| OU 298 | February 12, 1996 |
South Carolina cattle producers are wondering when will the cattle cycle reverse itself and the industry return to a time of decent prices and profits. By all indications the chances of this happening soon are small. The USDA indicates, in their January 1, 1996, cattle inventory report that US cattle numbers are expected to be one percent higher in 1996 than in 1995. If this is true then, what can South Carolina cattlemen expect to happen in 1996 and over the next few years? Let's look at some of the economic signals that are affecting the cattle industry and attempt to answer this question.
| Inventory | Slaughter | ||||
|---|---|---|---|---|---|
| Year | Total | Beef Cows | Calf Crop | Total | Cows |
| 1990 | 95.8 | 32.5 | 38.6 | 33.2 | 5.9 |
| 1991 | 96.4 | 32.5 | 38.6 | 32.7 | 5.6 |
| 1992 | 97.6 | 33.0 | 38.9 | 32.9 | 5.8 |
| 1993 | 99.2 | 33.4 | 39.4 | 33.3 | 6.1 |
| 1994 | 101.0 | 34.7 | 40.1 | 34.2 | 5.9 |
| 1995 | 102.8 | 35.1 | 40.3 | 35.6 | 6.2 |
| 1996 | 103.8 | 35.3 | 40.1 | 36.2 | 6.5 |
| 1997 | 102.5 | 35.1 | 38.9 | 37.5 | 7.0 |
| 1998 | 99.6 | 33.4 | 38.1 | 36.8 | 6.7 |
| 1999 | 98.4 | 32.2 | 38.0 | 35.0 | 6.2 |
These cattle numbers suggest that there will be a continued increase in beef supplies for at least the next two years. Slaughter estimates for cows suggests that the kill rate will need to increase substantially to reduce the number of females capable of calving and decrease future meat supplies. My estimates (Table 1) indicate that the level of cow slaughter will continue to increase through at least 1997.
Cow slaughter is an important number to watch when trying to predict when the cattle cycle will turn around. The level of cows slaughtered and calf prices are very closely tied together. And, an increase in cow slaughter must precede any increase in calf prices. When cow slaughter is high producers generally are not making a profit and are reducing the size of their cow herd. This in turn will reduce the size of the potential calf crops over the next two to three years. A reduction in the calf crop will reduce the beef in the market place and eventually increase cattle prices. This will filter back to the cow-calf producer in the form of higher prices for their calves.
U.S. beef exports have been the bright spot in the demand picture for beef. Over the last decade, exports have increased significantly, going from 328 million pounds to 1.6 billion pounds annually (391 percent). In fact, the U.S. is expected to be a net exporter of beef in 1995. The first time since WWII. Exports now account for about 7.5 percent of total U.S. annual beef production. This expansion in exports has provided much needed support to U.S. beef prices. Further expansion during 1996 and beyond are likely to occur provided we can maintain favorable foreign trading conditions with our world partners.
Beef imports, which are historically larger than exports have remained nearly level during the last five. Live cattle imports are up slightly from our trading partners; Canada and Mexico. However, with anticipated increases in cow slaughter due to lower beef prices, beef imports are expected to decline during the liquidation phase of the beef cycle.
Cattle producers who supplement their cows or creep calves with grain will also have a significant increase in feed prices throughout most of 1996. Corn prices have increased by as much as 50 percent over its 1994 level. The increase in corn price is also having an impact on the price of soybean meal and whole cottonseed. A large corn crop is needed in 1996 to make any true difference in corn prices since the stocks to usage ratio for corn is near an all time low.
Most cattle producers will need to focus on improving forage and animal management, reducing stocking rates, seeking out alternative low- cost feedstuffs, or leasing additional pasture in order to reduce their cost of production and curtail potential losses. This scenario will likely be the rule and not the exception in 1996 and the next few years.
First, calves that are born in 1996 will not impact the meat supply for about two years. This is based on the production cycle of the animal; calves born in 1996 will be yearlings in 1997 and it will be 1998 before the majority of these calves can be slaughtered. The January 1, 1996 inventory numbers suggest that the calf crop is still increasing. Until this crop is reduced, by killing the cows that produce the calves, meat supplies cannot decline. Additionally, in the process of reducing cow numbers the meat from these animals will also be put on the market. In other words, things must get worse in order for them to get better.
Second, the history of cattle cycles indicates that it takes about eight to eleven years for a cycle to run its course. (Cycle being defined as the time between low points in cattle inventory numbers). We have seen five cycles since 1950. The start of the last cattle cycle is generally considered to be 1990 when total cattle numbers were estimated at 95.8 million head. The U.S. cattle inventory is now placed at 103.8 million head as of January 1, 1996. Based on this historical pattern, it will take another two to three years for this cycle to reach its ending low point.
Hence, beef market prices are expected to move lower through most of 1996. Slaughter cattle prices are expected to move 3-5 percent lower, feeder cattle 3-7 percent and calves 5-8 percent lower. The 1996 price outlook is for slaughter cattle to average in the low $60's. Choice fed cattle (Midwest basis) may average $65 in the first quarter of 1996; falling to the high $50's during the summer and back into the low $60's in the Fall when Summer fat cattle supplies retreat from their seasonal highs.
Historically, higher feed grain prices narrow the premiums paid for light weight cattle (calves) relative to heavyweight feeder cattle. This fact is now occurring in South Carolina's cattle markets. Weekly prices as reported by South Carolina's Market News Service, USDA show 4- 5 weight calves selling at $54 per hundredweight while 7-8 weight feeders are selling at $48 per hundredweight (February 5, 1996). Light weight calves in the Spring of 1995 were trading at a $10 per hundredweight premium.
Differences between these different weight classes of cattle will likely continue to be small through much of 1996 and will almost assuredly continue until the price of feed grain drops. Given this rational, feeder cattle (750 pounds) price will likely average near $50 per hundredweight in 1996; 400 to 500 pound calves are estimated to bring a price of $53 per hundredweight. These prices will be marginally higher in the March-April time frame declining seasonally in the summer. Fall prices will depend heavily on the size of the corn harvest and its affect on the price of corn..
When will the bottom of the cattle cycle occur? This will become clear only when beef cattle numbers decline or the liquidation of the cow-herd begins. The stimulus to initiate these two events is profitability or rather the "lack of it". Most South Carolina cow-calf producers made money up until 1995. False expectations of a quick turn around in cattle inventory and a rapid rebound of cattle prices in the Spring of 1996 will only extend the length of the cycle.
Now is the time for forward thinking cattle producers to make changes in their cattle operations. Given that many of the forces driving this cycle are beyond the control of any single cattle producer, we must concentrate on those factors that we can control and do it now.
1996 by Department of Agricultural and Applied Economics, Clemson
University.
