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The cattle cycle: a primer for beef cattle veterinarians (Proceedings)
Historically cow-calf producers have been plagued by a market that is beyond their control, that is, a reasonably competitive market.
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).
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.
Table 1. The U.S. cattle production cycle, 1867 - 2007
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).
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.
Managing through the cycle
There have been several "counter-cyclical" strategies proposed for cow-calf producers to avoid some of the financial hardship resulting from the cattle cycle. The simplest method is to not expand the cow herd when prices are at the highest which is what the average producer has done in the past. Expanding the cow herd at this time is expensive and the most productive years of the female will occur during the down market. Another method is to retain an average value of heifers instead of an average number. In this scenario if the average value invested in heifers each year is $10,000 then when the market is high and bred heifers are selling for $1,000 then 10 heifers would be retained. Conversely, during low price markets 15 heifers would be retained if heifers were selling for $675. Another proposed method is to not retain any heifers during high price cycles and then expand during the down price market (Table 1 and 2). Both of these later methods require prior planning so that the producer can cash-flow the purchase or retention of heifers during the down market. These methods will be discussed in more detail during the presentation. In order to make the best management decisions a financial analysis should be completed to determine the potential benefits and losses prior to initiating the management.
Table: Net present value of a 1994 heifer
Opportunities for veterinarians
Veterinarians need to be aware of the cattle cycle and can help the clients negotiate the changing markets. Understanding why and when the cycle will change can help you advise your clients as well as prepare your own business. According to the NAHMS Beef '97 survey, approximately 10 percent of producers throughout the United States cut their veterinary expenses in an effort to cope with the down cattle market in 1996. The NAHMS study revealed that 7.4 percent of producers decreased their vaccination expense, 7.7 percent decreased herd medications (de-worming, lice and grub treatment, etc.), and 5.0 percent decreased individual medications (antibiotics, etc. for sick animals) on their operations. Of interest to veterinarians, 14.1 percent of producers decreased the level of veterinary services (pregnancy testing, bull testing, obstetrical work, etc.) used on the operation (NAHMS, 1998). Although the NAHMS study did not determine how much of an expense reduction was made, a trend in decreasing the operation's herd health program was identified. Depending upon the operation, this could have significant ramifications on the ranch's productivity. Veterinarians must become more intimately involved with the decision making process to prevent services from being cut by financially stressed producers. In today's society, consumers are demanding value in their purchases. Beef cow-calf producers require that same value when they purchase products or services from veterinarians. Veterinarians must capitalize on their position as information handlers to become involved with the decision making process. The practitioner's viewpoint can allow for a more objective outside assessment of individual and herd information.
Table: Net present value of a 1999 heifer
Kohls RL, Uhl JN. 1972. Marketing of Agricultural Products (5th edition). Macmillan Publishing Co., Inc.
NAHMS: Down Market Effects in Beef Cow-calf Herds, Fact Sheet. National Animal Health Monitoring System, N268.598, 1998.