The expansion phase of the U.S. cattle cycle is long overdue but a host of factors are working against herd rebuilding and are forcing segments of the industry to consolidate.
The cattle cycle, where the herd expands and contracts at regular intervals of 10 to 12 years, has been in place since the end of the U.S. Civil War.
The cycle drives cattle prices, with periods of low supply encouraging higher prices and oversupply pressuring the market low.
However, the U.S. herd has been shrinking for 16 of the last 18 years. At times prices should have triggered expansion but they didn’t, said Gary Brester, a Montana State University agricultural economist.
Part of it was a lack of extended profitability as cost rose as fast, or faster than cattle prices, squeezing every sector from the cow-calf producer to the processor.
Little or no profit has resulted in continuing consolidation of feedlots and packing plants, said Meis.
He thinks American feedlots have 25 percent more capacity than they need, and some must shut down.
“We built those hotels when there were 130 million cows,” he said, but now the herd is much smaller.
“Until they downsize to fit the cow herd, our margins are going to be elusive. I don’t care what price corn is and I don’t care how good we are at feeding byproducts. It is going to be a tough deal if we are going to keep occupancy rates that are profitable.”
Packers understand this and are downsizing. More closures are expected to match the available supply of slaughter animals.
In past cattle cycles, rising prices encouraged people to breed more cows, but better genetics and improved management allow more meat production with fewer cattle.
Today’s herd of 90 million head can produce the same amount of beef as 130 million head in previous decades. That cannot continue as numbers keep falling.
Another factor that extended the U.S. herd decline this cycle was the multi year U.S. drought that damaged pastures in key cow-calf producing regions.
Also, feedgrain prices soared with the drought and with increased demand from the growing ethanol sector.
But moisture has improved, pastures are rebounding in some areas and corn prices are going down.
However, the average rancher is getting older, and few want to work hard raising cattle. They also have a drought phobia.
Meis said most American ranchers have low debt ratios on mature operations, partly because they did not expand their land base or add more cattle. When they saw their pastures burn off, they feared losing the entire farm if they restocked it when the grass started growing again.
Others face regulatory conflicts with the Environmental Protection Agency and the Bureau of Land Management, which handles federal grazing lands.
Some ranchers have also sold land for housing developments. For those remaining, Meis predicts more will raise 100 cows instead of 30.
As well, he predicts more consolidation, in which producers are professional beef producers rather than keeping a few cows on the side for diversification.
Herd rebuilding looks feasible on paper this year, but it takes time to recover, said Derrell Peel of Oklahoma State University.
He thinks the U.S. needs 1.8 million more cows to maintain production, but it could take until January 2017 to get there.
Government statistics indicate that some heifers are being held back for breeding. Experience shows those reported on farms in January are gone by summer because the producers could not sustain them, he said.
Other heifers were kept back to replace culled cows sold off when the drought hit.
The beef supply is now showing the consequence of a shrinking herd.
Fewer yearlings and cows are available, so slaughter is dropping and less beef is produced every year. Ironically the first stage of rebuilding squeezes beef supply because females that would go to slaughter are held back for breeding.
Other changes have hurt the industry.
People switched from growing irrigated alfalfa to high priced corn.
In addition, life was made easier for crop producers with the introduction of crop insurance.
Nearly 90 percent of all principal crops grown in the United States are covered by crop insurance, up from 20 percent 30 years ago. This was not available for cattle producers.
More crop insurance equals fewer cattle because people do not need to turn to livestock as a diversification strategy.
The industry also wrestles with how to attract young people.
Brester argues they will return if there is money to be made. However, attitudes about financing, land and equipment purchases must change so that young people learn the difference between asset control and ownership.
In addition, older producers did not want to give up control until recently because there was no income to transfer to fund retirement.
However, there is a growing number of ranchers 70 or older who want to move on, so intergenerational transfer may become more common.