Feeder cattle prices averaged $25-$30/cwt. higher in 1997 than in 1996. The price turnaround has many cow-calf producers planning for a return to the glory years of the early 1990's. Other producers seem to worry that the quick turnaround will just as quickly fizzle. Cattle feeders ended the latter half of the year with lots of cattle in the feedlots and with prices slipping below the previous year's levels all at a time when cattle numbers were supposed to be on the decline. What's going on here? Perhaps a look back at previous cattle cycles, and at just what and how cattle prices are determined will help set the stage for what's likely to occur over the next several years.

Beef Price Cycles

The most immediate question many calf producers have on their mind is: "Will the run-up in prices continue?" Breaking the longer term prices into patterns following the posting of a cycle's price low can provide at least a partial answer. Figure 2 shows the price recovery of the past 3 cycles as a percentage of the low price in the 48 months following the price low. The price recovery pattern to date from the low prices of April/May 1996 looks much like those of the last two cycles. By July of 1997, calf prices were 85% higher than the lows of 1996. The 60% to 80% recovery range however seems to be a consolidation range. Prices tend to remain in this range for a couple of years after the initial recovery. Based on the past two cycles, we might conclude that calf prices in the $80-$90 range are here for sometime and that a continuation of the calf price recovery is not at hand.

Beef Production Cycles

The lag between producer's response time to high or low prices and the resultant increases or decreases in beef ultimately reaching the consumer tends to make the cycles repeat themselves. Herd rebuilding (holding cows longer and retaining heifers) results initially in reduced supplies on the market, making a good price situation better. Likewise, herd liquidation makes bad prices even worse as more cows are sent to slaughter and heifers are sent to feedlots. Thus, herd rebuilding and liquidation tends to accentuate the high and low price periods.

Where are we in the current cycle? After building the U.S. cow herd from 1990 through 1995 by about 9%, cattle producers finally cut numbers in 1996 by about 3%. Despite media hype to the contrary, cattle numbers will show another decline in 1997. While about 8% fewer cows were sent to slaughter in 1996, heifer slaughter increased by 9%. Therefore, total female slaughter has increased by about 2% from 1996. This is likely to result in the January 1, 1998 cattle inventory showing another 1% to 2% decline from the January 1, 1996 level. The pattern of herd liquidation, the pause in price increases and the current large number of heifers in feedlots all indicate that 1998 will show some further decline in cattle numbers rather than become the "hot" herd rebuilding year forecast by some.

Cattle Profit Cycles

The real driving force of the cattle cycle is the profit or loss situation faced by producers. Interestingly, it has taken 4 or 5 years of losses in the last several cycles before the cow herd is reduced enough to push prices back to profitable levels. Including 1997, the present cycle has resulted in 3 loss years. If past profit/loss cycles hold, it would not appear that 1998 will return the average U.S. cow-calf producer to total profitability.

Marketing Implications of Cycles

A recent study of the historical relationship between the cyclical cow-calf profits and other phases of cattle production revealed the following⁽²⁾:

(1) Cattle feeding and stocker operation profits tend to be consistently positive in the initial rise in prices of a cycle and tend to be consistently negative on the initial fall in prices, but tend to be random up and down in between major breaks in the markets.

(2) Cattle feeding and stocker profits show a strong positive relation to cow-calf profits on the sharp market "up" and "down" turns of cycles, but have only a weak positive relationship to cow-calf profits during the gradual up-trend and down-trend years.

(3) Retained ownership of calves may reduce the initial losses in cow-calf operations during the low price phase of the cycle but show little hope for recovering all cow calf losses.

Based on the current cattle cycle position and the lack of any consistent pattern of retained ownership profits other than in the major price break years, cow-calf producers shouldn't bank on profits from retaining their calves through stockering or feeding, simply because of the price cycle. The major upturn in this cycle (1996 into 1997) has already passed, and as discussed here, a period of consolidation in prices is most likely to occur. Stocker and feeding profits are most sensitive to the buy-sell margin, and profits can be made in low as well as high price years. For this reason any cow-calf producer who pencils out a profit from retained ownership in any particular year should seriously consider price risk management strategies on both cattle and feed.

Emphasizing the cow herd seems to be an appropriate cycle-based strategy. If the past profit cycles repeat themselves, heifers retained in 1998's cow herd should have a good chance of producing several calf crops during the profit phase of the cycle. Heifers held for sales as breed heifers in 1999 and 2000 have the best chance of hitting the cycle's rebuilding phase when demand becomes strongest for replacement stock. My calculations show that for the Southeast as least, retaining heifers is more profitable than retaining steers in an average price year. The odds favor holding onto heifers even more over the next few years.

What Really Determines Cattle Prices?

A basic understanding of the major factors impacting cattle prices can help put in perspective both the long term and short term cattle price forecast. The table below shows how various factors have affected both feeder calf and fed cattle prices.

The Cattle Price Crystal Ball - Effects of Various Factors on Fed Cattle and Feeder Cattle Prices

Factor	Percentage Effect on Price From Prior Time Period of a 1 % Change in the Factor	Dollar Effect On Fed Cattle  ($/Cwt)	Dollar Effect On A 550 Lb. Feeder Calf  ($/Cwt.)
Beef Supply - Net of Imports/Exports	-1.5%	-$.98	-$2.05
Pork Supply	-.35%	-$.23	-$.48
Poultry Supply	-.23%	-$.15	-$.31
Population	+1.0%	+$.65	+$1.35
Corn Price - $.10/bushel Change			-$1.44

As can be seen from the "crystal ball", small changes in supply can have large impacts on prices. It is the supply side that most effects long-term cattle prices as the production cycle moves through the phases discussed above.

Feeder calf prices are derived from fed cattle prices (what the calf can be sold for after feeding) less the cost of gain. Of course, a major portion of the cost of gain is feed cost. The first major move of the last three feeder cattle price cycles has actually been due to changes in feed cost rather than beef supplies. For instance, Chicago corn prices averaged $4.30/bushel for the first half of 1996, as compared to $3.36/bushel for the first half of 1997. Beef production was down by around 3% the first half of 1997, as compared to 1996. Using the "crystal ball" formulas, the corn price decline accounted for about $13.50/cwt. of the increase in calf prices while beef production accounted for around $6.00/cwt. of the increase. In both the 1986 and 1975 cycle, corn price declines of $1.00/ bushel or more preceded major calf price increases.

The importance of grain prices to the feeder cattle price outlook begs for a grain price forecast. While the 1998 crop weather will most likely dictate what will happen to grain prices, three overall factors should be kept in mind. First, grain prices have fallen significantly already. Secondly, world wide grain stocks are relatively low. Thirdly, there are a lot more hogs and chickens to eat the grain than last year. When all these factors are taken together, it seems unlikely that calf prices will get much, if any more, help from the grain side in 1998.

Beef Production

the new year begins with a large number of cattle in the feedlots (up 8%) and the effects of fewer cattle to place may not show up noticeably until the latter half of 1998. For the year as a whole, I expect total cattle slaughter to be down around 4 % to 5%.

Beef production for the year will not be down as much as will slaughter, since cattle weights are expected to exceed 1997's levels for most of the year. During the first half of the year, the added weight per head will be particularly noticeable as slaughter weights during the first half of 1997 ran well under 1996 levels. During the first quarter of 1997, cattle slaughter was down by less than 1%, but production dropped by about 3%. During the first quarter of 1998, slaughter may fall as much as 3% under the first quarter of 1997 with little change in production.

Imports and Exports

Although beef exports failed to surpass imports in 1997, the growth in beef exports has been a real plus to the industry. Consider that in 1985, beef exports amounted to only 1.5% of production. Last year, exports accounted for over 8% of production. Since imports have remained relatively flat over this time period, the export growth has been the equivalent of reducing U.S. supplies by 6.5% (8%-1.5%). That is, if we still exported only 1.5% of our production, we would have to move about 6.5% more beef through our domestic market. Using the "crystal ball" formula, its easy to see the importance of the export markets to the prices producers receive.

The growth in meat exports over the last 15 years has been due to a number of factors, all of which will bear watching in the future. The long-term decline in the dollar relative to other currencies, reductions in world trade barriers, improvements in meat shipping and storage technology, and population and income growth around the world have all contributed to the growth in meat exports. Unfortunately, for the short-term only continual improvement in meat shipping and storage technology looks positive. For the longer term, world economies are likely to improve. World wide trade liberalization must continue if beef exports are to show growth over the longer term however and the recent failure of "fast track" legislation is troublesome. Still the long term continuation of beef export growth seems to be likely, just not at the strong pace of the past 15 years.

 Competing Meats

A smaller beef supply in 1998 will be more than filled by the competition. Pork producers are poised to send about 2.5 million more hogs to slaughter in 1998 than in the previous record production year of 1995. Pork production may be around 8% larger in 1998, with the first half of the year showing even larger gains at times. Poultry production will show its usually 5% to 6% production gain in 1998. The impact of the large increase in competing meats on the domestic market will be accentuated, as both pork and poultry producers have had a tough time of pushing exports. Most all of the increased meat supplies will have to be absorbed here rather than abroad. Obviously, this kind of competition will keep a serious lid on higher cattle prices in 1998.

Cattle Price Forecast

Western Kansas fed cattle markets during the first of the year are likely to remain in the mid $60 range before rallying into the upper $60's to low $70's by spring. Peak April prices aren't likely to exceed the $72 mark by much if any. With larger beef production cuts in store for the latter half of the year, fed cattle prices may strengthen to produce the first quarterly fed cattle average price above $70 since the first quarter of 1995.

Heavy weight feeder cattle will follow a similar pattern as fed cattle with much of the first of the year spent in the high $60 to low $70/cwt. range. As optimism builds for placements of cattle along with stronger fed cattle markets, the heavy feeders will pick up in price, perhaps touching into the upper $70 range toward year's end.

Calf prices are projected to make normal seasonal highs in the upper $80's by early this spring. Normal seasonal lows of the fall won't be too much lower than the spring highs. Keep in mind that the feeder cattle price outlook can be much altered by a short 1998 grain crop.

1. Presented at the 1998 Extension Winter School, Rock Eagle, January 20, 1998.
2. McKissick, John C. and John Ikerd, "Retained Ownership In Cattle Cycles", Managing for Today's Cattle Markets and Beyond, The University of Georgia and USDA, July, 1997.

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