Drought and this cattle cycle have tracked hand in hand. Better put, drought has had its hand squeezing the throat of the cattle industry, driving enough decisions to have a collective impact on the industry. Drought has driven herd liquidation for some time (five years) forcing cattle to be put on feed and restricting the ability of ranchers to retain heifers. More heifers on feed have inflated the slaughter nix. The most recent cattle-on-feed report validated that drought conditions have yet to relent enough, long enough to allow the industry to restock. Placements exceeded trade expectations, inflating numbers on feed. Many had concluded that prolonged liquidation had depleted available numbers. Guess not quite.

Many think that the feeder cattle supply is tight now but the tightest feeder cattle supply for this cycle is still in the near future. After a protracted liquidation where the drought migrated around the U.S. impacting herds, one would think that the liquidation would exhaust itself. Once stocking rates have been slashed, herds have been reduced to fit conditions. Many were ready to conclude that an equilibrium with the herd size and drought had been achieved. However, it will not be reversed until the drought is fully mitigated. The drought expanded from 2021 to 2022 and then retreated somewhat in 2023.

Is the drought over? Drought was much alleviated in the western U.S. but actually migrated to where it worsened eastward. It will eventually run its course. This has been a multi-year drought. I will bring up once again the 89-year drought cycle (previously impacting the 1840s and 1930s) with its targeted year of 2025 for peak drought this cycle. So far, the El Nino has been mostly a dud. When regions where they stock feeders on range dry out, they are forced to move cattle into feedlots early. This has inflated demand for forage adding days on feed, which typically increases market weights. That actually also increases the feeder cattle supply available to go on feed temporarily. While the price of feeders rose, this has been a fairly good period for feedlot profitability. U.S. and foreign consumers have proven to be more resilient about higher beef prices than we probably had cause to expect.

When the drought is alleviated, many forces now influencing the cattle herd will be metamorphous. As range and pasture conditions recover, ranchers and stockers will have some choices returned to them that the drought has denied them. Instead of putting feeders into feedlots they can retain ownership by putting them on grass. Feeders on grass tend to grow slower than those in feedlots so beef production slows as well. Ranchers can also begin retaining heifers to rebuild their herd as well as being less strict on when to cull cows if they are still productive. When the industry shifts from liquidation to expansion, that is when the feeder cattle supply available to feedlots dives to the bottom. When it rains, hay supplies expand and stocking rates recover, the demand for feeder cattle will surge to its peak for this cycle. With fewer numbers on feed and less non-fed slaughter, that is when the beef supply bottoms for the cycle too. In my opinion this is all still ahead of us.

There are a number of new beef packing plants under construction that appear to me could not be more poorly timed to the next trough in fed cattle numbers for this cattle cycle. I would think that this is a recipe for disaster for these new companies. I have seen a pattern over the course of my industry experience when the entity that builds new plants does not end up being the one operating it long term. In fact, I know this from experience, having invested in a couple of these doomed projects. This current round of new plants appeared feasible because at the time of their conception, fed numbers exceeded kill capacity. They got a lot of government financial help as USDA is investing tens of millions of dollars in these start-ups. This may end up subsidizing the eventual new owners. Progressive Farmer/DTN wrote that there are three new packing plants under construction in the states of Missouri, Texas and Nebraska that collectively will add 6% to the daily cattle kill capacity in 2025-26. This will contrast with still fewer cattle on feed as the herd finishes liquidation and then pulls heifers from feedlot supply to expand once again to start the next cattle cycle in that timeframe. Texas A&M says that there will be fewer cows in 2024 than in 2023. This would look like a collision of decisions with an ominous outlook.

Eventually feedlots will again find out that they can pay too much for feeder cattle even with sky-high beef prices. Feedlots will have surplus packing capacity, potentially bidding up for cattle in order to keep blood on the floors at the cycle’s peak. That lasts as long as packer equity holds out. It is likely that beef prices will rise to find out whatever the limit is that consumers are willing to pay before passing on beef. The gist is that there is likely one more big push higher to find the price heights and supply lows for this cattle cycle. The light bulb may burn brighter just before it goes dark.

We have never gone through a cattle cycle before with Livestock Revenue Protection (LRP) policies available. LRP policies are based on put prices but are typically more favorably priced with better terms. Payment is deferred to the end date of the policy when cattle are sold. At the peak of the cattle cycle there is too much equity at risk to bet the farm/ranch.

Commstock brokers have been selling a lot of these policies as the risk of loss is commensurate with the dollars invested. They are a relatively new product and the timing of their availability seems appropriate with the risk of the cattle cycle. I have already warned cattle producers that years that end in six have been historic money losers for feedlots. This pattern goes back many decades, and this cycle appears to me to be timed so that by 2025-26 this price history is poised to rhyme again.