Cattle Cycle Unlikely To Turn Before 2000

The much-anticipated turn in the cattle cycle–when the nation's cattle herd will again begin to expand–appears unlikely to occur before 2000. The cattle cycle is caused by the biological time lag in beef production, coupled with producers' decisions to expand or liquidate their herds as economic forces dictate. During herd expansion, more heifers (young females that have never calved) are shifted from the feedlot to the breeding herd. This lowers cattle slaughter, which raises prices, leading producers to continue expanding their herds.

For the second year in a row, producers retained fewer numbers of heifers for summer breeding than indicated in USDA's January 1 cattle inventory report. In both years feed or forage conditions deteriorated, encouraging the marketing of heifers as feeder animals rather than retention for breeding.

Producers had indicated on January 1, 1997, that they were retaining 2 percent fewer beef heifers than the previous year as replacements for the late spring-early summer breeding season. However, in the July 1, 1997 inventory report, producers indicated a reduction of 4 percent in the number of heifers retained compared with a year earlier.

Although feed grain prices were well below a year earlier in the spring and summer of 1997, pasture and range conditions once again were disappointing, and hay prices were at record levels, reflecting very tight forage supplies and harsh winter conditions in the northern states. The October Cattle on Feed report found 21 percent more heifers were on feed than a year earlier. In addition, heifer slaughter for the first nine months of the year was at a near-record pace, second only to the prime herd liquidation years of the mid-1970's.

Beef cow slaughter remained near the high year-earlier level during the first quarter of 1997, as continued tight forage supplies led producers to cull less efficient cows. Since spring, however, beef cow slaughter has been down about 20 percent from a year earlier and is expected to decline even further over the next couple of years. But without retention and breeding of larger numbers of heifers, beef cow numbers–and calf crops–will continue to decline at least through 1998.

Supplies of feeder cattle outside feedlots and available for placements this fall and in 1998 are already beginning to tighten–supplies on October 1 were down 7 percent from a year earlier, and feedlot placements in October were down 4 percent from a year earlier. Feeder cattle supplies will continue to tighten over the next couple of years as the calf crops decline and as more heifers are retained for the breeding herd. Supplies will drop through at least 1999, and the decrease will halt then only if more heifers are retained for herd expansion this fall and bred next summer to calve in 1999. Tight feeder cattle supplies, combined with reduced cow slaughter, will hold beef production down.

The current cattle cycle began in 1991, the first year of expansion after a low point in 1990 of 95.8 million head of cattle and calves, down from the previous cycle's 1982 peak of 115.4 million head. The current cycle peaked in 1996 at 103.5 million head, the second consecutive cattle cycle to peak at a lower level than the previous cycle. The cattle and calf inventory was down to 101.2 million head in 1997 and is likely to continue to decline at least through early 1999.

Since the collection of cattle inventory data began in 1867, each successive cattle cycle peaked at a higher level through the 1968-79 cycle, when the cattle inventory peaked at an all-time record 132 million head. The decline from this peak began a period of adjustments to increase efficiency and remain competitive against the increasingly efficient pork and poultry sectors. The cattle sector experienced large income losses in the mid-1980's as a result of providing overfinished cattle, with more fat than desirable, leading to shifts toward a leaner consumer product. That trend, however, has likely moved toward an excess emphasis on lean beef, at odds with the current domestic and export markets, which are placing a premium on an increasingly tight supply of high-quality marbled beef.

The current cycle entered the liquidation phase in late 1995, which intensified in 1996 as grain prices set new records. Corn prices rose to well over $4 per bushel in late-spring to early-summer 1996. Conditions for cow-calf producers were exacerbated by a severe drought that spread from the Southwest in late spring into the Central Plains, the heart of the cattle-raising sector, by mid-summer. Drought sharply reduced grazing prospects and led to higher hay prices, forcing cattlemen to cull their herds severely and retain fewer stocker cattle–those kept for additional grazing before being placed in feedlots. Reduced forage also lowered demand for stocker cattle that are purchased for pasture gain.

At the same time, rapidly rising grain prices reduced the break-even price that feedlot owners could pay for cattle to be placed on feed. The value of feeder cattle weighing 750 to 800 pounds declined from a range of $67-$74 per cwt in first-half 1995 to $55-$59 in first-half 1996. Even as feeder cattle prices plummeted, feedlot owners reduced placements sharply in first-half 1996 to under 7.6 million head, down 14 percent from a year earlier.

The end result was a year of large losses for feeder cattle producers, leading to liquidation of the beef cow herd and dramatic reduction in heifer retention. Cow slaughter rose from 6.3 million head in 1995 to 7.3 million in 1996. As a result, beef production rose to 25.5 billion pounds, second only to the 25.7 billion pounds produced in 1976, when the cattle inventory was 132 million head (compared with 1996's 103.5 million) and the industry was experiencing the largest liquidation in history.

Beef production in 1997 is projected to be down slightly from 1996 levels. Production in 1998 is expected to decline about 2 percent, but declines in the second half of the year are likely to be even greater if forage supplies and grain prices become more favorable, encouraging retention of cows and heifers. Although these downward shifts in beef supplies are raising cattle and retail beef prices, large and expanding supplies of competing meats will limit price increases.

The Cattle Cycle: Biology As Destiny?

The cattle cycle is a 7- to 10-year period encompassing the expansion and subsequent contraction of the country's beef cattle herd. A new cycle starts when the herd begins expanding again. Livestock producers' ability to expand or contract in response to market signals is circumscribed by a biological factor–the length of time required to produce new animals for the market.

The biological component of the poultry cycle is by far the shortest, requiring only about 7 months from the time an egg is fertilized and laid, the chick is old enough for breeding, and her offspring reach slaughter weight. Moreover, chicks retained for the breeding flock comprise only a minuscule proportion of the production potential; most chicks will be sold for food before reaching breeding age. As a result of this short biological cycle and the small ratio of breeding animals to slaughter animals, poultry producers can adjust very rapidly to market conditions.

The biological hog cycle is somewhat longer than for poultry, about 20 months from the time a sow is bred and farrows, a retained gilt reaches breeding age, and her offspring reach slaughter weight. Unlike poultry, each gilt retained for breeding has some impact in slowing pork production gains during the 12-18 months before her first offspring are sold. But that impact is steadily decreasing with litter size approaching nine pigs and most sows farrowing at least twice a year, allowing pork producers considerable ability to respond to market opportunities.

The biological cattle cycle is considerably longer than either the poultry or hog cycle. Fifty months can pass from the breeding of a beef cow; the birth of her calf and its growth to breeding age; and the birth of that offspring's calf, its weaning, time in grazing and a feedlot, and finally, slaughtering.

Given this long biological cycle, cattle producers must make decisions for future production nearly 4 years ahead, limiting their ability to adjust quickly to market changes. Moreover, each heifer calf retained for the breeding herd has an almost one-to-one bearing on reducing beef production in the 4 years it takes for expansion, since cows generally produce a single offspring annually. Thus, the cattle cycle lasts from 7 to 10 years, as decisions on whether to breed more cattle or to slaughter cows and heifers for beef production are impacted not only by such factors as meat and feed prices and forage conditions, but by the single births and the long biological component of the cycle.

November 24, 1997 Economic Research Service

USDA, Washington, D.C.

Consensus National Futures and Financial On Line Index

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