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This article is reprinted from the Livestock Trader's Guide

The United States is the largest producer of high quality grain fed beef in the world.  With an abundance of pasture land suitable for grazing and large supplies of feed grains, the United States is one of the only countries in the world which has a cattle industry largely separate from its dairy industry.

Cattle production is a long and involved process with two major production sectors:  Cow-Calf operations and Feedlots.  Cow-calf operations are in the business of reproducing cattle.  The finished product of a cow-calf operation is feeder cattle, or a weaned animal weighing between 600 and 800 pounds, ready to go on feed.  Cow-calf operations usually sell their cattle crop to feedlots, who are in the business of producing high quality beef cattle – grading select or better – by fattening them with grain and protein concentrates.  Depending upon the weight of the animal at placement in the feedlot, feeding conditions, and desired finished weight, the feeding period can last from 90 days to 300 days, though it tends to average about 140 days.

Feedlots sell their production to meat packers, who slaughter the animals and package them into the cuts of meat we all enjoy.  Though in recent years, the industry has tended to shift towards a small number of very specialized feedlots, which are increasingly vertically integrated with cow-calf operations and processing sectors to produce high quality fed beef. 

The activity of packers is partially set public tastes as well as supply from feedlots.  Feedlots base their production on demand from packers, as well as supply availability from cow-calf operations.  Both the feedlot and the processor have some degree of flexibility in their operations, able to move inventory and change output.  At the beginning stage of the production cycle, the cow-calf operation has a very long lead-time in adjusting its operations. 

In order for a calf-calf operation to increase its production, it must retain animals for breeding purposes.  This would require a calf-calf operation to retain more heifers from its marketing, which in turn reduces the cash flow to the operation and reduces the supply of cattle on feed. The retained heifer would be bred several months later, with the additional calf crop not marketed until the following year.  If a cow-calf operation wishes to reduce its production capacity, it only needs to sell some of its breeding stock, generating immediate cash flow, but decreasing future productivity for a minimum of at least 2 ½ years.  Because of the long lead-time necessary to increase capacity, cow-calf operations tend to be very leery to sell breeding stock and tend to maintain fairly regular herd sizes.

Cow-calf operations are businesses, and like any other business the goal is profit.  During times of profitability, cow-calf operations try to expand by increasing breeding stock.  This has the short-term effect of reducing the supply of feeder weight cattle, which in turn tends to support prices.  The feedlots pay higher prices for the cattle, which in turn raises the price processors pay, and eventually the price the consumer pays.  Eventually, however the price becomes high enough to the consumer that they begin to eat other substitutable meats (pork, poultry, fish).  Packers begin to incur losses, and reduce operations.  The lack of demand from processors causes feedlots to decrease the number of animals they are willing to feed, which in turn reduces the price they are willing to pay for feeder weight cattle.  Cow-calf operations, faced with losses, sell off breeding stock, further decreasing prices as supply increases. Eventually, the flood of supply from herd liquidation stops, and the available supply is below the current demand at these depressed prices.  Cow-calf operations begin retaining heifers for breeding purposes, supply shrinks even more, and prices increase as the whole process begins again.

This boom to bust cycle in herd sizes is known as the Cattle Cycle.  The Cattle Cycle refers to the increase and decrease in herd size over time.  This cycle usually last between 8 and 12 years, as the time it takes to adjust herd sizes to changes in pricing is long.  The typical Cattle cycle takes about ten years from low production and profitability to another trough.  The herd building process typically takes between six and seven years, while herd liquidation phase usually takes between three and four years.  The Cattle cycle has had historic peaks in 1935, 1945, 1955, 1965, 1975, 1982, and 1996.  The last cycle topped out in 1996 with slaughter the Cattle and Calf population at 103.5 million head.

The Cattle cycle is typically measured from trough to trough (bottom to bottom) and as such, the current cycle began in 1991.  In 1991, the United States Cattle and Calf population stood at 96.3 million head and grew to 103.8 million head in 1996.  Currently the Cattle cycle is officially in its 5^th year of contraction.  The last Cattle cycle from 1980 to 1990, peaked in 1982 and had 8 years of contraction and only two years of expansion.  At the peak of the 1980 to 1990 cycle, Choice 2-4 Texas 1,100 to 1,300 lb slaughter steers averaged $65.94/cwt  in 1982.  By the 5^th year of the herd contraction in 1987, Choice 2-4 Texas 1,100 to 1,300 lb slaughter steers averaged $66.63/cwt and by the end of the cycle in 1990, they averaged $78.73/cwt, an increase of $12.79/cwt or 19%. 

During the contraction phase of the last cycle, the number of Cattle on Feed increased roughly 70% as breeding stock and more heifers were introduced to the slaughter mix.

As is often the case, during the contraction phase – about half way – Cattle prices began to take off.  Choice 2-4 Texas 1,100 to 1,300 lb slaughter steers bottomed in 1986 below $60/cwt and rallied to almost $80/cwt as cattle inventories dropped.

The current cattle cycle began in 1991, as herd expansion began to take hold.  In 1991, 577 thousand head were added to the population in the January 1^st census.  In 1992 and 1993, herd expansion was in full force adding 1,163 and 1,620 thousand head, respectively.  By the spring of 1993, the increased number of cattle began to weigh on prices, with prices topping out at $82.66 hundredweight – basis Choice 2-4 Texas 1,100 to 1,300 lb slaughter steers.  The increase in production from 3 years of herd expansion had taken its toll on prices. 

From the spring of 1993 until September 1998, Choice 2-4 Texas 1,100 to 1,300 lb slaughter steer prices declined, dropping from $82.66 to $57.93 per hundred pounds.

The current cycle, which is in its 11^th year, saw heavier liquidation in 1997 due to drought, which forced some cow calf operations to speed up herd liquidation.

Current economics have also served to extend this cycle.  Currently it is more profitable to sell heifer for feeding than to retain them for breeding.  As such, cattle populations have been plummeting.  After all, Cow/Calf operations like any other business exist to turn a profit, and they should continue to sell heifers as long as economics favor herd liquidation over expansion.

Cattle cycles tend to peak when supply increases above the level of demand.  Since beef is a non-storable commodity  (limited storage life) the best judge of demand for beef is slaughter rates.  The cattle cycle tends to peak when inventory tends to decline ahead of slaughter.  The 1980 to 1990 Cattle cycle saw inventory peak in 1982, while slaughter rates did not peak until 1984/85.  This excess supply pressured prices down fin 1985 and 1986, until herd rebuilding began in earnest.  The price depression caused by this excess demand is known as the Whiplash Effect.

The Whiplash Effect also occurs at the end of the cattle cycle. When supply falls bellow demand – or slaughter on a relative scale.  At this point in the cycle, it becomes more profitable for cow/calf operators to retain heifers for breeding than sell them, and inventory levels begin to rise as demand is increasing.  Typically in this period, prices tend to be low and increase precipitously as demand chases a limited supply of beef, which becomes even smaller as ranchers retain heifers for herd rebuilding.  At the bottom of a cycle, slaughter tends to lag inventory, as seen in 1986 to 1990 and the last 4 years.

The Whiplash Effect is key to understanding the Cattle Cycle and Cattle prices on a longer-term basis, as the Whiplash Effect has traditionally seen prices reach extremes not justified by inventory levels alone. By understanding the Cattle Cycle and where we are currently in it, the astute Livestock Trader can plan market operations accordingly, as whiplash periods tend to see extremely volatile pricing.

The current Cattle Cycle is long in the tooth, in its 11^th year, but no signs of changing slaughter rates indicate a change currently.  If slaughter rates slow precipitously, prices could fall dramatically as too much supply chases slowing demand.