Avoid misinterpreting year-to-year cattle inventory changes
Cattle inventories and markets move both seasonally and cyclically. Analysts often start with year-over-year comparisons. Doing so removes the impact of seasonality, but focusing on only two points in time can skew perceptions by ignoring broader trends.
The baseline you choose matters. Comparing July 2021 values to July 2020 values may overstate inventory changes. COVID-19 created a backlog of cattle last summer. That could have altered weaning, backgrounding, replacement, culling and marketing decisions, which could have inflated, or deflated, some inventory numbers.
Choosing a baseline other than "a year ago" is a remedy. Using a more "normal" year or an average over several recent years can prove useful for some comparisons.
While some years appear to not "fit" the cattle cycle, the cycle still exists. But during outlier years, outside forces have an overriding influence on producer decisions.
Prices tend to vary inversely, though not perfectly, with cattle numbers. As inventories decline cyclically, prices are expected to increase. Iowa fed cattle prices were 25% higher in July 2021 than in July 2020. Feeder cattle prices were 14% higher. Cull cow prices were similar to a year earlier. Certainly all else was not equal when comparing 2020 and 2021.
Cyclical contraction continues
USDA’s mid-year Cattle report based on data gathered from producers by the National Agricultural Statistics Service shows July 1, 2021 beef cow numbers down 2.0% from July 1, 2020, 2.8% below July 1, 2019 and the smallest since 2015, which was the second year of the current cattle cycle (Table 1). Note, USDA suspended the mid-year Cattle report in 2013 and 2016 due to federal government sequestration.
One of the more surprising 2021 mid-year numbers was the 2.3% drop in beef heifers kept for replacement compared to 2020. Fueled by COVID-19, the number of heifers entering the herd during the first half of 2020 surged 6.8% compared to 2019’s first-half entrants. Strong cow prices may have enticed some producers to keep heifers and sell cows. Comparing to the relatively high base last year suggests that contraction may not be as severe as the first glance at the figures might suggest.
Several factors drive inventory dynamics. Some are: the financial condition of producers, weather (feed availability), and consumer demand both domestically and internationally. Weather patterns, especially drought, can shift inventories into feedlots or extend cow herd liquidation.
Deteriorating corn crops and pastures in many cattle producing states is not new news. Still, drought effects on cow slaughter have become more apparent. Year-to-date federally inspected beef cow slaughter is larger than a year ago by 162,051 head or 8.9% (Figure 1). Compared to the same period in 2019, it’s up 224,986 head or 12.8%. The second quarter of 2021 was the largest second quarter beef cow slaughter figure since 2010, and that’s after quite large 2020 fourth quarter and 2021 first quarter values.
However, the sizable surge in beef cow slaughter does not necessarily mean a severe beef herd liquidation is underway. After all, the beef cow inventory is larger than at the beginning of the current cattle cycle, so a larger supply of cull cows are available.
Let the data tell the story
Other indicators help monitor the stage of the cattle cycle. Although no single indicator is perfect, using several indicators together can provide insight into the current cattle cycle.
The ratio of beef cow slaughter so far in 2021 versus the January 1 beef cow inventory is 6.4% compared to 5.8% in 2020 and 5.6% in 2019. A 6.4% mid-year culling rate is typical for a contraction phase of the cycle. During the 2010 to 2013 contraction, the ratio of beef cow slaughter in the first seven months of the year averaged 6.3% of the January 1 inventory.
Heifer retention helps key future slaughter and beef production. Attractive prices enticing producers to retain heifers reduces fed cattle slaughter and beef production over the succeeding couple of years, further buoying prices. Shortened fed cattle supplies persist until calves from those extra heifers grow to slaughter weight. This process usually takes at least two years. Growth in beef production outpacing demand weakens prices. In response, producers liquidate heifers. Short-run beef production climbs, which can put more downward pressure on prices. Eventually, liquidation slows, supply falls short of demand, and the cattle cycle turns.
So far in 2021 heifer slaughter has been 7.6% higher than last year. But compared to the first seven months of 2019, heifer slaughter is up only 2.4%.
The mix of heifers on feed as a percent of the total cattle on feed remains similar to rates seen at the top of the last cattle cycle. The July Cattle on Feed report for feedlots with capacity of 1,000 or more head indicated heifers were 38.2% of the on feed mix (Figure 2). In July of 2019 and 2020, it was 38.9% and 38.5%, respectively. Typically, the ratio of heifers on feed needs to decline in order to retain enough heifers to first stabilize, and then to increase, the size of the cow herd. The percent of heifers on feed declined substantially from 2012 to 2015. That decline has yet to occur in the current cycle.
So far in 2021, beef cow slaughter in Iowa, Kansas, Missouri and Nebraska is up 1.4% from the same period in 2020, but 2.4% lower than in 2019. Heifer slaughter is 6.6% higher compared to 2020, but 0.4% lower than in 2019. These moderated volumes suggest producers in this region may be freshening the herd with younger cows. In Iowa, 21.7% of the current cattle on feed in 1,000 head or more capacity feedlots are heifers. This is the lowest percentage for any quarterly estimate in the history of the data back to 1992. The lowest before this was in April 2015.
Predicting the peak or trough
There are several factors that might provide incentives for some cattle producers to behave differently, or counter cyclically, compared to other producers. Counter cyclical behavior basically means that producers would retain more heifers and/or cows than usual when cattle inventories are at or near the high point of the current cycle under the assumption that prices will soon rise. On the flip side, they would sell more breeding females than usual when cattle inventories are at or near troughs in the cycle assuming that prices will soon decline. Factors that can incentivize counter cyclical actions include:
- Having a significantly lower cost to produce calves than others.
- Holding an opinion that prices for breeding females near the top of the cattle cycle are undervalued. Or, overvalued near the bottom of the cycle.
- Having a different attitude toward risk than other producers.
Knowing the stage and trajectory of the cattle inventory cycle can help producers plan long-run strategies for their businesses. Producers need to be able to forecast, with a reasonable degree of certainty, the future path of prices during a cattle cycle.
Several factors complicate forecasting. First, every inventory cycle is different. Inventory cycles typically last about 11 years. However, some cycles have been as long as 14 years and some as short as nine years. Second, supply and demand shocks continuously hit the market making it difficult to judge price movements purely by changes in cattle inventory.
Lee Schulz, extension livestock specialist, 515-294-3356, firstname.lastname@example.org