Inside the markets – Cattle markets seeing downslope with seasonal trends
“The markets have an emotional component,” said Lance Zimmerman, analyst at CattleFax. “As we went through the fourth quarter of last year and the first quarter of this year, we hit a point of euphoria. We are going through a transition and feeling anxiety now. We will hit a depression.”
Zimmerman, who presented during the Sept. 10 CattleFax Trends+ webinar, noted that the U.S. cattle industry is coming off a period where more equity was at risk than ever before, and the current transition period represents a time where equity preservation is important.
“Volatility remains historically extreme,” Zimmerman added. “Also, 550-pound steer calf prices have dropped $42 per hundredweight since their highs earlier this year. That is a loss of about $230 per head on average.”
CattleFax Analyst Mike Murphy said, “We are going to see nearly a 2 million head increase in the beef cow inventory in two years. Historically, those are significant increases that we don’t find very often.”
Breaking his analysis into segments, Murphy noted, “Calves have been fairly seasonal this year.”
The 2015 spring rally extended longer than is typical for the market, partially due to good grass.
“We had such good grass conditions,” he said. “We are starting to find the pressure now, which comes in the second half of the year.”
Murphy continued that, despite the recent trend toward a fourth quarter rally, producers should be cautious and not expect price improvement until the spring.
“The rally depicted here has been heavily influenced over the past couple of years,” he said. “I think the market will spend more time trading softer into the fourth quarter.”
Predicting a market low of $225 per hundredweight and a high of $245, he noted, “That is an awfully wide range for a three-month window, but that is the volatility we may be experiencing.”
After the first of the year, Murphy noted that prices are expected to recover, with spring highs at $255 to $265.
“We would not expect to go back to $275 to $290,” he added.
Much of this trend has already been anticipated by the market, he continued.
“Typically, we see the market trend lower from fall to spring,” Murphy said. “March futures were at $182 a few weeks ago.”
Though Murphy feels that $182 is lower than the market will actually dip, he sees a likelihood that prices could hit the $190s for feeder cattle, which is a reflection of the desire by cattle feeders to buy a better margin.
“When we look at the feeder/fed cattle spread, they are a reflection of the cattle feeder’s desire to buy a better margin,” Murphy noted. “The peak of the spread was at the summer, and we are now seeing the spread narrow up. That is a reflection of the loss of margin in the feeding sector.”
Further, that spread is expected to continue to narrow in the first quarter of 2016, Murphy added.
“As we look at our steer prices, we have gone from the low $230s, and we are trending toward the $205 to $210 range,” he noted. “We have seen pressure on the market, and when cattle feeders lose money for a long period of time, they try to make better purchasing decisions. We have to define the downside risk in the low to mid-$190s.”
For fed cattle, Murphy noted, “It has been a unique year. We didn’t have much of a spring rally, and we spent a lot of time trading sideways.”
The market worked to establish a fed cattle low, he continued, noting that CattleFax expects a market rally moving into fall.
“We are talking about prices in the low $140s, and we expect the low $150s going into fall highs,” he said.
In the spring rally, Murphy expected prices to hit the upper $150s in transitioning into next summer.
“We are setting up a big increase in beef cow numbers. We will see continued expansion into 2017-18,” Murphy commented. “The market will transition lower over the next few years.”
Elanco sponsored the Sept. 10 Trends+ webinar.
Saige Albert is managing editor of the Wyoming Livestock Roundup and can be reached at email@example.com.