Released Nov. 7, 2007
STILLWATER, Okla. – It has cattle market analysts shaking their heads, trying to figure it out: The market for cattle in the United States is strong and providing good incentives for producers to increase their herds, but producers are ignoring the market and opting for the status quo.
That has some wondering if the so-called “cattle cycle” is broken, said Derrell Peel, Oklahoma Cooperative Extension Service livestock marketing specialist.
Analysts talk about the cattle cycle where the national cattle inventory expands until the market provides too little profit, and then producers collectively cut back on breeding herds until lowered supplies cause the market to once again offer acceptable profit levels. It is the classic scenario of supply and demand taught in every beginning-level economics class.
“The cattle cycle is national, only in this case producers are not responding as they have in the past,” Peel said. “The set-up to where we are today goes back to an eight-year period of cattle liquidation that bottomed out in 2004.”
In January of that year, total cattle numbers were slightly less than 95 million head. The most recent time the U.S. numbers were lower than the 2004 figure was in 1959.
“In Oklahoma, our numbers actually bottomed out in 2000,” Peel said. “We began to rebuild some numbers, but the bottom line is that we are still at nearly 50-year lows in the cattle inventory.”
Peel said record prices for cattle, which would normally encourage rebuilding, have been overridden by the drought.
“In 2002-2003, it was in the intermountain west, the last two years it moved to Oklahoma and Texas, this year it’s in the southeast,” he said. “As it has moved around, it has extended cattle liquidations and now it’s muting the expansion.
Add in a sharply higher feed complex, the whole set of feed-related issues such as corn going for ethanol and wheat in short supply because of production problems, and petroleum-related issues leading to high fuel and fertilizer costs and the result has been significant increases in a wide range of input costs.
“Even though cattle prices are at a high level, that profitability is not as meaningful because of the higher input costs,” Peel said.
Among market analysts, there are a variety of opinions on what the “real” collective effect has been on the cattle cycle.
“Some think that the cattle cycle is still working but that it’s slowed drastically by drought and higher production costs,” Peel said. “On the other end, there are those who think that these changes have wiped out the cyclical expansion scenario.”
Peel classifies himself as being somewhere between those two modes of thought.
“I have the impression that the economic signals for expansion have been greatly weakened, plus there’s a perception that things are just too risky and folks don’t want to be real aggressive,” he said.
Peel blames the uncertainty on producers’ reaction to the basic risks of production.
“Farmers and ranchers are generally very optimistic folks; they usually say they can produce, it’s the markets they’re unsure of,” he said. “Mother Nature has been so unpredictable over the last three to four years, they’re no longer sure they can produce.”
Peel believes the reaction is temporary.
“They’ll bounce back, they’re not quitting or giving up,” he said. “I just think they want to play it safe, play it cautiously, so they’re holding back.”
That caution is playing out in Oklahoma this fall in the sharp reduction in wheat planted for winter grazing. Dry weather, high seed costs and production uncertainty had many producers opting to not plant in August or September - necessary for grazing – and instead waiting until October to plant, trying to reduce the risks of producing a grain crop.
“For cattle producers to expand, and keep in mind that there are a lot of small producers who simply can’t afford much risk, they have to spend money to fertilize, mow pastures, buy feed and purchase fuel,” he said. “They’re just not willing to be aggressive about it.”
Peel does not believe much will change next in the next year either, citing that 2008 is going to be just as interesting as 2007 given the potential effects ethanol can have on the feed market, the lack of a completed U.S. farm bill, petroleum price factors and election year politics.
“A lot of folks are wondering, ‘Whose turn will it be to host the drought next year?’” he said. “There are just too many variables to try and track. Folks are hunkering down, playing it safe and waiting to see what happens in the months ahead.”
All of this means that the national herd expansion will continue to stagnate, which is not good news for consumers. Beef prices have climbed higher because of demand and rising grain prices. Until supplies improve, retail prices are unlikely to come down.
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Contact: Ron Dahlgren, (405) 744-3737, ron.dahlgren@okstate.edu
