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United States Cattle Cycles: Perspectives on U.S. Cattle and Calves Inventories and Prices
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Title: United States Cattle Cycles: Perspectives on U.S. Cattle and Calves Inventories and Prices
Physical Description: Fact Sheet
Creator: Prevatt, J. Walter
Publisher: University of Florida Cooperative Extension Service, Institute of Food and Agriculture Sciences, EDIS
Place of Publication: Gainesville, Fla.
Publication Date: 2000
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Acquisition: Collected for University of Florida's Institutional Repository by the UFIR Self-Submittal tool. Submitted by Melanie Mercer.
Publication Status: Published
General Note: "Original publication date April 2000. Reviewed June 2003"
General Note: "FE 164"
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Source Institution: University of Florida Institutional Repository
Holding Location: University of Florida
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System ID: IR00001851:00001

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FE 164 United States Cattle Cycles: Perspectives on U.S. Cattle and Calves Inventories and Prices1 J. Walter Prevatt and John VanSickle2 1. This document is FE 164, one of a series of the Food and Resource Economics Department, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida. Original publication date April 2000. Reviewed June 2003. Visit the EDIS Web Site at http://edis.ifas.ufl.edu. 2. J. Walter Prevatt, professor, Department of Agricultural Economics and Rural Sociology, Auburn University, Auburn, Alabama; and John VanSickle, professor, Department of Food and Resource Economics, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida, Gainesville, Florida. The Institute of Food and Agricultural Sciences (IFAS) is an Equal Employment Opportunity Affirmative Action Employer authorized to provide research, educational information and other services only to individuals and institutions that function without regard to race, creed, color, religion, age, disability, sex, sexual orientation, marital status, national origin, political opinions or affiliations. For information on obtaining other extension publications, contact your county Cooperative Extension Service office. Florida Cooperative Extension Service / Institute of Food and Agricultural Sciences / University of Florida / Larry R. Arrington, Interim Dean The U.S. cattle cycle is described as the pattern of expansion and contraction in the inventory of cattle and calves over time. The U.S. cattle industry is in its fifth cattle cycle since 1949, with the latest cycle beginning in 1990. The cattle cycle of the 1970s has been framed as severe in terms of length, reduction in inventory and the price impact felt by producers during the middle of the cycle. The current cycle is approaching that of the 1970s, but with greater price impacts, lower returns and less production. For example, the 1999 calf crop is the lowest since 1952. All-in-all, the current cycle has been one of the toughest cattle cycles in history. What is a cattle cycle? The United States Department of Agriculture (USDA) conducts two surveys per year (January 1 and July 1) to estimate the number of cattle and calves on U.S. beef and dairy operations. A cattle cycle documents the pattern of expansion and contraction of the inventory of cattle and calves for a specified time. Thus a cattle cycle is defined as the period of time from the lowest inventory number for cattle and calves to the next lowest inventory number (trough to trough). Figure 1 illustrates how a cattle cycle works. (Note the mound shape of the cattle cycles for 1949-58, 1958-67, 1967-79, 1979-90 and 1990-?.) Figure 1. U.S. Cattle and Calves Inventory, 1949-99. Each cattle cycle has four phasesconsolidation, expansionary, peak and liquidation. The consolidation phase lasts until beef prices begin to reflect reduced beef production and the potential for higher beef prices. The expansionary phase normally begins as cow culling rates decline and the number of heifers being retained for breeding purposes increases. This generally occurs as beef supplies decline and prices rise. The peak phase occurs in the cattle cycle as the number of cattle and calves increases to where the beef supply shifts out (to the right) which results in a significant decline in beef prices. The liquidation phase is characterized by low prices for all classes of cattle. These lower prices

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United States Cattle Cycles: Perspectives on U.S. Cattle and Calves Inventories and Prices 2 force beef producers to reduce their inventory of cattle and calves, which initially increases beef supplies and reduces beef prices. Liquidation continues until beef supplies decline sufficiently to shift the supply back (to the left), resulting in higher beef prices. In addition, changes in beef demand (due to changes in consumer tastes and preferences, disposable income, policy/regulations, etc.) can also simultaneously shift and have an effect on the cattle cycle. The relationship between the U.S. cattle inventory and average U.S. calf prices is shown in Figure 2. The U.S. inventory of cattle and calves and U.S. average calf prices move in opposite directions. As cattle inventory builds, average calf prices decline. Likewise, after cattle and calves inventory numbers decline, average calf prices increase. Figure 2. U.S. Cattle Inventory and Average Calf Price What is the normal length of a cattle cycle? Several factors can influence the length and severity of the cattle cycle. As you might expect, higher market prices (profits) lead to increases in the cattle and calves inventory, and lower market prices (losses from oversupply) lead to decreases in the cattle and calves inventory. The more sustaining the period of profitability in cow-calf operations is, the longer the expansionary phase will be. Likewise, the longer the period of losses incurred, the longer the liquidation phase of the cycle. Although the expansionary phase of the current cattle cycle (1990 to ?) appeared normal, lasting until 1996, the liquidation phase of the current cattle cycle has been extended due to the lenthy period of losses that U.S. producers have incurred. The last four cattle cycles have ranged from 10 to 13 years in length. Two cycles were 10 years in length (1949-58 and 1958-67), one cycle was 12 years (1979-90) and one cycle was 13 years (1967-79). The current cattle cycle (1990-?) is in its tenth year and will likely last another two to three years. The 1967-79 cattle cycle was unusual in its length and severity. Its problems were compounded by President Nixon's beef price freezes, the oil price shocks of the 70s, drought and high grain prices (Mathews et al., USDA, 1999, p. 14). In general, however, the average length for each of the six recorded cattle cycles (1928-present) has been about 10 years (Andersen et al.). Figure 3 shows the inventories and length of the current and previous four cattle cycles. The inventory of cattle and calves during the 1990 cattle cycle shows a more gradual increase and decrease than the previous four cattle cycles. The response in cattle market prices to these moderate changes in inventory will be presented later. Figure 3. Length of U.S. Cattle Cycles The length of the current cattle cycle will undoubtedly be longer than 10 years due to the high level of weaned heifers being placed in feedlots, which does not allow for an increase in breeding herd replacements. In addition, it generally takes at least two years to breed, calve and wean a calf from a weaned heifer. It is highly likely that weaned replacement heifers will not be retained until cow-calf producers attain a reasonable level of profitability (i.e., when cattle and calf prices transition higher). The 1999 August Situation and Outlook, published by the USDA, projects that cattle inventories will continue to decline. "Record slaughter weights and another year of poor incentives to hold back heifers for herd expansion led to record beef production in 1999. Near-record heifer slaughter in 1999 and large numbers of heifers already in feedlots on January 1, 2000, almost insure that the U.S. cattle inventory cannot begin to expand before

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United States Cattle Cycles: Perspectives on U.S. Cattle and Calves Inventories and Prices 3 the 2001 calf crop and likely not before 2002." (USDA, January 2000. p. 4) It was also projected that inventories would decline with the 1999 calf crop, which was estimated to be the smallest calf crop since 1952. "The midyear cattle inventory was down 1 percent from a year earlier, indicating continued declines from the 1996 cyclical peak. Cow calf operators have lost money since 1995 and can expect only modest improvements in returns above cash costs this year. Beef cows were down 1 percent and the number of beef replacement heifers was down 4 percent. These figures strongly suggest that producers are not going to start breeding more replacement heifers until at least 2000 and the earliest the calf crop is likely to rise is in 2001. Even as the inventory continues to decline, however, the 1999 calf crop is estimated down only 1 percent, or less than 300,000 head. This would be the smallest calf crop since 1952." (USDA, August 1999. p. 2) The current cattle cycle will be at least 12 years in length, or longer, due to weak cattle and calf market prices. The current cycle most likely will be comparable in length to the 1967-79 cattle cycle. The 1967-79 cattle cycle faced the economic stress of beef price controls, drought and high grain prices. Grain prices surged in 1996, but quickly retreated to the depressed prices farmers are receiving today. Factors that have contributed to extending the liquidation phase of the current cattle cycle include continued large supplies of beef since 1996, large supplies of total meats, imports of live cattle from Canada, cheap feed and weak foreign currencies. What distinguishes the current cattle cycle from previous cattle cycles? In order to address this question we must compare the changes in the inventory of cattle and calves with the changes in U.S. cattle prices by year for each of the last five cattle cycles. The U.S. inventory of cattle and calves by year for each of the last five cattle cycles is reported in Table 1. Note the consistent, positive annual percentage changes (the expansionary phase) followed by the consistent, negative annual percentage changes for each cattle cycle (the liquidation phase). This reflects the degree of difficulty of changing the U.S. cattle and calves inventory. Also, notice the moderate annual percentage change in inventory for the current cattle cycle (1990-?). The annual percentage changes in inventory of the current cattle cycle, both positive and negative, are smaller than the previous four cattle cycles. The current cattle cycle will not be completed until an increase in inventory occurs, which will signal the beginning of the next cattle cycle. This will not occur until producers receive profits on their cattle and begin to expand their herds. The 1979-90 cattle cycle was 12 years in length. The inventory of cattle and calves during this cycle increased the first three years and decreased the remaining eight years. The present cattle cycle (1990-?) showed increases in cattle inventory for six years and began to decline in 1997. The 1990-? cattle cycle has been less productive than most of the previous cattle cycles. The largest annual cattle inventory increase during the present cycle was 1.8 million head (+1.8%), which is considerably smaller than any of the previous cattle cycles. Likewise, the largest annual cattle inventory decrease during the present cycle was 1.9 million head (-1.9%), which is smaller than all the previous cycles, except for 1958-67. The present cattle cycle is expected to report lower cattle inventory numbers for at least two more years. The total increase in the inventory of cattle and calves is reported at the bottom of Table 1. The inventory increase is measured from the beginning to the maximum inventory of cattle and calves for each cattle cycle. The increases in the inventory of cattle and calves for the first three cattle cycles listed ranged from 17.824 to 23.245 million head, while the increases for the last and present cattle cycles were 4.580 and 7.732 million head, respectively. The percentage inventory increases for each cattle cycle reflect the same absolute changes in the inventory of cattle and calves. The increases in the inventory of cattle and calves for the last and present cattle cycle were 23% and 38%, respectively, of the average increase (20.277 million head) for the first three cycles listed. Figure 4 illustrates the annual percentage change in the U.S. cattle and calves inventory during 1949-99. Obviously, increases in

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United States Cattle Cycles: Perspectives on U.S. Cattle and Calves Inventories and Prices 4 the inventory of cattle and calves have declined significantly during the last two cattle cycles. In addition, other market factors have had a significant impact on the U.S. cattle and calf prices in the 1990-? cycle. Figure 4. Percentage Change in U.S. Cattle and Calves Inventory, 1949-99. An examination of U.S. cattle prices during the last five cattle cycles provides information about changes in cattle prices. Table 2 describes U.S. cattle prices by year for each of the last five cattle cycles (USDA, U.S. Agricultural Statistics, Table 7-10, pg. 60). Cattle prices described in this price series represent all cattle greater than 500 pounds, which includes feeder cattle, fed cattle and cull cows and bulls. Also, the annual percentage change in cattle prices for each cattle cycle is provided for comparison. The annual percentage changes in cattle prices vary widely from the beginning to the end and often change sign during each cattle cycle. In addition, the annual percentage changes for the present cattle cycle (1990-?) behave similarly to those of other cycles, except that the total absolute decline in price is much larger for the current cattle cycle. The total decrease in cattle prices from the beginning of the cattle cycle to the minimum cattle price during the cattle cycle is reported at the bottom of Table 2. The cattle price decreases for the first three cattle cycles ranged from $0 to $4.90/cwt, while the cattle price decreases for the last two cattle cycles were $13.40 and $15.90/cwt, respectively. The cattle price decrease for the present cattle cycle was significantly larger than the other cattle cycles. For example, when expressed in dollars per head for an 1100-pound animal, the present cattle cycle reveals a price decrease of $175 per head. Thus making this price decrease the largest when compared to other cattle cycles. The cattle price decrease between 1993 and 1996 was $13.90/cwt ($72.60 $58.70) or a decrease of 19%, while the increase in cattle inventory was only 4.4% (4.37 million head). Since the current cattle cycle's peak in 1996, cattle inventory has declined 4.8% (5.03 million head). Also, cattle prices during 1998 did not rebound. Figure 5 illustrates the annual percentage change in U.S. cattle prices during 1949-99. Figure 5. Percentage Change in U.S. Cattle Prices, 1949-99. An examination of U.S. calf prices during the last five cattle cycles provides information about changes in calf prices. Table 3 describes U.S. calf prices by year for each of the last five cattle cycles. In addition, the annual percentage change in calf prices for each cattle cycle is provided for comparison. Note that the annual percentage changes in calf prices vary widely from the beginning to the end and often change sign during each cattle cycle, and that that the annual percentage changes for the present cattle cycle (1990-?) behave similarly to those of other cycles. The total decrease in calf prices is reported at the bottom of Table 3. The calf price decreases for the first three cattle cycles ranged between $0 and -$6.5/cwt (-0% to 28.8%), while the calf price decreases for the last two cattle cycles were -$29.0 and -$37.2/cwt (-32.7% and 38.9%), respectively. Note that the calf price decreases for the last two cattle cycles were larger than the other cattle cycles. The calf price decrease, when expressed in dollars per head for a 500-pound calf for the last two cattle cycles, reveals a calf price decrease of -$145 and -$186 per head. Thus making these calf price decreases significantly larger than the calf price decreases for the other cattle cycles. Figure 6 illustrates the annual percentage change in U.S. calf prices during 1949-99. The cattle cycle of the 1970s has been framed as severe in terms of length, reduction in inventory and price impact in the middle of the cycle. The current cattle cycle approaches the 1967-79 cycle in terms of

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United States Cattle Cycles: Perspectives on U.S. Cattle and Calves Inventories and Prices 5 Figure 6. Percentage Change in U.S. Calf Prices, 1949-99. length, but has been much more severe in price impact. Prices for cattle have declined more in the current cycle than in any previous cycle. The U.S. cattle industry has suffered significant injury during an extended liquidation phase in which cattle producers have consistently lost money since 1995. Although some industry analysts had expected the cattle cycle to end in 1999, the USDA industry has since announced that the current cattle cycle will be extended at least another two years. Evidence indicates that the current cattle cycle is different from the other cattle cycles, and that producers will continue to experience lower returns. The continued placement of heifers into feedlots signals that U.S. producers hold no confidence in any significant rebound in prices. Liquidation will continue until U.S. producers begin to realize profits on cattle and calves currently being sold. Tables 4 and 5 report the cattle and calf price elasticities for the 1949-99 cattle and calves inventory as arc elasticities. These price elasticities measure the change in quantity taken as the result of a unit change in price. Thus a 0.09 cattle price elasticity of the cattle and calves inventory means that a price increase of 1% produces a 0.09% increase in the quantity taken. Alternatively, a 0.42 cattle price elasticity of cattle and calves inventory means that a price decrease of 1% produces a 0.42% increase in the quantity taken. Therefore the demand curve is inelastic between these two points. Demand is inelastic if elasticity is less than 1, and elastic if elasticity is greater than 1. In conclusion, a tremendous amount of change has occurred in the cattle industry during the last 50 years. Beef demand shifted out (to the right) during the 1950s, 1960s and 1970s, and shifted back (to the left) during the 1980s and 1990s. The inventory of cattle and calves trended upward until 1975 when it peaked at 132 million head. It is currently on a downward trend with the inventory of cattle and calves, as of January 1, 1999, at about 98.5 million head. However, beef production today is about the same as that of the mid 1970s, but with about 32 million fewer cattle and calves. Other factors, such as improved production practices, better genetics, technological inputs, weather, other meat and live animal trade, pricing methods, marketing practices, market information (quantity, quality and timeliness) and beef demand, have no doubt impacted the inventory of cattle and calves and, thus the cattle cycles, and will continue to do so in the future. References Anderson, David P., James G. Robb and James Mintert. Cattle Cycle.Edited by Chris Bastian and Deevon Bailey. Managing for Todays Cattle Market and Beyond. University of Wyoming, Wyoming Cooperative Extension Service, Laramie, Wyoming. 200 pages. 1996 U.S. Department of Agriculture. U.S. Beef Industry: Cattle Cycles, Price Spreads and Packer Concentration. Technical Bulletin 1874. By Kenneth H. Mathews, Jr., William F. Hahn, Kenneth E. Nelson, Lawrence A. Duewer and Ronald A. Gustafson. Market and Trade Economics Division, Economic Research Service. Government Printing Office. Washington, DC. April 1999. U.S. Department of Agriculture, Economic Research Service. Dairy and Poultry Situation and Outlook. LDP-M-62. August 2000. U.S. Department of Agriculture, Economic Research Service. Dairy and Poultry Situation and Outlook. LDP-M-67. January 2000. U.S. Department of Agriculture. National Agricultural Statistics Service, Agricultural Statistics Board, USDA. U.S. Government Printing Office, Washington DC. Various Years, 1970-99. U.S. Department of Agriculture. Agricultural Statistics. U.S. Government Printing Office, Washington DC. Various Years, 1950-98.

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United States Cattle Cycles: Perspectives on U.S. Cattle and Calves Inventories and Prices 7 Table 1. A comparison of the U.S. inventory of cattle and calves during the last five cattle cycles. Item 1949-58 1958-67 1967-79 1979-90 1990-? Mil. Hd % Chg Mil. Hd % Chg Mil. Hd % Chg Mil. Hd % Chg Mil. Hd % Chg Year 1 76.830 91.176 108.783 110.864 95.816 Year 2 77.9631.593.3222.4109.3710.5111.2420.396.3930.6 Year 3 82.0835.396.2363.1110.0150.6114.3512.897.5561.2 Year 4 88.0727.397.7001.5112.3692.1115.4441.099.1761.7 Year 5 94.2417.0100.3692.7114.5782.0115.001-0.4100.9741.8 Year 6 95.6791.5104.4484.1117.8622.9113.360-1.4102.7851.8 Year 7 96.5921.0107.9033.3121.5393.1109.582-3.3103.5480.7 Year 8 95.900-0.7109.0001.0127.7885.1105.378-3.8101.656-1.8 Year 9 92.860-3.2108.862-0.1132.0283.3102.118-3.199.744-1.9 Year 1091.176-1.8108.783-0.1127.980-3.199.622-2.498.522-1.2 Year 11 122.810-4.096.740-2.998.048-0.5 Year 12 116.375-5.295.816-1.0 Year 13 110.864-4.7 Maximum Inventory of Cycle 96.592 109.000 132.028 115.444 103.548 Beginning Inventory of Cycle 76.830 91.176 108.783 110.864 95.816 Inventory Increase 19.762 17.824 23.245 4.580 7.732 Percentage Inventory Increase (%) 25.7% 19.5% 21.4% 4.1% 8.1% Table 2. A comparison of U.S. cattle prices during the last five cattle cycles. Item 1949-58 1958-67 1967-79 1979-90 1990-? $/cwt % Chg $/cwt % Chg $/cwt % Chg $/cwt % Chg $/cwt % Chg Year 1 19.8 21.9 22.3 66.0 74.6 Year 2 23.317.722.63.223.44.962.4-5.572.7-2.5

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United States Cattle Cycles: Perspectives on U.S. Cattle and Calves Inventories and Prices 8 Table 2. A comparison of U.S. cattle prices during the last five cattle cycles. Item 1949-58 1958-67 1967-79 1979-90 1990-? $/cwt % Chg $/cwt % Chg $/cwt % Chg $/cwt % Chg $/cwt % Chg Year 3 28.723.220.4-9.726.212.058.6-6.171.3-1.9 Year 4 24.3-15.320.2-1.027.13.456.7-3.272.61.8 Year 5 16.3-32.921.35.429.07.055.5-2.166.7-8.1 Year 6 16.0-1.819.9-6.633.515.557.33.261.8-7.3 Year 7 15.6-2.518.0-9.542.827.853.7-6.358.7-5.0 Year 8 14.9-4.519.910.635.6-16.852.6-2.063.17.5 Year 9 17.215.422.211.632.3-9.361.116.259.6-5.5 Year 10 21.927.322.30.533.74.366.69.0 Year 11 34.42.169.54.4 Year 12 48.541.074.67.3 Year 13 66.036.1 Beginning Cattle Price ($/cwt) $19.8 $21.9 $22.3 $66.0 $74.6 Minimum Cattle Price ($/cwt) $14.9 $18.0 $22.3 $52.6 $58.7 Cattle Price December ($/cwt) -$4.9 -$3.9 $0.0 -$13.4 -$15.9 Cattle Price December (%) -24.7% -17.8% 0.0% -20.3% -21.3% Cattle Price December 1100# ($/Hd) -$54 -$43 $0 -$147 -$175 Table 3. A comparison of U.S. calf prices duirng the last five cattle cycles. Item 1949-58 1958-67 1967-79 1979-90 1990-? $/cwt % Chg $/cwt % Chg $/cwt % Chg $/cwt % Chg $/cwt % Chg Year 1 22.6 25.3 26.3 88.8 95.6 Year 2 26.316.426.75.527.64.976.8-13.598.02.5

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United States Cattle Cycles: Perspectives on U.S. Cattle and Calves Inventories and Prices 9 Table 3. A comparison of U.S. calf prices duirng the last five cattle cycles. Item 1949-58 1958-67 1967-79 1979-90 1990-? $/cwt % Chg $/cwt % Chg $/cwt % Chg $/cwt % Chg $/cwt % Chg Year 3 32.021.722.9-14.231.514.164.0-16.789.0-9.2 Year 4 25.8-19.423.73.534.59.559.8-6.691.22.5 Year 5 16.8-34.925.15.936.45.561.73.287.2-4.4 Year 6 16.5-1.824.0-4.444.722.859.9-2.973.1-16.2 Year 7 16.8-1.820.4-15.056.626.662.13.758.4-20.1 Year 8 16.1-4.222.18.335.2-37.861.1-1.678.935.1 Year 9 18.716.126.017.627.2-22.778.528.578.8-0.1 Year 10 25.335.326.31.234.225.789.213.6 Year 11 36.97.990.81.8 Year 12 59.160.295.65.3 Year 13 88.850.3 Beginning Calf Price ($/cwt) $22.6 $25.3 $26.3 $88.8 $95.6 Minimum Calf Price ($/cwt) $16.1 $20.4 $26.3 $59.8 $58.4 Calf Price December ($/cwt) -$6.5 -$4.9 $0.0 -$29.0 -$37.2 Calf Price December (%) -28.8% -19.4% 0.0% -32.7% -38.9% Calf Price December 500# ($/Hd) -$33 -$25 $0 -$145 -$186 Table 4. Cattle price elasticity of cattle and calves inventory, 1949-99. Item 1949-58 1958-67 1967-79 1979-90 1990-? Year 1 Year 2 0.090.740.11-0.06-0.23 Year 3 0.25-0.300.05-0.44-0.62 Year 4 -0.42-1.530.63-0.290.91 Year 5 -0.170.510.290.18-0.21

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United States Cattle Cycles: Perspectives on U.S. Cattle and Calves Inventories and Prices 10 Table 4. Cattle price elasticity of cattle and calves inventory, 1949-99. Item 1949-58 1958-67 1967-79 1979-90 1990-? Year 6 -0.82-0.590.20-0.45-0.23 Year 7 -0.38-0.320.130.52-0.14 Year 8 0.160.10-0.271.89-0.26 Year 9 -0.22-0.01-0.34-0.210.33 Year 10 -0.08-0.16-0.73-0.29 Year 11 -2.01-0.69 Year 12 -0.16-0.14 Year 13 -0.16 Estimates represent arc elasticities [(Q2-Q1)/(Q2+Q1)]/[(P2-P1)/(P2+P1)] Table 5. Calf price elasticity of cattle and calves inventory, 1949-99. Item 1949-58 1958-67 1967-79 1979-90 1990-? Year 1 Year 2 0.100.430.11-0.020.24 Year 3 0.26-0.200.04-0.15-0.12 Year 4 -0.330.440.23-0.140.67 Year 5 -0.160.470.36-0.12-0/40 Year 6 -0.84-0.900.140.49-0.10 Year 7 0.53-0.200.13-0.94-0.03 Year 8 0.170.13-0.112.41-0.06 Year 9 -0.22-0.01-0.13-0.13 Year 10 -0.14-0.19 Year 11 -0.54-1.65 Year 12 -0.12-0.19 Year 13 -0.12 Estimates represent arc elasticities [(Q2-Q1)/(Q2+Q1)]/[(P2-P1)/(P2+P1)]