Market perspectives Murphy looks toward cattle market futureWritten by Saige Albert
“As we evaluate the beef cattle industry from a short-term perspective, we have discussed over the past several weeks that maybe we have gotten too rich in terms of the fed cattle market,” commented CattleFax Analyst Mike Murphy during a Jan. 21 Cattle Fax Trends+ webinar.
Murphy looked at prices, as well as market trends, for the next several years, mentioning that the current environment is positive, but the future may not see the same high prices of the last few years.
“We feel like we have tested the high end of our market range,” he said.
In the fed steer market, Murphy noted that the current trend, since July 1, 2014, indicates a contra-seasonal market.
“The data would suggest, if we are following a contra-seasonal year, that the trend would be an underperforming market going into springtime relative to fed cattle,” he said.
He also added that the market will likely start to turn higher again next summer.
“Some people may be wondering why, with the current tight supply, the beef industry is in a contra-seasonal environment,” Murphy said. “We have to recognize that we are dealing with our situation relative to competing meats.”
“When we look at beef on a retail, wholesale or live basis, beef is record-high compared to both pork and poultry,” he continued. “We have lost the advantage relative to our competitors for 2014 in the protein sector.”
At the same time, the ability to export both beef and pork has been diminished as a result of the strength of the U.S. dollar relative to currencies of trading partners.
“The final thing we have to think about is leverage,” Murphy added. “Leverage and margins favored the production side of the beef industry for most of 2014. It appears that we are in the process of shifting the leverage to someone above us in the chain.”
Similar contra-seasonal patterns can be seen in the feeder cattle markets, particularly for 750-pound steers.
“The cash feeder market is moving lower into the spring,” Murphy noted. “I would step back and caution ourselves relative to the market. There is more risk relative to the cash market than in the futures markets.”
Murphy also cautioned producers against getting too bearish relative to current levels.
“If we have a strong rally in futures, we might use that to protect ourselves, but we have to have caution with such a strong basis in the market,” he explained.
For fall feeder cattle, Murphy also predicted stronger prices than were seen in the beginning of January, and he noted better markets are likely in the third quarter of the year.
Lighter animals – the 550-pound steers – will be supported in early March and likely taper off.
“As we look between now and the next 45 days, the lightweight market is very well supported and could get a little stronger,” Murphy continued. “It goes back to demand.”
“To summarize the feeder cattle market, those on winter operations should expect more on the cash feeders going into the spring. Futures have priced a lot of the correction in there,” he said. “Those dealing with summer grass operations should expect the market will be pressured in the spring and recover in the fall.”
“Lots of things could change, and we know how quickly markets move,” Murphy said.
For cull cows, Murphy mentioned the market has been successful the past few years.
“There has been some disappointment in this sector recently,” he commented. “Not to say that producers will lose money, but cull cows this year may not be as much of a windfall as they were a year ago.”
From the spring and summer, he noted the market will likely drop off moving into the fall months.
“We encourage producers, if they have a cow to get rid of, that they do it sooner rather than later,” Murphy said.
With steers seeing contra-seasonal market trends, Murphy noted that heifer slaughter numbers are down.
“As we look at the long-term perspective, we are in the midst of expansion,” he commented. “When heifer slaughter as a percentage of fed slaughter drops below 35 percent, that is a sign of expansion.”
Current slaughter levels indicate expansion levels not seen since the mid-1990s.
“We are in the midst of an expansionary environment,” Murphy continued. “With expansion, we should start to expect that our supplies of beef will grow over the course of the next few years.”
Net beef supply
Murphy noted that net beef supply, which is calculated by multiplying domestic slaughter by weight and subtracting exports, is expected to be tight in 2015 as compared to 2014.
However, in 2016-17, net beef supply is expected to grow again.
“That growth is important because it suggests we have likely seen the high end of the range relative to the market,” Murphy said.
He also noted that the other component to that story is competitive protein markets.
Increases in per capita meat and poultry consumption are expected in 2015-17. An increase of nearly 10 pounds per capita in meat and poultry consumption is expected by 2017.
“As we evaluate this information and how it applied to feeder cattle and calves, we are in the high-end of the range for the markets,” Murphy said. “We need to step back and understand that there is probably more of that downside relative risk to the market, rather than upside risk.”
While Murphy says he wouldn’t go so far as to say that beef producers will not be profitable moving forward, he said it is important to keep the markets in mind.
“The only way we can advance is with growth in demand,” he continued. “That will be a challenge with some of the things going on from a global perspective in terms of our market.”