Deciphering the Dynamics: The Ongoing Evolution of the U.S. Cattle Cycle

The ebb and flow of the cattle industry is as fascinating as it is intricate. If you’ve been tracking the rise in Live Cattle and Feeder Cattle futures prices since mid-2020, you know that the industry is in a unique phase of its historical cattle cycle. Let’s delve deeper into understanding the dynamics and trends that continue to shape this crucial sector of agriculture.

The Current Landscape: Prices and Droughts

Recently, on August 4, 2023, front-month Feeder Cattle futures marked a record high of $249.525/cwt. This peak can be attributed to severe drought conditions in 2022 that forced producers to place cattle in feedlots prematurely. Dry conditions not only limited available forage but also escalated feeding costs. This hastened shift towards feedlots included a growing proportion of heifers, which are young female cattle yet to give birth.

In parallel, the harvest numbers for mature beef cows that had given birth rose by 11% in 2022 compared to 2021. Consequently, by January 1, 2023, the total count of beef cows in the U.S. had dwindled by 4% year-over-year to 28.9 million, a number not seen at the start of a year since 1962.

Front-month Live Cattle and Feeder Cattle futures daily settlement price, $/cwt

Tracing the Cattle Cycle

The cattle cycle is a historical pattern mapping the inventory fluctuations of cattle and calves in the U.S. Typically spanning eight to twelve years from peak to trough, the cycle has seen 12 peaks and 11 troughs since 1890. It is a reflection of supply and demand affected by cattle prices, input costs, weather patterns, breeding techniques, and genetics.

Furthermore, the proportion of heifer slaughters, which reached 31.3% by May, is a vital metric that the trade community keenly observes. A reversal in this trend would signify the onset of a new phase in the cattle cycle, primarily marked by an increased need for breeding.

U.S. cattle inventory by cycle, 1979-present

The Journey of American Beef Cattle

The life of an American beef cattle commences on a cow-calf operation. These operations, predominantly family-owned, average 44 head nationally. Grazing land, which spanned 614 million acres in 2022, covers about 27% of the U.S.

The cows and calves are primarily maintained on pastures and are introduced to the feeding system once weaned, which includes several stages from a stocker or backgrounding operation to being sold as “feeder cattle”. The CME Group Feeder Cattle futures contract represents this stage in the cattle lifecycle.

The next phase is the feedlot, where animals aim for a weight gain between 2.5-4lbs daily. Upon reaching the slaughter weight, these cattle are sold to meat packers. Risks associated with cattle prices at this juncture can be hedged using CME Group Live Cattle futures.

Cattle inventories, 1970-2022

Evolutions in the Cattle Industry

Over the last 130 years, the cattle lifecycle has undergone significant changes. While in 1977, the average slaughter age for beef cattle was 609 days, by 2007, it had reduced to 468 days. Yet, despite the shorter life, the average carcass in 2007 produced 28% more beef per animal than in 1977. Modern techniques have enabled the production of equivalent beef quantities with fewer animals and lesser feedstuffs.

Conclusion

The contraction phase of the cattle cycle is evident with the current low herd numbers. While high prices have been a result of droughts and their impact on cattle-producing regions, the anticipation is for an increase in heifer retention and herd rebuilding in the upcoming years. Factors such as drought, pasture conditions, and producer profitability will dictate the length of this contraction phase.

As the cattle cycle continues its historical ebb and flow, the CME Group remains dedicated to providing essential benchmarks for the constantly evolving cattle industry, ensuring that stakeholders can manage price risks effectively.