The July USDA cattle report confirms that we are currently in the liquidation phase of the cattle cycle. Cattle cycles generally run ten years from peak to peak, but all can vary. To date, we have reduced approximately 7% of our breeding herd. In past cycles that could have indicated a bottom, however with current economic conditions and the western states in a multiyear drought, this cycle’s reduction could be more significant. Some analysts believe that we still have considerable breeding stock reductions ahead of us.
Cow-calf producers are really in the grass business. Grass and hay account for the majority of inputs in these operations. Inflation prices and drought have caused massive increases in the costs of raising livestock. What can we do? Every producer must evaluate their operation, especially their hay and grass supplies to see if additional stocking rates are possible. Being a contrarian and building herd numbers when the industry is retracting can pay big dividends. Currently, some producers are looking at commodities and by-products to see if using these can extend their feed supplies enough to make additional stocking feasible.
If the current liquidation phase lasts another 7-10% the demand for heifers and young cows will eventually increase. This will pay big dividends for those who have the feed and ability to increase numbers now. This cattle cycle is a little different than the cycles of the past. Today, we are reducing numbers due to drought and not due to economic profitability. The returns for cow-calf operations are still very good and is projected to continue for the next few years.
We are seeing consumer patterns change. The demand for ground beef is currently very high, as consumers seem to be shifting from the more expensive cuts of meat to the ones that are more economical. We are likely to see the consumer shift protein products as well. Many believe there will be a reduction in beef consumption and an increase in poultry consumption. Last month we saw those shifts start. In addition to product substitution, we also saw consumers increasing their purchases to the less expensive fast-food chains and away from the grocery store. This change from a protein rich diet to a carbohydrate-based diet is not in the best health interest of our nation, but the wallet will dictate what most consumers will do. The biggest fear the industry should have is the impact of this change on young families. When a child is raised on beef and other protein rich food sources their tendency is to make the same purchases as an adult. If this switch happens in their formative years, the fear is that these future consumers will tend to prefer a carbohydrate-based diet as adults.
While there will always be ebbs and flows to the cattle cycle and beef demand, producers who can find opportunities to increase stocking rates in these times may find themselves in the economic driver seat in the future. The pendulum effect of any market is it to overreact and shift too far both in the liquidation phase and the rebuilding phase of the cattle cycle. As producers, our goal should be to keep stocking rates as high as possible and take advantage of this over-reaction while keeping a more constant beef supply for the American consumer.