CattleFax sees softer prices moving into 2016Written by Saige Albert
Markets for 2016 will be reminiscent of the second half of 2015, said CattleFax Analyst Mike Murphy in a Jan. 20 Trends+ webinar from the organization.
“We have an average forecast of $133 for the year in 2016,” Murphy said. “In the second half of 2015, our average was $136.”
“We are expecting the market to be just a little softer in 2016 as a whole,” he added.
Moving into the coming year, Murphy noted that there are a number of factors that will play into prices this year, including heavier fed weights, leverage, competing proteins and exports.
“The continuation of feeding cattle with heavier out-weights, won’t be as much of a problem we believe, but it is a factor to keep on our radar,” he said.
At the same time, leverage – or the relationship between line, wholesale and retail prices will become more important.
“Typically, when we transition into a bigger supply, we need to incentivize the consumer and those between the producer and the consumer,” Murphy explained. “We need to incentivize them to take more product.”
The shift between the packer and the retailer will also have to be watched closely, as it may have price impacts.
Murphy also noted that tight beef supplies are going to become a thing of the past moving forward.
“Our tightest net beef supply was in the 2014-15 window,” he said. “When it is all said and done, depending on what happens with the final trade number for December, 2015 should end up with the smallest net beef supply.”
He added, “We have a slight increase in net beef supply forecast for 2016, and we tend to see those numbers grow as we get bigger slaughter levels in 2017-18.”
The increase will be a driving force in the market moving forward, he added.
The global market will continue to be a factor as well, and exports are of particular concern.
“Currency is something we need to pay attention to,” Murphy said.
As far as imports are concerned, he also noted that the majority of imported product is a 90s lean beef that comes from Australia and New Zealand.
“Australia is now in the transition period where they will likely go into an expansionary phase,” he continued. “They are starting to get timely rains, and as they start to move into expansion, the result will be less product shipped into the U.S.”
At the same time, a decline in beef prices means that the U.S. is a less attractive market to export to, and a decline of about eight percent in imports is forecast for the coming year.
For exports, Murphy marked challenges in the global marketplace.
“Economically, when we start to look at where we are in China and Hong Kong, Japan, South Korea and with our NAFTA partners of Canada and Mexico, they are all suffering from some form of economic slowdown,” he said, adding that the situation is not recession but rather a slowing of growth in those countries.
“Typically what happens is, as we produce more beef, we should see growth in export markets,” Murphy explained. “I would say today, if we had to leave ourselves with a caution in the forecast, the export market would be a caution. Continued concern globally and from a currency standpoint could turn this forecast from a positive into a negative.”
Starting in the feeder markets, Murphy mentioned that the industry has undergone an equity drain in 2015, commenting, “We’ve given back a good chunk of the equity we gained in the fourth quarter of 2013 and 2014. By the time we are through the first quarter of 2016, we’ll have given it all back in the cattle feeding industry.”
He noted that feeders are looking to buy a small margin, and he targets the average price for a 750-pound steer at $165.
“Will the feeder be willing to buy a very small margin today, or are they going to look to buy a bigger margin?” Murphy asked. “The latter would have an adverse influence on the value of feeder cattle.”
At the same time, cash markets are in the low $130s today, he mentioned, but deferred live cattle are trading in the upper teens. A strong basis means that the cash market is significantly above the future market.
“That works against the feeders again because we buy cattle against the deferred live cattle value,” he said.
While corn shouldn’t be as much of a concern form 2016, Murphy said, “From a margin perspective, margins are going to be negative in the first five or six months of 2016 for feeders. It won’t be as bad as spring, but it still isn’t very positive.”
For calf values, Murphy said that an average of $195 should be expected.
“If we applied the seasonal range, we are talking about $215 as the high of the spring, and at the lower end of the range this fall, we’ll be talking about $175,” he said. “Fat and stocker margins will be in the red in 2016, and the leverage is no longer in favor of the cow/calf operator as it has been in recent years.”
Rather, leverage is shifting to the feeder and stocker operator.
Murphy also explained that calves are typically 130 to 140 percent of the value of fed cattle.
“If fed cattle go back to $100, then calves will go to between $130 and $140,” he said. “That is common in the commodity business. We go back toward the cost of production.”
Look in next week’s Roundup to learn more about the influence of competing proteins on today’s beef markets.