CattleFax predicts continued herd expansion, price optimism

CattleFax Analyst Lance Zimmerman said that the big correction in cattle prices predicted early in 2016 isn’t happening, and instead, the organization has revised cattle prices even lower for all fresh beef, utility grade cull cows and calf prices for the summer.

“As we transitioned into 2016, which led us to initial lower revisions for the year, we had a lot of the same challenges from 2015,” Zimmerman said. “We expect better exports in 2016, but we’ll also talk about current-ness in the feedlot segment.”

Zimmerman looked at the impacts of the feedyard segment and its impact on calf prices during a May 25 CattleFax Trends+ webinar sponsored by Elanco.

Cattle cycle

While there is argument as to whether the cattle cycle still exists, Zimmerman noted that a 10-year market cycle has been seen for many years.

“We started at the beginning of this decade with record-high harvest numbers,” he said. “The drought combined into that, and we had good fed cattle numbers. We saw those numbers continue to erode as we dug into the supply.”

In 2014-15, Zimmerman noted that supply lows were hit, which resulted in market highs at the same point in time.

“Those market highs materialized in the fourth quarter of 2014 and the first quarter of 2015,” he said.

As 2015-16 came around, Zimmerman noted that a 30-plus percent price correction was seen, which is similar to historic data, relative to past cattle cycles.

“With the extreme correction we went through, we’re likely closer to the bottom of the cycle than we might be historically,” he said.

Price cycle

Zimmerman explained that the decline in prices is likely near its low point.

“As fast as we went up, it’s our expectation that we’re going to take the bulk of the price decline right off the bat,” he said. “When we look at the second half of the decline we went through in 2015, combined with the market that we’re dealing with today, the bulk of the price decline is already behind us.”

He continued that lower prices are likely through 2017 and maybe 2018.

“As we look at the marketplace, we need to recognize that the margin has transitioned back to the end user – the retailer, restaurant and even the processer,” Zimmerman said. “The cattle feeder, stocker operator or even the cow-calf guy will have tighter margins and tougher losses compared to what we were sued to earlier in this decade.”

Despite tighter margins, Zimmerman called the trend a “normal transition as we go through the expansion phase.”

In past cattle cycles, following major highs, as seen in the late 70s, early 90s, 2004 and 2014, a break is seen. For example, Zimmerman looks at 1991, noting that it represented one of the biggest breaks from cycle high to cycle low.

“It equated to a 48 percent break,” he said. “We’re already at a 41 percent break in the current cycle. A 48 percent break today from highs of $244 equates to a $127 feeder cattle market on a cash basis.”

“We’re still a ways away from realizing prices in the $127 to $128 range, but we need to be receptive of the fact that the market remains depressed,” Zimmerman commented. “A lot of this is happening faster and the market is more volatile than any of us would have expected. There is potential to see that market recover or at least trade steady.”

Cow inventory

Looking at cow inventories, Zimmerman also noted that the base is still growing, demonstrated by the low percentage of heifers being sold as feeder cattle and calves and the percentage of heifers going into the fed production mix.

“All of these factors point to cow inventory continuing to grow,” he said. “The peak is not likely to be met until 2017.”

With a high cowherd predicted at 2017, Zimmerman added that peak production will not likely be seen until 2019 or 2020.

“It’s not out of the realm of possibility to talk about 2019 or 2020 setting new records for beef production,” he commented. “A lot of things have to line up perfectly, but that’s a situation that’s in the cards.”

Feedyard losses

“If we look at what it’s going to take to see a rally in the feeder cattle and calf markets in 2016, one of the first places we need to turn to is the source of demand,” Zimmerman said. “The source of demand in the feeder cattle markets is the seller of fed cattle.”

Persistent losses in the feedyard segment impacted calf prices, driving them lower in the last nine months.

“The feedyard segment went though a period of time in the last 12 months where they lost over $5 billion as an industry segment,” Zimmerman said. “Those losses continue to be extreme, and they continued through early spring.”

He continued, “This not only had an effect on feeder cattle prices, but it kept the sellers of feeders in negative equity territory, as well, hurting the calf market.”

The profits made by feeders from October 2013 to the end of 2014 has since been lost by feeders, and the equity drain on the market place created a challenge.

“In January, we talked about the industry looking at an extra 1.3 million head of cattle outside of feedyards on Jan. 1 to be placed,” Zimmerman said. “Placements have done a really good job from January through April, remaining on place with the available feeder cattle.”

Outlook

While the market has been stale and the downtrend has continued, some feeders are seeing profits, and Zimmerman said, “I’d argue that the give-and-take is that they are operating around a breakeven. We’re starting to see feeder trends change.”

Zimmerman also noted that more cattle will likely be placed, and he expects the market to get back to the low-160s by August.

“If we get above that, it will be an opportunity for feeders sellers to be aggressive with marketing,” Zimmerman said. “Whether we look at the fed cattle markets as being seasonal or contra-seasonal, all of these patterns see movement high in the summer on average. It’s not a given, but at least there’s some reason for cautious optimism as we work into summer.”

Calf markets

Zimmerman added that calf markets are in much the same situation.

“When the fed cattle market, stockers or backgrounders are losing money, calf prices break,” he said. “Buyers are struggling to find calves to fill up the pastures that are greening up, but as we get into October, November and early December, supplies are going to be abundant and sellers are going to use that.”

“CattleFax expects calf prices to continue to recover as we work into the summer period as supplies naturally tighten and lift the market,” Zimmerman said. “As supplies start coming around in the fall, revisiting some of the lows that we saw earlier this spring are a definite possibility.”

Look for more from CattleFax in next week’s Roundup.

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