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LIVESTOCK MARKETS TURN IN CYCLES
The production side of the livestock markets is driven by biological cycles, which occur because of the inherent lag between the time producers decide to change production levels, and the time it takes for these decisions to impact supplies available to the market. For example, if hog producers decide to increase production by retaining gilts for the breeding herd, it will be several months before this actually results in more pork production. The interrelationship among the various livestock cycles can greatly impact prices and profitability.

Cattle Cycles

Cattle supplies have been shrinking since 1996. At the beginning of this year, cattle inventory had declined by about 5.5 million head from the 103.5 million head recorded at the beginning of 1996. Declining cattle numbers eventually translate into lower cattle slaughter and declining beef production. This pushes prices up and higher profits encourage cow-calf producers to increase the number of cows.

The data indicates that we are approaching the bottom of the cattle cycle. Prices for light weight calves, 400 to 500 pound, are over $1 per pound and have been at those levels for more than a year. These prices represent very solid profits for cow-calf producers and this year we could see a modest upturn in beef cow numbers. Still, it will be at least another year for the increase in cows to translate into a rise in total cattle numbers.

Once cow-calf producers decide to expand, fewer cows and heifers are sold for slaughter, which reduces beef production. This causes further gains in cattle prices and production profitability. If this cycle follows the typical pattern, cattle producers will see very strong prices for at least the next two to three years before the tight supply situation begins to ease.

The current cattle cycle has gotten an added bonus - strong demand. Consumer spending on beef was stable near $190 per person per year throughout the 1990s, but spending has now jumped to more than $210 per person. This has resulted in more than $5 billion in additional revenue for the cattle inventory.

Over the years, exports have become increasingly important for the beef industry. In the early 1990s, beef exports totaled about 1 billion pounds, compared to 2.3 billion predicted for this year. Domestic demand still drives the market, but export surprises can have a real price impact.

Hog Cycles

The hog production cycle is much shorter than it is for cattle, but the factors at work are similar. Hog numbers are at a relatively low ebb, and hog production profits have been very good for more than a year. This suggests that we are near the expansion phase of the cycle, but the latest Hogs and Pigs Report indicated that producers are very cautious.

This expansion reluctance may be the result of several factors. The last downturn in prices in late 1998 was disastrous, with cash hog prices falling to around $8 per cwt. Christmas hams in 1998 brought more in grocery stores than farmers could get for an entire hog at auction markets. Essentially every producer lost money and the red ink forced many producers out of business entirely. With that memory still fresh in producerís minds, the cautious approach to expansion is more understandable.

In addition, states, cities and towns continue to add to existing environmental and zoning regulations that make hog herd expansion more difficult. This is especially important as the concentration in the hog industry continues at a rapid pace. Still, the incentives for expansion are very strong and pork production next year will almost certainly be up from the level expected for 2001.

Not too many years ago, the U.S. was a major net importer of pork. Imports in 1990 were near 900 million pounds, while exports totaled less than 250 million pounds. Now we export more than 1.3 billion pounds of pork, about 400 million pounds more than we import. Clearly, world market developments are a much greater influence on hog prices than they were a decade ago.

Economic conditions still have an impact on U.S. livestock markets. Todayís two income families are willing and able to pay extra for convenience, and significantly more meals are consumed away from home than was the case just a few years ago. Consumer spending on food is a very minor part of the budget, and the food budget is low on the list. Still, rising unemployment and falling consumer confidence can have an adverse impact on meat demand and on livestock prices. AM

Rich Pottorff is chief economist with Doane Agricultural Services Co., St. Louis.


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