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CattleFax at NCBA: Tax cut lifting beef demand

Progressive Cattleman Editor Lynn Jaynes Published on 09 February 2018
Randy Blach

Americans, and by extension the cattle industry, will receive a boost in 2018 due to the recently passed tax reform bill. Mike Murphy, director of protein research and risk management for CattleFax, told producers at NCBA the new tax policy stands to return $900 per household on average.

In addition, dollars previously invested overseas are coming back to the U.S. (Apple alone is bringing back $200 billion), and the historically low unemployment rate is expected to remain at 4 to 4.5 percent over the next 12 months. With tax reform and unemployment lows, the GDP is expected to hold at 2.5 to 4 percent through the end of the year. While all of these changes do not directly translate into dollars in the consumers’ pockets, they are supportive of consumer spending and should benefit beef demand.

However, a healthy economy, Murphy said, is always challenged with managing the potential for inflation. As such, interest rates are expected to go up a full percentage to keep the growth in check.

Energy

In 2017, OPEC (Organization of the Petroleum Exporting Countries) moved to minimize energy production, and that has helped support global prices. In March 2018, these countries will come back together, and Murphy said it seems they’ll try to stay within that production level, keeping prices stable.

U.S. crude oil production has continued to climb in the last five years, and in 2018 the U.S. will be producing about 10 million barrels of crude oil per day. Murphy said consumers are traveling more miles, but what is really driving that usage is what we export – not to just Canada and Mexico, but other countries as well. Today crude oil prices are running about $50 to $55 per barrel, and they may get as high as the mid-$70s during peak seasons for 2018. The average retail diesel price in 2017 was $2.65 per gallon, and the 2018 estimate is $3.04 per gallon.

Corn and grain

Murphy said the U.S. continues to be a smaller player in the global corn market, down to about 35 percent of the global market share. The price of grain has stabilized, as well as production. Murphy said, “We expect corn prices to move higher in the summer time frame – driven by one key component: what the managed money position does.”

There isn’t much acreage change in row crops – corn, soybeans and wheat. “All are off their peaks,” Murphy said, “but that’s indicative of declining margins.”

For corn and grain usage, there are three main determining factors:

  • Feed residual usage: Increasing supplies of cattle, hogs and chicken should indicate increased grain consumption.
  • Ethanol: With increased value of energy, this might create potential for improved margins (stable usage is predicted).
  • Exports: Economic growth and South America weather are major influencers.

If crude oil per barrel is in the $55 to $80 range, corn prices for fall of 2018 are expected to find support above $3.50 per bushel, unlike the past four years.

Hay

Outside of the 2012-13 drought, hay stocks are the tightest since 1976. The 2017 hay acres were also the smallest on record. With more livestock to feed, Murphy said hay values are likely to be a little elevated, around $10 to $15 per ton. However, he noted, Mother Nature has to provide some relief this spring and summer to achieve quality hay.

Long-term outlook

Randy Blach, CattleFax CEO, provided a long-term outlook, starting with the cyclical impact of the beef industry. Total inventories of cattle continue to grow, and “we see some slowdown, but it’s pretty clear we have a growing harvest now through the end of the decade for fed and non-fed slaughter cattle,” he said. For 2018, Blach said, “The die is pretty well cast with kill counts and weight increasing through the end of the year.” Total production is expected to continue to rise, up to 1.8 percent in 2019 and 2 percent in 2020. Combined with increases in pork and poultry production, “there will be plenty of everything.”

Profitability (assuming no risk management) for 2017 came out to be $1.30 per head on average. Addressing the volatile swings in profitability over the past three years, Blach said, “I think we’ll continue to become a more and more risked managed business with more consolidation, but we’ll employ more business practices for risk management because the amount of capital it takes in this business is staggering.”

Volatile swings can still be expected depending on trade agreements and increased meat supplies. Without trade agreements (but taking into consideration increased meat supplies), 40 pounds more protein per person in the U.S. would have to be consumed to keep markets stable.

Regarding industry segments, Blach said the stocker business has had a pretty good run in 2017, and “we think this year will be another profitable year; probably not as good as a year ago, but it will still be positive.” He said the cow-calf producers are in a comfortable range now, and while calf prices may be down this year, it’s still steady. “We’ll likely end up with a soft landing, with cost of production not exceeding market prices,” Blach said. He also indicated the feedlot sector may be more marginal in profitability through 2018.

Blach’s summary points were:

  • Record beef and protein supplies are on the way.
  • Demand will be key in the U.S. and globally.
  • Trade agreements and market access are vital for long-term profitability and growth.
  • Cyclical risk is ahead, but the majority of the price break has been experienced.
  • Market swings and volatility are expected to remain vicious due to:
    • Harvest capacity in the fed and non-fed market will be a bottleneck.
    • Plant and insect-based proteins are on the rise.
    • Traceability is important to gain access to many markets.
    • The speed of change will never be slower than it is today.
    • There are opportunities galore as the market differentiates.  end mark
Lynn Jaynes
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PHOTO: CattleFax Randy Blach speaks at the NCBA Outlook Seminar in Phoenix. Photo by Cassidy Woolsey.

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