Sort & Cull

Not to embarrass anyone in the room who forgot to send a card or couldn't even find the time to post "congrats" on Facebook, but cattle herd expansion celebrated its fourth birthday on Jan. 1, 2018. If the cyclical celebration proved to be forgettable, you weren't alone.

It turned out to be a small party with plenty of cake left over.

Maybe a host of would-be well-wishers just didn't think a four-year run of increasing cattle numbers was all that much of a milestone ("Sorry, I couldn't miss American Idol that night, but count on me for a big present when the little guy turns 10."). Yet such an innocent-sounding dismissal is simply ignorant of how dramatically the lifespan of expansion phases has shortened over the last 30 years.

Indeed, the fragile process of herd growth has become so tenuous, I think the case could be made for measuring periods of expansion in terms of dog years.

First, consider the sobering fact that the last time beef producers had a chance to party over four consecutive years of herd growth was Jan. 1, 1994. Furthermore, since the late 1960s, cattle cycles have become increasingly short of expansion and increasingly long on liquidation. Consider the metrics of the previous four cycles:

-- 1967-1979: Eight years of expansion adding approximately 22 million head, followed by four years of liquidation.

-- 1979-1990: Three years of expansion adding 4-5 million head, followed by eight years of liquidation.

-- 1990-2004: Six years of expansion adding 8 million head, followed by eight years of liquidation.

-- 2004-2014: Barely two years of expansion adding a mere 2 million head, followed by seven years of liquidation.

The old-school rule of thumb suggested that cattle cycles each averaged close to a decade, give and take patterns typically including five years of growth and five years of contraction. But just from the small data sample above, you see pitching such a big tent doesn't offer much in terms of meaning or confident prediction.

I doubt many would take issue with my assumption that the industry will never again see the likes of herd expansion in the late 1960s and early 1970s. While the beef demand curve of the last several years has been relatively impressive, any rancher suggesting per capita consumption will eventually work back toward 90 pounds is probably busier smoking grass than grazing it.

Throwing this golden age of expansion under a bus driven by chicken producers, fewer calorie-burning appetites, and larger carcass weights (e.g., all cattle averaged 817 pounds last year, nearly 200 pounds heavier than the average scale ticket of the 1967-1979 cycle), the average expansion phase of the last three cycles was no more than 3.7 years, slightly shorter than the ongoing herd growth before us.

Over the last four years, the national cattle herd has grown by 5.87 million a year (i.e., up 7% from Jan. 1, 2014). Are expansion plans getting long in the tooth? Certainly compared with the most recent cycles, you could argue (both in terms of years and numbers added) that they are beginning to show some age.

On the other hand, the combination of sustained ranch/feedlot profits, cheap feed and improving export demand (to be sure, the wildcard of the three) would strongly suggest expansion could easily remain in the saddle for several more years. Furthermore, turning a cruise ship, as the saying goes, is not as easy as redirecting a speedboat.

Finally, the big unknown potentially determining future birthdays of expansion is the threat of drought in the grazing ahead. Ominous dust already began to blow last year in key production areas like Texas, Oklahoma and South Dakota, and further deterioration in the months ahead could quickly trigger necessary cow liquidation.

The very last thing U.S. producers need to see in 2018 is a disastrous coupling of severe drought and failing competitiveness in the global beef trade (i.e., disadvantaged by burdensome tariffs and inferior international agreements). If such a double whammy turns up in the cards, last month's expansionary birthday party could suddenly look like a wake.

For more of John's commentary, visit http://feelofthemarket.com/…

(AG)

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