Murphy sees positives for 2018 cattle markets

“We have a lot of positives working for us today, and we think that’ll continue into 2018,” said CattleFax’s Mike Murphy during a Jan. 24 Trends+ webinar.

Murphy looked at the current inventory of beef cattle, coupled with optimism in the markets, to project calf prices for 2018 and the near-future.

Herd size

Looking at the beef cow inventory, CattleFax projects the Jan. 1, 2018 herd will be up about 700,000 head.

“The report from USDA will be out on Jan. 31, and we can confirm that number,” Murphy said. “Over the longer term, we’ll start to see the beef cattle herd flatten out.”

Largely, Murphy said the beef cowherd will grow on a smaller scale as the industry begins to reach capacity.

“We define capacity as 32 to 32.5 million head of beef cows,” he explained. “If we remember 2004-08, there were certain regions of the country that turned grass into row crops because there was a higher drive for value in the farm sector.”

As a result, capacity was reduced in the industry.

Translating back to the calf crop, CattleFax predicts the 2018 calf crop will be close to 1 million head, including dairy calves.

“We will see growth of the cattle herd start to level off,” Murphy said.

For the 2018 market, slaughter numbers will hit 26.5 million head.

Additionally, CattleFax sees fed slaughter to increase above year-ago levels.

“We’ve got to be very cautious with the leverage relationship between cattle feeder and packer-processors,” he added.

Marketing impacts

In looking at how supply will translate into marketing, Murphy said exports provide an important component.

“We’ve projected export growth in 2018, about six percent from an annual standpoint,” he said. “In the first half of the year, we’ve had a 10 percent increase so far.”

Part of the drive for an increased export market comes from South Korea.

“Especially in January and February when South Korea is hosting the winter Olympics, and we feel like we’re getting an added bonus for product going into South Korea,” Murphy commented. “This is a bright spot for us, and we continue to grow exports on an annual basis.”

In addition, the U.S. dollar continues to weaken, which tends to support trade, from an agriculture standpoint.

“As we think about it from the dollar perspective, we could very well lose more ground to the dollar over the course of the next several weeks,” Murphy said.

Domestic

At the same time exports are projected to increase, domestic demand is up.

“We have robust demand,” Murphy said. “There are positives to demand in our opinion, and we look for demand to continue to be stable in 2018.”

At the same time, CattleFax predicts a larger 2018 supply as a result of increased slaughter, he said.

“On a per capita basis, we’re looking at a 1.6-pound increase,” Murphy said. “It’s a big increase.”

With several reasons to be optimistic, Murphy sees an improved economy as the biggest positive sign.

“We’ve seen growth in the economy,” he continued, noting tax reform has resulted in benefits for both individuals and corporations.

“We have bigger supply and a supportive demand situation, both globally and domestically, and it all comes back to economic growth,” Murphy said. “These are all positive signs.”

Value

With many indicators very positive for cattle markets looking forward, Murphy looked at how those factors translate into increased value for producers.

“As we think about value, we have to remind ourselves of the volatility the market has incurred over the last few years,” he said. “We have to consider the likelihood of that volatility continuing into 2018.”

For calf producers, Murphy pointed to a strong pattern in the marketplace.

“Some people will be looking to buy stockers this spring, but when we look at the calf market, we’re really concerned about this fall’s calf crop,” Murphy commented. “If we look at a 15 percent break in the market – which is a pretty healthy break – that takes calf prices into the upper $1.40s.”

Murphy said the price prediction aligns with trends from the last several decades, with the exception of 1995 and 2015-16.

“In July of 1995, as corn prices went up, our cattle feeding profitability went straight down, so there is a possibility of more than a 15 percent break in the fall timeframe,” he said. “I don’t think that’s a concern for 2018, but we have to keep it in mind.”

Longer-term

Over the long-term, CattleFax projects the 550-pound steer price to bottom out at $1.25.

“If we look at the price of 550-pound steers as a ratio against the value of all-fresh retail beef prices, we see a range of 28 to 38 percent historically,” Murphy explained, noting that some exceptions as a result of extreme events can be seen.

If retail prices reach four to five dollars a pound for all-fresh beef over the next several years and a 25 percent ratio of steer price to all-fresh beef price is achieved, Murphy predicted a low of $1.25 for steer calves – which is the same lows from the fall of 2016.

“This is not a guarantee that calves won’t reach a new low in this cycle, but unless demand completely blows up, we’re not going back there,” Murphy explained. “I think we can comfortably use $1.25 on the low end of our price range over the next two to six years.”

Next week in the Roundup, look for market predictions on bred heifers, fed cattle and feeder cattle.

Saige Albert is managing editor of the Wyoming Livestock Roundup and can be reached at saige@wylr.net.