I’ve received many inquiries over the past six to eight months from cow-calf producers asking if they should be expanding their cow herd. Producers are asking whether they should try to get another calf out of the older cows and how aggressive they should be with heifer retention. In my experience, cow-calf producers do not know when they should be expanding or contracting their herds. Cow-calf operators don’t know the signals to watch for. I often tell producers they have to do the opposite of the U.S. cow-calf producer. But how do they know the intentions of the U.S. cow-calf producer? Therefore, consider this your cow-calf marketing class 101.
There are four stages of the U.S. economic business cycle. These are trough, expansion, peak and contraction. During the contraction period of the business cycle, interest rates start to decline and usually make a low during the trough phase. Once the economy starts to expand, interest rates tend to increase. Interest rates are at their highs during the peak period of the business cycle. Why is this important? Beef demand is highly correlated with consumer spending. A one per cent increase in consumer spending equates to a one per cent increase in beef demand. Approximately two-thirds of U.S. GDP is composed of consumer spending.
On the chart below, I’ve shown the size of the cattle herd from 1970 to 1985 with the scale on the left axis. On the right axis, I’ve shown the live cattle futures close on July 31 of each year. The U.S. was in a recession during 1970 and moved into an expansion phase the following year. During November 1973, the U.S. economy was in the peak period of the business cycle. During this period, fed cattle prices moved from a low of $28 to a high of $54. Cattle prices nearly doubled in this three-year period.
During November 1969, the Federal Funds rate was 9.25 per cent but during the trough period of November 1970 and the following year, the Federal Funds Rate was around 4.0 per cent. Once the economy started to expand, the Federal Reserve increased its benchmark lending rate and the Federal Funds rate was back up near 10 per cent by November 1973.
The problem is this: The U.S. cow-calf producer needs one year of historically high prices before heifer retention starts and the cow slaughter drops. Then it takes one to one-and-a-half years before the calves from these heifers come on the market. In total, the timeline is two to two-and-a-half years of historically high prices before additional cattle numbers come on the market. Notice on the chart, the U.S. cow-calf producer was expanding in the early ’70s but continued to expand the herd from 1973 to 1975 when interest was at the highs and the cattle market was declining.
After 1975, the lower cattle prices resulted in herd contraction. The next major economic expansion occurred from March 1975 to January 1980. Live cattle futures moved from a low of $41 to a high of $77, which is an 87 per cent increase in price from low to the high.
Notice that prices started to rally in 1977 through 1979 while the herd was contracting. This is a two-year lapse, as mentioned. In 1974, before the recession, interest rates were at 10 per cent to 12 per cent and by 1976 interest rates were about five per cent during the trough. We all know how interest rates reached record highs in the early ’80s at 20 per cent to stall out the economy and slow consumer spending. What is funny here is that the U.S. cow-calf producer was expanding the herd from 1980 through 1982 when interest rates were at the roof. I think it is very clear from these two examples how the Canadian cow-calf producer needs to respond. When the U.S. economy is at the lowest period of the trough phase of the business cycle, this is the alarm for the Canadian cow-calf producer to hold back heifers. Interest rates are at the lowest during the worst part of the recession. When GDP is at the worst, this is the signal to expand the herd. It’s quite simple.
The U.S. Federal Reserve has lowered its benchmark rate two times in the last 12 years. The first time was during the recession of 2008. The second time was during March 2020. If the Canadian cow-calf producer held back heifers during 2009, the calves from these heifers would have been coming on the market in 2013 when the cattle market was making fresh historical highs. Alberta fed cattle cash prices made historical highs during May and June 2015.
It’s been one year since the U.S. Federal Reserve dropped its benchmark lending rate to 0.0 per cent to 0.25 per cent. This is when the Canadian cow-calf producer should have started holding back heifers. You may not have known the signal, but you can act now. You still have a one-year jump on your U.S counterpart. The next couple of years will be fairly profitable for cow-calf producers and for feeding cattle. If you follow the expansion and contraction phases of the U.S. cow-calf producer, you will not be successful long-term. No pun intended, but you have to go against the herd mentality.