The key to understanding how projections like this are made (3-5 years ahead of time) and how you can make them and adjust your management to benefit from them, lies in an understanding of the U.S.A. 'cattle cycle' and its underlying influence on Australian cattle prices. The following is an overview of the cattle cycle and its effect on Australian cattle price levels.

Putting the Australian cattle industry in context:

The scope of cattle prices in Australia are primarily driven by beef prices in the USA for the following reasons.

1. Total production from the huge 100+ million head U.S. herd is virtually all for domestic consumption. So their domestic market sets the price of their beef and cattle. (they import as much as they export).

2. Sixty percent of Australian beef production relies on exports to both U.S.A. and Asia.

3. Our beef competes with U.S. beef in both the USA and the Japanese markets. The sheer size of the U.S. beef market (about ten times larger than ours) ensures their market remains the price setter.

4. U.S. domestic beef prices set the price boundaries for Australia export beef and hence our cattle prices.

Once you appreciate the primary dependence of Australian cattle prices on U.S. beef prices and that U.S. beef prices move with the cattle cycle, the cause of cyclical Australian cattle prices becomes clearer, and manageable.

The 'U.S. cattle cycle:

The Cattle cycle is an ocellation in cattle numbers between too many cattle and not enough cattle for the needs of the US domestic market. Because cattle prices are 90% supply driven, this results in the typical situations of  'high supply and low prices' and 'light supply with high price'. However the significant understanding is that the complete cycle takes  9-11 years to play out and has repeated itself over the past 70 years.

The Cattle cycle upside:

On the upside of the cycle (where its headed for right now) lower cattle numbers produce less beef than demand so cattle prices tend to rise. A rise in cattle prices encourages producers to retain more heifers and keep cows a year or two more. This reduces the supply of slaughter cattle even further; prices continue to rise and producers tend retain more breeders -etc. Eventually these retained breeders produce high supply which busts the market. From the bottom of the cattle cycle the expansion phase typically lasts 6-7 years with peak cattle prices years near the middle.Because.

Australian cattle prices tend to lift in sympathy with the U.S. cattle cycle, these are the years of greatest profit potential for Australian producers. However, the more Australian production tend towards high supply in these years, often caused by drought, the less of the cash benefits producers' get and the more processors keep.

The cattle cycle downside:

Eventually the production from increasing cattle numbers more than satisfies demand. Buyers become less competitive and cattle prices flatten. The downside spiral begins when the more prices fall, the deeper producers cut into breeder numbers to maintain cash flow. Initially this causes an even greater increase in beef supply than cattle numbers would suggest and tends to hammer prices down. From the top of cattle cycle, the liquidation phase usually lasts 3-4 years.

In these years, and sometimes an additional year either side, cattle and beef prices fall to unprofitable levels. The cattle cycle and its effects do not discriminate between 'good' cattlemen with 'excellent' cattle and the other type. In these years even 'good' producers tend to loose money. Others are squeezed out.

For Australian producers, many other factors sit on top of the underlying influence of the cattle cycle. Drought, exchange rates, health issues and the economies of our trading partners are a few of the topically evident ones. However, these issues affect the price of cattle only within the margin available from the underlying U.S. cattle cycle. Herd liquidation inevitably produces low prices. Expansion brings the opportunity of high prices.