18 July 2008

11 minute read

Cattle and Beef: Daily live cow prices in July remain at relatively high levels despite heavy commercial cow slaughter that continues to be supported by dry conditions, high supplemental feed costs, and imported cows from Canada. In early July, weekly fed cattle prices and beef cutout values had moved countercyclically to levels not seen since October 2003.

Cattle and Beef Trade: Total beef imports are expected to fall 12 percent from last year. Exports are expected to expand as Japanese and NAFTA markets have been strong heading into the peak of summer. Live cattle imports are expected to be above last year’s levels. Imports from Canada continue to have a higher percentage of feeder cattle due to more advantageous feeding opportunities in the United States.

Dairy: Higher feed costs should ultimately slow increases in milk production next year. However, this year, the dairy herd continues to expand and output per cow continues to rise, albeit at a slower pace. Herd expansion should slow in the third and fourth quarters compared with the first half of 2008. A slight contraction should become apparent in 2009. Milk production will continue to expand both this year and next as output per cow continues a gradual rise. Demand in the major product sectors remains strong, especially export demand. Prices both this year and next will remain near 2007 levels.

Cattle and Beef

Dry Conditions Push Cows to Market

Despite a spotty reprieve in early July, dry conditions are generally spreading over wider areas in the Southern Plains and are spreading over a wider area in the Southeastern United States. The areas in the best condition—the Central Plains and areas in the Central and Northern Rocky Mountains—are those between the dry areas and the flooded areas of the Midwest. Except for the areas mentioned above, most hay-growing areas are experiencing adequate precipitation and hay prices are increasing. Area planted to corn is below original plans. As of the week ending July 6, 89 percent of the U.S. corn crop was in fair to excellent condition, equaling conditions at the same time last year. However, feed grain and protein prices continue to increase, maintaining significant cost pressure on all cattle sectors.

Rising fuel, energy, and feed costs increasingly affect cow-calf and backgrounding (stocker) profit margins, especially in those areas with inadequate precipitation where supplemental feeding has begun again or winter feeding never ceased. Commercial cow slaughter, especially beef cow slaughter, has been extensive over the last year. However, U.S. commercial cow slaughter currently includes a significant share of Canadian cows, averaging about 3,700 head per week since the first week of 2008 through June 26th (Agriculture and Agri-Food Canada). Meanwhile, the domestic beef cow contribution to U.S. Federally Inspected cow slaughter appears to be declining in recent weeks.

Another sign of pressure on beef cow inventories is that the heifer share of cattle on feed on April 1, 2008, was the highest since April 1, 2004, the year of the last cyclical low in cattle and calf inventories. The following year, 2005, saw the lowest number of heifers entering the cow herd in more than a quarter century and set the stage for January 1, 2008’s lowest cow inventory since 1952. The mid-year Cattle inventory report, to be released by the National Agricultural Statistics Service July 25, 2008, will provide additional information on the direction of cow and cattle-onfeed inventories in the near term.

Feeder cattle prices, while increasing, are below year-earlier levels and, because of high feeding costs, have not enjoyed, proportionally, the percentage increases gained by cattle feeders for fed cattle. Net placements of feeder cattle in feedlots in May 2008 were 12 percent below May 2007 placements, in part because of heavy feedlot placements of lighter weight feeder cattle last fall and winter. May 2008’s placements were 2 percent above May 2006 placements, but still 13 percent below the May 5-year average for 2003-07. Suggestive of heavier feeder cattle being placed in feedlots in response to higher feed costs, the breakout among feeder cattle placement weight groups shows the over-800-pound group down 10 percent from May 2007 and up 7.5 percent from May 2006, compared with the under-600-pound group, which was down 19 percent from May 2007 and down 23 percent from May 2006.

Central and Southern Plains cattle feeders have seen prices for live cattle increase to the low $100s per cwt through the first week in July, prices that bring them near breakeven levels for the first time since May 2007.

Early July fed cattle prices were approaching levels last observed in Fall 2003, just prior to the confirmation of the first U.S. BSE case, when BSE-motivated bans against importing Canadian cattle and beef reduced already declining U.S. beef supplies to cyclically low levels. How long these price levels can be maintained in the face of seasonally increasing dressed weights and declining demand for grilling beef remains to be seen, especially given relatively low prices for competing meats.

Commercial beef production in April and May 2008 was at all-time record highs for those 2 months, as were average commercial live weights of cattle slaughtered for both months and average Federally Inspected dressed weights for April. As of mid- July 2008, weekly cutout values for Choice beef were increasing counterseasonally, even as dressed weights were increasing seasonally. Packers were also enjoying record values for byproducts.

The spread between carcass cutout values for Choice and Select beef has widened into July, a time when the spread usually approaches a seasonal low. A widening spread can suggest either inadequate supplies of Choice beef or plentiful supplies of Select and processing beef. However, the percent of carcasses grading Choice or better, at almost 58 percent (as of June 28), is 3 percentage points above year-earlier (June 28, 2007) levels. Prices for 90-percent-lean processing beef are running almost 19 percent above year-earlier (June to June) levels, but still below imported frozen 90-percent-lean beef prices. Retail prices also continue to rise, reaching $4.30 per pound for Choice beef in June 2008, 2 percent above the June 2007 price and 10 percent above the June 2006 price.

Cattle and Beef Trade

Beef Imports Continue To Lag

Through May this year, beef imports were down 22 percent year-to-date as a result of a confluence of issues. The U.S. dollar remains weak, making foreign beef relatively more expensive. Additionally, domestic cow and bull slaughter has remained above last year’s levels and is expected to remain so through the second and third quarters, resulting in high supplies of lean-processing beef for hamburger. The supplies of lean-processing meat will further depress the domestic demand for imported processing meat from Australia and New Zealand, which is generally processing meat used for products such as ground beef. Uruguay, which also sends fresh and frozen product to the United States, has also declined dramatically in 2008. Uruguay has diverted much of its beef exports from North America to the European Union and Russia.

Quantities of imported thermo-processed beef, used in many ready-to-eat products, have also been declining steadily since the beginning of the year. This is illustrated by declines in imports, particularly from Brazil and Argentina, whose exports to the United States are limited to thermo-processed beef products and account for about 80 percent of such imports.

Moderate and sporadic precipitation in Australia has made it difficult for producers to rebuild their herds after a drought-induced liquidation. However, U.S. imports of Australian beef have been low, perhaps signaling that, at least thus far, Australian producers have not begun liquidating again.

Total beef imports are expected to be 2.692 billion pounds, a 12-percent decrease from last year. They are expected to rebound in 2009 to 2.955 billion pounds.

Exports to Japan Increase

U.S. beef exports to Japan historically increased in the second quarter as Japanese went into their Golden Week holiday period. The same pattern has reemerged since the resumption of exports. Strong official export numbers were reported for April and May, and FAS Weekly Export Sales Reports indicate that June was also a good month for U.S. beef exports to Japan. However, export levels have not come close to reaching their pre-BSE levels in 2003.

The United States and South Korea concluded an agreement on April 18, 2008 to fully reopen South Korea's market to all U.S. beef and beef products consistent with international standards and the World Organization for Animal Health (OIE) guidelines. However, in response to significant public outcry in Korea, Korean importers and U.S. exporters reached a commercial understanding that only U.S. beef from cattle under 30 months of age will be shipped to Korea as a transitional measure, until Korean consumer confidence in U.S. beef improves. U.S. beef which has been in storage in Korea is being inspected and being offered for sale, and U.S. plants are preparing beef for export under the protocol and transitional measures. U.S. beef exports to South Korea are expected to gradually increase into next year.

U.S. exports to Mexico, Canada, and relatively new trading partners such as Vietnam have also helped exports in 2008 grow from last year. This year U.S. beef exports are expected to be 1.7 billion pounds, a 19-percent increase from 2008. Next year’s exports are expected to increase an additional 11 percent, to 1.89 billion pounds.

Canadian Cattle Imports Still Above Last Year

Imports of Canadian live cattle into the United States have been 37 percent above 2007 year-to-date through July 5th, according to AMS reports. Slaughter cows and bulls, which were not able to be imported from Canada until November 19, 2007, account for 12 percent of all live cattle imports this year and are responsible for some of this increase. Imports of feeder cattle have also increased 42 percent relative to last year, as feed costs and the competitiveness of the Canadian packing industry continue to provide incentive for animals to be fed in the United States.

In contrast, cattle imports from Mexico are down 32 percent from last year according to AMS reports. Good rainfall, particularly in the eastern half of the country, has generated good grazing conditions, which could potentially lead to more exports coming late in the year.

Total cattle imports this year are expected to be 2.65 million head, a 6-percent increase from last year. Next year, 2.5 million head of cattle are expected to be imported.

Dairy

Higher Feed Costs Constrain Production Expansion

Higher feed costs have slowed milk production increases. The domestic dairy herd has continued to expand. The June Milk Production report estimated the number of milk cows in May at 9,281 thousand head, up 1.6 percent from a year earlier and slightly ahead of April’s estimate. Production per cow also continued an upward trajectory, rising 1.4 percent in May 2008 compared with a year ago. The May rise reaches only to the level of the long term trend and comes after several months of below-trend production increases. The price of the benchmark dairy ration, which consists of corn, soybeans and alfalfa hay, is expected to be 37 percent higher in 2008 compared with 2007. Presently, the 2009 forecast is for the price of that ration to climb only slightly. The milk-feed price ratio slipped to 1.78 in June compared with 1.88 in May and a loftier 2.88 in June 2007.

Higher feed costs should ultimately slow herd expansion in the third and fourth quarter of 2008 relative to the first half of the year and lead to gradually declining herd size throughout 2009. Milk per cow will likely continue to increase, but at below-trend rates throughout the balance of 2008 and 2009. Forecast milk production is 189.5 billion pounds for 2008 and 190.3 billion for 2009.

Domestic cheese prices soared to over $2.21 a pound in mid-June this year before retreating to $1.99 a pound for the first week of July, according to Dairy Product Prices. Domestic disappearance through April 2008 lags slightly below that for the same period in 2007. Higher prices and a slowing domestic economy are limiting domestic demand. However, exports have risen to fill the gap, keeping cheese demand strong. The cheese processing sector may be close to capacity limits, slowing production increases. Although May fluid use was up fractionally, incremental increases in milk production are going largely to Class IV uses. Cheese prices have probably peaked for the year and could decline slightly in 2009, but should remain well above the average of recent years. Prices will likely average $1.935 to $1.965 per pound this year and remain firm, averaging $1.855 to 1.955 per pound in 2009.

The May Cold Storage report placed butter stocks 5 percent above April, but 3 percent below a year ago. The seasonal downturn in stocks may be beginning early, and according to Dairy Market News, demand is ahead of production and some sales are being met out of stocks. Prices remain strong and very close to 2007’s peak. The 2008 season-average butter price is projected to be $1.360 to $1.420 per pound. Prices in 2009 should remain about the same, averaging $1.350 to $1.480 per pound. Nonfat dry milk and skim milk powder (NDM/SMP) production through May exceeds all years at least back to 2005. However, it is exports of NDM and SMP that are propelling the butter/powder market. Year-to-date exports of NDM/SMP are nearly double that for the same period of 2007 and comprise nearly 50 percent of total production. With Australia sidelined by drought, the United States remains the major exporter of powdered milk. The higher 2008 production has contributed to lower prices than in 2007, and NDM prices are expected to average $1.370 to $1.400 per pound. Next year’s forecast modest milk production increase should help firm prices in 2009 to an average $1.475 to $1.545 per pound.

Whey stocks continue high, pressuring prices despite strong exports and domestic use. Prices are expected to average 28.0 to 30.0 cents per pound this year and 32.0 to 35.0 cents per pound next year.

Strong product demand and modest production increases for both this year and 2009 will keep Class III prices near 2007 levels. The Class III price is expected to average $18.10 to $18.40 per cwt in 2008 and $17.55 to $18.55 per cwt in 2009. The Class IV price is expected to average $15.70 to $16.10 per cwt in 2008 and climb to $16.55 to $17.65 next year. The all milk price will average $18.95 to $19.25 this year and be virtually unchanged in 2009, at $18.60 to $19.60 per cwt.

Further Reading

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