‘When will the beef cycle bottom?’

Welcome to the “Summer of Pork”.

US cattle ranchers’ profits have been pinched in recent years, said Bank of America in a Friday note, and the situation isn’t expected to improve until 2025.

In fact, ranchers in the “Prairie Gateway” — Texas, Kansas, Nebraska and Oklahoma — lost money per head of cattle between 2019 and 2022, the bank says. Unit economics could improve this year, but the analysts say there’s still “a ways to go before the cycle turns.”

Before we get into the drivers of this, uh, “beef cycle”, such as drought and heifer populations, we should say why it matters.

Cattle costs rise when the “beef cycle” contracts [ed: awful phrasing pls stop], fuelling food inflation that’s rather more complex than price gouging or “greedflation”.

Meatpacking is a spread business, as BofA reminds us — companies like Tyson Foods and Cargill are beef brokers for grocers, basically — so declining herd sizes pinch their profits. And those profits surged during the Covid-19 pandemic (temporary pricing power is a helluva drug!), making a tough comparison for investors who want earnings growth today.

So, anyway, uh . . . what even is a “beef cycle”?

Bank of America explains it as fluctuations in herd size over time, driven by beef prices and profitability per head, along with natural events like drought. They include this handy chart, based on Urner Barry’s The Beef Book (4th edition):

So if we are in the “least favourable” part of the beef cycle, with smaller herds and more expensive calves, what does that mean for future ranching profits and beef prices?

We tend to think of Beef Cycles as 10-year events with 5 years of expansion followed by 5 years of contraction. In our view 2023 is year 9 of the current cycle expanded from 2014-2019 and started to contract in 2020 . . . 

We see 2024 as a potential bottom in herd size and are monitoring these drivers: 1) cowcalf operator (cattle rancher) unit economics, 2) drought conditions (particularly in the Prairie Gateway — TX, KS, NE & OK) and 3) Heifer (female cattle) retention.

First we’ll cover the drought, which hasn’t helped the ranchers’ profitability. From the bank:

Cattle eat grass, a lot of it. They are the least efficient converters of feed among the animal proteins and require ~6lbs in the feedlots to gain 1lb of muscle and even more roughage (grass) to gain 1lb in the field. That’s over 6.6K lbs. of roughage per cow from birth weight until it reaches the feedlot. Drought conditions matter as they impact grazing conditions for cattle. Cattle spend 6 months to 1 year grazing before entering a feedlot.

It isn’t just drought that’s raising costs. Commodity costs have climbed broadly, and made it less profitable to raise cattle between 2019 and 2022, USDA data show. The good news for ranchers — not steak lovers (though the two obviously aren’t mutually exclusive) — is that the analysts have noticed a sharp, 22-per-cent increase in the price of feeder cows so far this year, while input costs have only climbed in the mid single digits. So they forecast that it’s about to get a lot more profitable to raise cattle:

The official USDA data for the first half of 2023 isn’t out just yet, however, and Bank of America says it will take time for ranchers to respond to these higher prices with larger herd sizes.

One early sign of increased herd sizes will be what BofA calls “heifer retention.” When ranchers reduce the share of female cows they are sending to slaughter, that’s a sign they are planning to increase the size of their herds:

More bad news for steak lovers there. The 2023 figures show that ranchers do not seem especially interested in reducing the share of heifers they’re slaughtering:

Currently however, the % of cattle slaughtered that are female is running at 53% in 2023, following 51% in 2022 (ie, more females than males) contributing further to herd decline. In past cycles the rate of female slaughter has gradually drifted from the high-40s% range to the lower 40%’s as ranchers retained more heifers.

It’s very unlikely that ranchers are just getting more moo-sogynistic [ed: pls], so what gives? Bank of America says there is historical precedent here, and that this could look more like the late 1970s:

This cycle appears different and will require a sharper correction which has happened only once before from 1978 to 1979 when the % of female cattle slaughtered dropped from 51% to 46.5%, this could be a similar set-up for 2024. We’ll continue to watch to see when the rate drops as our signal that heifers are being retained and the cycle is close to bottoming.

So which farmyard favourites will be the bargains during apocalypse cow? BofA:

On-shelf Beef prices to stay high, 2023 “Summer of Pork”… A pick-up in Pork feature activity and available supply could make on-shelf Pork prices more attractive as an alternative, while retail Chicken also remains elevated.

In other words, we can all look forward to a Hot Dog Summer.