Both farmers and ranchers throughout the country continue to battle extreme drought conditions—conditions that have persisted in certain areas of the country since 2000. At the same time, the amount of cattle on feed has remained at historically high levels for the latest five consecutive months. According to the USDA, June data indicated an increase of 1.2% percent above year-ago levels and at the highest level for that date since the series began in 1996. With drought conditions located in some areas with high concentrations of cattle, we ask ourselves to what extent, if any, has weather played in these historic levels of cattle on feed.

From January 2020 to May 2022, we found a strong positive correlation between the Texas Drought Severity and Coverage Index (DSCI) and the number of cattle on feed. The DSCI is an index constructed by the National Drought Mitigation Center at the University of Nebraska-Lincoln, the United States Department of Agriculture, and the National Oceanic and Atmospheric Administration. The index measures drought conditions in a specific area and can range from zero to 500. An index level of 500 would indicate that the area examined is experiencing exceptional drought throughout. Texas drought conditions were used within this analysis due to the fact that Texas remains the largest player in the cattle market.

High levels of positive correlation between variables are often misunderstood. Correlation does not suggest causation. The calculation only measures the strength of the variables’ linear relationship.

After further analysis, we found that within the timeframe examined, on average, a 10 percent increase in the Texas DSCI would increase the number of cattle on feed, measured in thousands of head, by roughly 2.5 percent holding all other variables equal. Intuitively this positive relationship makes sense. Extreme drought conditions would most likely lead ranchers to shift cattle away from grazing to feedlots, as the supply for grass would diminish.

Additional statistical test indicated that the drought index studied in this analysis could be useful in forecasting cattle on feed. Models used to forecast must adhere to relevance—meaning as market dynamics change, models must adjust and incorporate other explanatory variables. Drought conditions could possibly offer forecasters a useful variable within their analysis’.

Unfortunately, this short analysis only goes so far. Drought conditions are not the only complication market participants are facing at the current time. The market, like many others, continues to deal with supply chain disruptions, increased feed costs, and inflationary pressures. The models incorporated in this analysis, do not include these additional independent variables. More research and analysis will have to be done in order to incorporate these measurements. But for now, we can conclude that the drought has had a statistically significant effect in explaining the increasing number of cattle on feed from January 2020 to May 2022.

Photo Credit: Cameron Watson / Shutterstock.com

Andrei Rjedkin
Urner Barry
1-732-240-5330 ext 293
arjedkin@urnerbarry.com 

Angel Rubio
Urner Barry
1-732-240-5330
arubio@urnerbarry.com

Akash Pandey
Urner Barry
1-732-240-5330
apandey@urnerbarry.com