CattleFax sees signs for expansion
“Mother Nature has been devastating the industry over the last couple of years,” said CattleFax Risk Management Specialist Mike Murphy during a Sept. 4 update. “We have seen continued liquidation as we look at the beef cow sector.”
Murphy, along with Grain Market Analyst Chad Spearman, noted that while the cattle industry sees economic signals for expansion, environmental factors must also align before slaughter numbers show heifer retention.
“We have an opportunity to stabilize the beef cow herd if Mother Nature will allow it,” Murphy continued. “The value of beef is there, but our feed costs are high enough that we haven’t had the economic incentive. That will change in 2014 more than in 2013.”
Grain market impacts
Drought impacts on grain markets has been significant this year, marked Spearman, but signs for improved corn looks positive.
“Crop conditions remained better than average prior to recent declines in the past few weeks,” said Spearman. “As of Aug. 25, only 23 percent of the crop was dented across the U.S., and crop maturity continues to lag, which elevates freeze risk going into fall.”
Despite the risk for the crop freezing, he noted that there is optimism for solid corn production potential in the U.S., assuming no freeze.
“Potential production ranges from 13.7 to 14.1 billion bushels, which, if realized, would be record,” Spearman commented.
At the same time, usage of corn is also expected to rise substantially.
“As we look at corn futures, look for spot corn futures to find solid support at $4.40 to $4.50 a bushel, and significant resistance around $5.40 to $5.60 per bushel,” he commented.
Spearman added, “We expect to realize cheaper corn costs and cost of gain in the feedyard, as well as cheaper forage in the long run.”
Year to date, beef cow slaughter has increased by 1.2 percent, commented Murphy, who further noted that declines seen in the last few weeks are expected to continue through the rest of the year.
Another factor that impacts economic incentives is reflected in the number of heifers slaughtered as a percentage of fed slaughter numbers.
“Looking at 2013 compared to 2012, we are right in line with 36 percent of the fed slaughter in heifers,” Murphy explained, noting the figure indicates the industry is still in a liquidation phase. “We will be watching this data closely, most importantly in the first quarter of 2014.”
Heifer retention, which signals potential industry expansion, would be seen when yearlings are turned out in the summer of 2014.
“Next summer, with cheaper feed grain, we should have the opportunity to see more heifers placed on feed as calves, if we are going to see that take place,” he added.
Murphy continued that since 2006-07, the cattle industry has witnessed significant declines in inventory.
“Through that period, we have weathered storms. We had the great recession in 2008 and its influence in calf values,” he explains. “We also had a recovery in the market from 2010-13. The recovery really supports that we should have seen expansion taking place, but Mother Nature has not cooperated.”
Murphy speculates that as more moisture is seen, the national cattle herd could stabilize looking toward 2015.
“Overall, we feel pretty good that the economic signal is clear,” Murphy commented. “We just need to have Mother Nature respond and show us more green grass, and then we will start to stabilize.”
“It is important for everyone in the calf and feeder cattle segments to understand that one of the keys of the value of feeder cattle and calves is that we are dealing with an excess of feeding capacity,” Murphy said.
Reflecting over the last decade, Murphy noted that, even as slaughter capacity declined with the decline of cattle herd numbers, feedlot capacity sustained a consistent level.
“Since 2008, we have had significant feedlot issues, good recovery into 2010-11, and since then we have been in an equity drain that continued into the summer of 2013,” Murphy explained.
Looking forward, he expects that the market will remain flat through the fall with slight improvements until next spring, when strong acceleration in market values is expected.
“Next year, we are expecting to see calf value up to $2.10 to $2.15 per hundredweight,” Murphy said. “This is with the assumption that we have good grass in terms of grazing.”
Following that peak, he marked the next season of flat values at $1.70 to $1.75 per hundredweight as a low, depending on corn values coming out of next summer.
Fed cattle and utility cows
For the fed cattle market, Murphy expects values in the in the low $1.50 to $1.60 per hundredweight range.
“As we move into the first quarter of next year, if the fed market is improving, there is a chance to move the market into the low $1.60s,” he said.
For utility cows, Murphy also marked a seasonality in the market, but one of the assumptions for cull cows is that there is a very small increase in non-fed slaughter animals. This summer’s market, he said, will sustain prices in the mid to low 70s.
“We think those levels will sustain themselves as we move into the fall,” Murphy said, marking that the cull cow market could approach the upper 90s in the spring. “The key would be a significant decline in the non-fed slaughter forecast. If for some reason Mother Nature plays a role that is more negative and limits decline in cow slaughter, and we would temper our optimism in the cow market.”