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MARKET TALK – for Mar. 14, 2011

I’ve had many inquiries over the past couple months in regards to the U.S. cattle cycle. Prices for feeder cattle have reached historical highs and cow-calf producers are wondering when U.S. cattleman will respond to the price signal and start moving into the expansion phase of production.

The USDA cattle inventory report issued last month shows that the total cattle herd on Jan. 1, 2011 was 92.6 million head; down one per cent from the year ago level of 93.9 million. The 2010 U.S. calf crop was confirmed at 35.7 million head, down one per cent from 2009. This is the lowest total inventory since 1958 and the smallest calf crop since 1950. In this issue, I’m going to look at how U.S. cow-calf producers have responded to high prices in the past and hopefully draw some logical conclusions about what they will do in the future.

I’ve included a monthly chart of live cattle futures from 1980 to 2011 and included a chart of the U.S. cattle inventory for the same period to illustrate the trends we are talking about.

From 1980 to 1990, the cattle herd was in contraction phase, but notice prices actually started moving higher in the latter half of 1987. The drought of 1988 prolonged the herd contraction even though beef prices were starting to turn higher. Prices moved higher for approximately two and a half years before expansion occurred.

The market remained basically in an upward trend from 1987 through to March of 1993 while the U.S. herd remained in expansion mode from 1990 to 1996. In other words, U.S. cow-calf producers continued to grow their herds for three years while prices were trending lower.

From 1993 through 1998, cattle prices remained on a downward trend. Grain prices started to move higher in 1994 through 1996 causing feeder cattle prices to move lower. Live cattle prices hit historical lows from 1996 to 1998 before the contraction phase began.

With shrinking inventories, cattle prices then started moving up reaching historical highs at the time in 2002 and the expansion phase started in 2004. BSE in the summer of 2003 added to this expansion as prices surged south of the border to all-time highs and U.S. producers started to hold back heifers.

The U.S. herd expanded in 2005 through 2007 and then the 2008 recession triggered the contraction phase.

In conclusion, we can say that U.S. cattle producers need at least one full year of record high prices before they start holding back heifers. The calves from these heifers come on the market one to 1-1/2 years later. Therefore, the market needs to reflect record high prices for approximately 2-1/2 years before we see total inventory numbers increase.

There is another observation that is very important. Notice that the cattle market always made new highs during an expansion phase. The previous historical highs did not justify heifer retention. The cattle producer only started to respond when there was at a fresh high for that time period. In the February issue, I showed the longer-term cattle chart in a sustainable upward trend.

The first sign of expansion will be a slowdown in the cow slaughter. The second signal will be heifer retention from the cow-calf producer and fewer heifers coming on the market for feedlot placement. I expect to see both of these signals in 2011. We also have to take into consideration the extreme dry conditions in the U.S. Southern Plains and the record high grain prices.

Taking these factors into consideration, U.S. inventories should show the first increase on the January 2013 report.

GeraldKlassenanalyzesmarketsinWinnipegandalsomaintainsaninterestinthefamilyfeedlotinSouthernAlberta.Hecanbereachedat [email protected] or204-287-8268.

About the author

Columnist

Jerry Klassen

Jerry Klassen manages the Canadian office of Swiss-based grain 
trader GAP SA Grains and Produits Ltd., and is president and founder 
of Resilient Capital specializing in proprietary commodity futures trading and market analysis. Klassen consults with feedlots on risk management and writes a weekly cattle market commentary. 
He can be reached at 204-504-8339.

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