsequently over-liquidate once prices fall. The cornerstone is that producers change their production process in response to current high or low prices rather than expected future prices (Kohls and Uhl, 1972). During the last cycle beef cattle producers saw prices start to fall in 1991 (Figure 2). According to NASS, a peak of 103,487,000 cattle and calves was reached in 1996. Liquidations of female cattle continue until 2004 when cattle numbers reached 94,888,000. The Food and Agricultural Research Institute (FAPRI) predicts cattle numbers will now decrease until they reach the next l0w of 93,000,000 in the year 2013.

There are many reasons why the liquidation phase of the last cycle was prolonged. If you look closely at the figure you will see that cattle numbers started to level off in 2001 which had been predicted to be the low point in the late 1990's. The obvious effects of September 11, 2001 and the subsequent economic recession adversely affected the cattle market. Additionally, there have been severe droughts recently that have forced liquidations of cattle on a regional basis. Subsequently, there was the identification of Bovine Spongiform Encephalopathy in Canada and then in the U.S. Last reason may be that producers are becoming wary of the cattle cycle and are being more cautious to expanding their herds.