The cattle cycle – wherein inventory goes from lows to a recovery to herd highs, followed by liquidation, and then repeats itself – lasts about eight to 10 years. That’s not my estimate, but rather the analysis of several extension economists and USDA analysts made over decades.
We see the cycle at play once again: The prices that are determined by high inventories followed by heavy liquidation has proven true in 2021. The similarities to the last cycle, triggered around 2011-12, are just as noticeable this time around.
The last cycle was sparked by a historic drought, the worst on record for the Southern Plains in generations. Hundreds of thousands of cattle were culled after Texas and parts of Oklahoma went over a year without consistent rain in 2011. The drought continued in the Central Plains the following summer, leading to even greater liquidation. Several packing facilities closed as inventory dropped suddenly.
When those cows were sold, producers did the smart thing. They reinvested in herd quality by buying the best genetics possible. Carcass quality went up drastically. The volume of high Choice and Prime beef has soared in this cattle cycle. Select beef is disappearing from shelves. Consumer demand index is at the highest level in 30 years.
So when the rally began in 2014, sparked by low fuel prices, low inventory and a hunger for more beef, the 2014-15 period turned into a price peak unseen in history.
That was followed by a correction in the fall of 2015, a sudden and puzzling one in which cow-calf producers started to question the fairness of the market dynamics. Meanwhile, the industry dealt with new obstacles ranging from veterinary feed directives, a tide of activism against beef (remember “pink slime”?), continuing evidence of climate change and market disruptions.
Ultimately, the expansion ended in late 2019 when the Tyson plant fire disrupted packing capacity throughout the Midwest, creating a price plunge for calves that infuriated producers. It grew more pronounced the next spring as COVID-19 hit, the biggest takedown of our economy since the Great Recession.
For many producers and analysts, the markets worked because the people in the industry worked overtime. Shifts at packing facilities with limited shackle space went beyond 40-hour weeks for much of that period.
The result is a huge drop in the cattle inventory from the fall of 2019 to today, which is continuing due to nasty drought conditions in the West. Weekly average live cattle futures have seen their best 12-month run in years from $110 per hundredweight (cwt) to $137. The CME Feeder Cattle Index, the 550-pound steer price and the 800-pound steer price are all $15 to $20 higher per cwt than levels a year ago.
The next few years look good for producers, but obstacles will remain. Corn is going to be a higher expense commodity than in the last cycle, as will fuel, land leases and purchases, and the ongoing discussion about labor. The cattle cycle continues and so does the tradition of tight margins.
