Cattle Industry Flying High

Anyone in the cattle business knows that the last couple of years have been some of the most profitable our industry has ever seen. A combination of factors have led to this situation and we will take a look at some of those, as well as examine some strategies to help protect producers from the downward move in prices that always follows the cattle cycle highs.

The US cattle industry follows roughly a 10-year cycle. Ups and downs are a normal part of any industry and the beef industry is no different. Over time, data suggests that on average, it takes roughly 10 years for the industry to go from peak to peak, both in terms of inventory and prices. This pattern is playing out as we speak, with many comparisons between 2024-2025 cattle markets to 2014.

Let’s briefly look at some of the driving forces behind the current market situation.

Inventory. As of January 1, 2025, the US beef cow inventory was estimated at 27.9 million head, the smallest cow herd in more than 70 years. Of course as cow numbers go down, so too will the number of cattle available to be fed out for slaughter, leading to higher prices. 

Beef Demand. Ultimately, the price of any product or service is driven by the consumer’s demand for that item. The more they want or need it, the more they will be willing to pay. The beef industry has enjoyed a period of steadily increasing consumer demand for beef in the US going back for more than 15 years. Even though the industry has still seen the normal ups and downs in prices, strong consumer demand has resulted in a steady upward trend in retail beef prices, which increases the prices we as producers receive. Demand has remained strong, even as grocery store and restaurant prices have hit record highs over and over again.

Exports. While the US doesn’t export as much beef as it does some other agricultural commodities, the value of exports is very important. In 2024 it is estimated that exports contribute more than $400/hd. to every animal harvested. It’s important to note that while there is certainly strong demand for premium US beef around the world, a major component of our beef exports are actually portions of the animal that we don’t typically eat here. These products are generally referred to as variety meats and include things like tongues, organ meats and other products that Americans typically don’t eat, and which packers would otherwise have to dispose of, potentially at a cost, rather than a profit center.

There are certainly many other factors that influence price directly or through one of the three listed above. These can include weather, geopolitical factors (tariffs and such), consumer trends and many more. As producers, many of the factors behind the prices we receive are completely out of our control. Most of us in the agriculture industry are price-takers, meaning that because, in general, we sell a perishable commodity that must be sold within a particular window of time, to someone else who will take that product through the next step or steps in the cycle, before it ultimately makes its way to the consumer. Of course if you’re part of the growing movement of buying (and selling) locally, you understand that you do have more control over the prices you receive, but for the vast majority of cattle producers, that is not the case.

If history has taught us anything in the cattle business, it’s that there’s one sure-fired cure for high prices. And that is high prices. Every single time prices go up, the industry responds by increasing the size of the cow herd, eventually producing more supply, which in turn works to lower prices. It’s the law of supply and demand and it works every time it’s tried. 

We can’t be certain when prices will begin to move down. Market fundamentals suggest that we may see another year or two of very strong prices, but eventually, they will come down. So how do we, as producers, prepare ourselves for the downturn? Let’s look at a few options.
Market Risk Protection. Market Risk Protection, or just Risk Protection is a broad term for a variety of tools that producers have available to help manage price risk in the cattle markets. Every cattle producer should have some level of risk management as part of their overall business plan. As an industry, we’ve generally done a good job of talking about some of the ways that we can manage price risk, so that most folks should have at least heard of the concept.

A couple of most common are:

• Livestock Risk Protection (LRP) Insurance. LRP is a price insurance policy available for feeder and fed cattle. This program is administered through RMA (Risk Management Agency/USDA), which is the same agency that provides crop insurance products for farmers. This program is designed to protect against losses and is not intended to be a way to increase profits. Similar to crop insurance, or even auto or homeowner’s insurance, LRP is intended to pay in the event of significant or catastrophic losses. The program allows producers to set a floor price for their cattle based on a national cash price index and as such, you are not directly insuring a price for your cattle, but rather, protecting against a broader market decline. The idea of this insurance is not to enhance profitability, but simply to protect against losses in the event of a significant market downturn. That doesn’t mean that you might not have the opportunity to put a floor price on your cattle that should guarantee a profit, but that is not the over-arching goal of the program. Policies are available for cattle that are intended to be marketed from unborn calves to finished cattle and can be purchased on as few as one single head. Generous government subsidies are available, which can make this option more cost effective than other tools. Learn more about insuring your livestock with Farm Credit Crop Insurance.
• Futures and Options. It would take a lot more space than is available here to fully explain how futures and options can help a beef producer manage price risk. These tools, in some cases, work very similarly to LRP, however, there are distinct differences as well. In general, this method of risk protection involves using the CME cattle futures board to take a positon in the cattle futures market. This method should only be utilized by producers who have experience in the futures markets or who are working with a reputable broker who can help guide them through what can be a complex system of trades and requirements. Similar to LRP, using futures and options can allow producers to put a floor price on their cattle. This method provides a lot more flexibility than an LRP policy, but comes with much more complexity and risk, if not managed properly. It’s also more suited for larger producers, since contracts are traded in load lots (40,000 lbs. for fed cattle and 50,000 lbs. for feeder cattle), and can require a significant amount of cash to enter into certain types of contracts.

Managing Through Ups and Downs. At the end of the day, good managers tend to be more successful than poor managers over time. This seems pretty obvious, but let’s look at some of the characteristics of a good manager.

• Cost of production. Good managers understand how much it costs them to produce whatever product they’re selling. If you’re a cow/calf operator, that means how much it costs to get each calf you sell to market, start to finish. That includes the cost of keeping and maintaining the cow, including open cows because even if they don’t sell a calf, there’s still a cost to keeping her. Keep in mind that it’s more difficult to establish what your floor price needs to be if you don’t know what your cost of production is. A floor price should at least cover your break-even cost for a particular calf, and if you don’t know your cost of production, then you’ll end up just guessing at the level of protection you need.
• Marketing/Value Added. Good managers look for ways to market their cattle to command a higher price. There are many ways to accomplish this from pooled sales of weaned and vaccinated cattle, selling load lots, marketing cattle directly off the farm, to finishing, slaughtering and selling packaged beef at the farmer’s market. There’s no one size fits all here, so find a plan that works for you, your goals and your operation.
• Managing costs. Good managers, who understand their cost of production, can look for and find ways to manage costs. Whether it’s buying supplies in bulk, pre-paying for things like feed or fertilizer during periods of lower prices or keeping debt at manageable levels, controlling input costs can be a major driver to the success of an operation. Note – this does not mean cutting corners – rather, it means looking for and taking advantage of opportunities when they present themselves.

We’ve covered a lot of ground in a very short space and provided a very broad overview of a lot of complex information and tools. The take-home message is to be prepared. Use the good times we’re in right now to pay down debt and build liquidity to help weather lower prices on the horizon. Work with trusted advisors to develop a plan before the market changes so that instead of worrying, you just work the plan. 

If you have questions about anything presented in this article or you would like to learn more about safeguarding your investment with livestock risk protection, reach out to your local Farm Credit office at (800) 919-3276 (or contact us online).

Author

David Cuddy, Loan Officer

Farm Credit of the Virginias, Abingdon, Va