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Cattle Cycle, Record Prices Stretching Through Early Spring -- Economist

Remember the "Cattle Cycle?" It essentially dictates where cattle prices are and where they should be going, as it's done for around 150 years.

So, will the arrival of this latest impending reversal in the natural market cycle be any different? You would think not. But you might be wrong, says one prominent ag economist. The sun may not yet be setting on the cycle.

The cattle cycle has, since the mid-1800s, been fairly predictable. Every eight years the trend reverses, usually driven by total herd numbers and ultimately, their corresponding market prices. Right now, we're just about to the end of the latest eight-year period during which the U.S. herd has fallen by almost 4 million, or 11%. There are fewer calves out there, but female slaughter's already started to decline, a surefire sign that herd expansion is on its way back. And why wouldn't it be? Prices are at record levels. Expanding to capitalize on those prices just makes sense. So, does it all mean the herd is on its way back up?

"The phrase 'another new record for cattle prices' has kind of lost its punch this year because there have been so many new records established. Finished cattle prices began the year at about $135 per hundredweight, which were record highs. By March they reached $150, a new record high. In July, prices ascended to $160, for the first time ever. Now, finished cattle have touched $170, for the first time ever - a new record high," says Purdue University Extension ag economist Chris Hurt. "So have cattle prices reached their cyclical peak on the current cycle? The likely answer may be NO!"

Why is this still the case? The cattle industry is not the most nimble beast, and turning it around takes a while. So, even though the cycle may be signaling a change and producers may be starting to adjust, a quick response and a shift in numbers aren't guaranteed to happen quite yet.

"First, the size of each year's calf crop is still declining, so finished cattle supplies will drop at least through 2015 and well into 2016. Second, once herd rebuilding begins, as is now evident, expansion of the beef cow herd generally continues for four to six years," Hurt says. "This means beef supplies will be down again in 2015 and perhaps into much of 2016."

While supplies on the production side may not necessarily dictate a downturn in prices just yet, the same may not be true on the consumer side for much longer. By spring, consumer willingness to pay current high beef prices may have eroded to the point where lower-cost protein alternatives may take some of beef's marketshare, thereby dropping demand and prices. In view of this side of the equation, Hurt says there is likely more potential for lower prices.

"Offsetting the argument for even higher cattle prices to come is the expectation for growing supplies of competitive meats starting in the second quarter of 2015. This is the argument that beef consumers will have lower priced meat and poultry alternatives by the spring of 2015 and therefore, new record-high cattle prices will become increasingly difficult," he says. "To the extent this is true, it may shorten the window of opportunity for new record cattle prices to this fall and winter."

So, if you have cattle to market and you want to get in on the next wave of "record-high prices," Hurt recommends acting between now and early spring, when supplies of these competing products will likely knock beef off its trail of continued broken price records.

"Current anticipated finished cattle prices derived from futures suggest this same pattern, with prices in the higher $160s for the remainder of the year, then moderately lower prices in the mid-to-upper $160s would be expected into April. Starting in the spring of 2015, increased supplies of chicken, turkey, and pork will provide consumers with ready alternatives to high-priced retail beef and cattle prices may weaken. That weakening of cattle prices in the spring of 2015 is not a collapse, just a failure for cattle prices to keep making new record highs again and again as was the case in 2014," Hurt says. "The long-term profit outlook for the beef industry is bright, but the record prices on this cycle may well occur in the next six months."

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