CattleFax sees profitability for U.S. cattle industry
Questions for the future of cattle markets haven’t changed the overall optimism for CattleFax as they look through the summer to the fall.
“Overall, the cattle industry should be profitable for all segments through the summer,” said CattleFax Analyst Mike Murphy during a May 24 Trends+ webinar. “The stocker segment will be profitable into the third quarter, and the cow/calf segment will also have some positive margin into the fall timeframe, as well.”
Murphy looked at trends from the last year and combined them with continued expansion to forecast, a $1.50 average for 550-pound calves and a worst-case scenario for fed cattle at $1.12.
Moving through summer
“Fed cattle traded May 24 at $1.32,” Murphy said. “We’re close to the launching point we experienced over the last few weeks, and we believe the market is going to break down and break the trend.”
He continued, “The key is, as we look at this pattern, we went from the middle of October to the middle of April where we found highs in the fed cattle market.”
The roughly six-month trend can be juxtaposed to the market correction last year, where highs were seen in March and lows bottomed out in October.
“If we have the same sort of pattern in April, we could go into November before we find the fed cattle lows this year,” Murphy emphasized. “That puts more price pressure on the calf market at the tail end of the calf run.”
In evaluating concerns for the future of the market, Murphy saw challenges as it related to capacity at the packing houses.
“Last fall, we saw challenges in the market that related to lack of packing capacity. Obviously, it had impacts at the fed cattle level, but they spilled into the cow/calf sector, as well,” he said. “That issue has not been resolved.”
He described that, at the brick-and-mortar level, capacity exists, but rather, a lack of available labor creates problems.
“We have to kill more cattle now in relationship to a year ago,” Murphy said. “That becomes a little bit of a concern. We are going to get a few more harvested each week going forward, which doesn’t put quite as much pressure on a Saturday kill, but it’s still significant.”
Murphy added an incentive will be necessary for packers to harvest cattle at a timely rate to avoid a dramatic downturn in the market.
“Unfortunately, the timing of where we could see problems is right during the fall calf run, so we’ve got to be conscious of that,” he said. “The market is going to have to provide an incentive to get cattle harvested.”
Currently, however, Murphy added the market is already incentivizing packers to harvest cattle at active rates, which is positive.
“It’s positive to provide a margin to packers to get cattle harvested and be more aggressive,” he explained. “The more we provide incentives, the less risk we’ll have of repeating the flush-out mode we saw in the market last fall, which led to the big drop in the value of calves.”
Additionally, the relationship between fed cattle and retail is also important.
“We’ve had a significant re-alignment with the margin at retail,” he said. “Last fall, we were receiving between 16 and 18 percent of retail price, which was a historical low level, which only compounded the effect of trying to clear inventor through the system.”
The result was painful margins and returns for all segments of the cattle industry.
“We recovered an enormous amount of that percentage, and we pushed the market back up to the mid-1.40s at the fed cattle level,” Murphy said.
As he looks at the future of fed cattle prices, Murphy used a benchmark of 18 to 19 percent of retail price as a foundation.
“Every one percent change we have in this ration is worth about $5.50 to the market,” he explained. “When we had six percentage points, that’s worth about $33.”
Subtracting the $33 from highs of $1.45, Murphy sees a low-end to the market of $1.12.
“We can work from there to assess the value for feeder cattle and calves as we look at the fall,” he said.
He also noted, however, that cash is two to four percent better than the deferred futures.
For feeder cattle and calves, Murphy sees a bumpy downward trend, likely close to $1.40 for calves, with about a $30 spread between feeders and fed cattle.
“When we take that one step further and the timing a bit later into the fall, I think we’ll see a long-term average 10 percent premium, which would put a 550-pound calf at $1.50,” Murphy said. “We’ll see a premium in the north and discounts going toward the south, as well.”
The Trends+ webinar was sponsored by Elanco Animal Health. Look for more from this webinar in next week’s Roundup.
Saige Albert is managing editor of the Wyoming Livestock Roundup and can be reached at firstname.lastname@example.org.