By Augusto Semmelroth | Source: USDA, MLA, ABS, ACU
The ‘cattle cycle’ is a topic of great interest to academics, economists and, producers. Over the break, we were asked to look at the Australian cattle cycle and how it impacts prices. This article will delve into this and look at what’s in store for our cattle market based on the findings. If history gives us a reliable precedent for projections, 2015/16 will see the cattle market peak.
Cattle markets display distinct production and price cycles. Since the late 1800s, recurring trends have been observed in the US reflecting the biological constraints of livestock production. More importantly, the trends have also reflected producers’ attitudes towards their herd (i.e. expand vs reduce). That, in turn, is underpinned by their expectations about the current and future profitability of their businesses. By definition, cattle cycles have a herd expansion phase followed by a period of stock liquidation.
To demonstrate how production cycles are intrinsically linked to price cycles, figure 1 shows the herd stats for the US overlaid with the average yearly cattle price. As a general rule, cattle prices peak in the transition between cycles and coincide with low herd numbers. On the flipside, prices tend to hit a bottom when herd numbers peak, or a year earlier. In other words, production and price cycles are inversely correlated.
But what does the US cattle cycle have to do with the Australian cattle market? Don’t we have a cattle cycle of our own?
The answer to the first question relies on the fact that 86% of the yearly changes in our cattle prices since 1953 can be explained by changes in US prices. With that in mind, understanding structural changes in the herd size in the US, and consequently its price cycle, is vital when trying to interpret long-term price trends for our market.
The answer to the second question is, yes and no. Although ‘mild’ cattle cycles were observed until the late 1980s, they’ve become almost indistinguishable since. On the contrary, the most obvious pattern seen during the period has been the steady increase in the herd size during the 1990s followed by a plateau over the last 10-15 years. Yet, our cattle markets still seem to follow a price cycle alongside with the US.
To test the assumption that the Aussie cattle market follows the US cattle cycle, figure 3 shows the US cycles along with US and Queensland heavy steer prices (as a proxy for the Australian market). The results are pretty clear; the same inverse correlation between US herd numbers and prices can be observed.
There are a few take home messages from this article but we will aim to stick with the most important ones - or the ones that have the most impact for strategic decision making.
The first message is that livestock production is notoriously cyclical. Supply is undoubtedly the most distinct price driver for cattle markets within a cattle cycle. Further, production and price cycles run inversely.
The second message is that, whether we fully acknowledge it or not, the Australian cattle market is a small fish in a big pond. In other words, we are small players and price takers in the global beef market. As a result, our long-term price trends tend to be dictated by external forces, in particular the US cattle cycle.
The last point to mention is related to the importance of knowing ‘where’ in the cattle cycle we stand, at specific points in time. This is of critical importance as it can help us to ‘foresee’ and anticipate general price trends a few years in advance. That, in turn, can help producers to fine tune their long-term operational and marketing strategies.
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