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 Knowledge for the CommonWealth

The Beef Cattle Market: Make the Most of Today's Market

Farm Business Management Update, October/November 2003

By Tom Stanley

The market for beef cattle is in unprecedented territory. Virtually all types of cattle from slaughter-ready young stock to cull cows to feeder calves are experiencing some of the highest prices (in nominal and in real terms) in the past 30 years. There are several reasons for these high cattle prices. First, the east and southeastern U.S. experienced serious droughts from 1999 - 2002 and the western states are still in serious drought conditions. This situation has caused many cattlemen to reduce the size of their herds in recent years. Second, corn and soybean prices have remained relatively stable compared to prices observed in the mid 90's. These factors together made for a promising outlook for the cattle market for the latter half of 2003 and early 2004.

In May of this year, one beef animal in Alberta Canada tested positive for Bovine Spongiform Encephalopathy (BSE or "Mad Cow Disease") which has been linked to Creutzfeldt-Jakob Disease in humans. Canada supplies between 4 and 5 percent of all the beef consumed in the U.S. Essentially overnight, this portion of the national beef supply disappeared when the U.S. banned the import on all Canadian beef products. In the coming months, the supply of beef from Canada will resume, but the shortterm effect of the USDA's ban of Canadian beef spurred a market that was already poised for an upward gallop.

The east and southeast, which is home to a large portion of the country's beef breeding herd, have enjoyed an unusually wet spring and summer, making pasture and hay abundant. With high prices and abundant feed, it follows that many cattlemen will retain additional heifers or acquire additional breeding stock. If enough cattlemen across the region retain heifers, supplies of beef cattle could be further reduced and spur the price up in the short run.

What should cattle producers in Virginia do now?
I would recommend three things. First, make the most of today's market. Now is a great time to sell marginally productive cows and all the calves one can. Consider selling heifers for breeding purposes to other farmers determined to expand their herds. Very carefully consider any decision to keep a calf on the farm. The decision to forego selling a calf now for the potential gain that may be realize later is called "opportunity cost." Opportunity costs are higher than ever right now.

Second, watch USDA reports and other sources of market information.
Watch for signs that the number of heifers being retained on farms is increasing. When the National Cattle Herd is rebuilding, it follows that an increase in the beef supply will occur within 36 months. This is because of the biological lag imposed on the market by the nine months the retained heifer will spend pregnant and the four to eight months it will take her to raise the calf up to feeder calf weight. It does not automatically follow that prices will fall 36 months after a significant increase in heifer retention, but it is more likely.

Third, evaluate savings and investment instruments other than cattle.
Cattle producers will realize more income this fall than they have for a long time. Thus, beef cattle farmers need to implement savings and investment strategies that will minimize their exposure to income tax.

Like prices for other agricultural commodities, beef cattle prices are cyclical. Just think, productive commercial cows in our herds right now were calves in 1996 valued at under $55 per hundredweight! Someone who retained heifers in 1996 has probably realized a very handsome return on his/her investment. Almost inevitably another opportunity to buy heifers under $55 per hundredweight will materialize at some point in the next three to seven years.

After a prolonged drought from 1999 to 2002, today's beef market is a welcome relief to beef cattle producers in Virginia. Cattle farmers must carefully manage today's income in anticipation of inevitable market downturns in the future.

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