19 August 2008

16 minute read

Cattle: 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 counter-cyclically higher to levels not seen since October 2003, while first-half beef supplies were near-record.

Beef/Cattle Trade: Beef imports fell 21 percent according to official trade numbers updated with figures from the first half of the year. In contrast, beef exports increased 31 percent. Cattle imports from Canada are well above last year’s levels, while imports from Mexico are well below.

Dairy: Milk production increases, both this year and next, will be slight. Lower forecast prices and lower forecast feed prices combine to maintain dairy herds and hold production relatively steady. Strong export sales, a weak dollar and a softening domestic economy combine to limit rises in domestic use in 2008. However, domestic use could climb next year as exports decline from 2008 levels and lower prices stimulate use.

Cattle

Cattle Industry Adapts to High Feed and Energy Prices

The cyclical character of inventory dynamics characterizing the cattle industry from 2005 to 2007 is difficult to explain, but some industry analysts think it may be a continuation of the previous liquidation phase, despite an inventory increase of 1.6 percent between January 1, 2005, and January 1, 2007. A short review of historical cattle cycles demonstrates the complex nature of cattle cycles and the difficulty of characterizing a “normal” cycle, and raises the possibility that the 1996-2004 liquidation phase is continuing rather than being part of a new cycle.

Cattle inventory dynamics have been dominated by cycles, 10 of them since 1867 when cattle inventory records began. Only 4 of these cycles have lasted the ofttouted 10-12 year average during which inventories increase from an inventory low in an expansion phase, then decline in a liquidation phase to the next low. The first recorded cycle lasted 29 years, with a 24-year expansion phase followed by a 5-year liquidation phase. The shortest expansion phase in any cycle was from 1980 through 1982, 3 years, during which inventories increased 3.8 percent from low to peak inventory. Through 2004, the shortest liquidation was from 1966 through 1967, 2 years, during which inventories declined by 0.2 percent. The longest liquidation, 1919 through 1928, 10 years, during which inventories declined by 27.4 percent. The average duration of the 10 completed cycles is 13.8 years. If the 29- year cycle from 1867 through 1895 is excluded, the average duration of the remaining 9 cycles is 12.1 years.

Drought often triggers the liquidation phase of a cattle cycle, as happened at the cyclical peak in 1996, which was also the last time corn/feed prices set record highs. By late summer/early fall 1996, grain prices were dropping. In 1996, contrary to 2008, energy prices were low, the dollar was strong and increasing in strength, and feeder cattle prices were low enough that cattle feeding was profitable, despite the temporarily high grain prices. Drought also extended the liquidation phase that followed the 1996 peak until it reached a low in 2004.

In 2003, during the latter stages of what was then an extended liquidation phase, U.S. beef supplies were already tightening. Prior to 2003, about 60 percent of U.S. live cattle imports came from Canada. These live-cattle imports from Canada entered the United States as cows to be slaughtered mainly for hamburger, as fed cattle for quality beef, and as feeder cattle of various weights that would eventually find their way to U.S. feedlots. As a result, the May 2003 BSE-motivated ban on cattle and beef imports from Canada instantly reduced U.S. domestic beef supplies almost 4 percent. These shortages exacerbated an ongoing price run-up for U.S. beef and cattle.

On August 8, 2003, the United States relaxed its ban on imports of Canadian beef, and trade, limited to boneless meat from animals less than 30 months of age, slowly resumed between the 2 countries. By the end of October 2003, Canadian-bolstered beef supplies had reached a level sufficient to blunt further price increases, and U.S. cattle and beef prices peaked and began to decline. In the week just prior to the first U.S. BSE case, weekly U.S. cutout values for Choice beef had already declined 24 percent from their October weekly peak of about $194 per cwt.

The situation in 2008 is very different: By January 1, 2006, total U.S. cow inventories had begun to slowly increase and had climbed to just under 2003 levels. Grain prices also began increasing in early 2006 as demand for corn for ethanol production began ramping up in response to a series of Federal Renewable Fuel Standard mandates for increasing annual minimum ethanol contributions to domestic fuel supplies. By July 1, 2008, U.S. cow inventories had declined to 42.4 million head, a level achieved only twice since sometime well before the July series began in 1973. July 1, 2008, U.S. cow inventories are at or below cyclical lows reached on July 1, 2004. This follows the January 1, 2008, inventory, which was the lowest January 1 inventory since 1952. A major reason for this decline is that grain prices have persisted at relatively high levels, suggesting a new livestock feeding paradigm. Cattle prices, while at historically high levels for all but feeder cattle, are below costs of production for most cattle sectors.

Reduced by extremely dry conditions for at least the last 2 years and despite increased dairy cow inventories, calf crops are the smallest since the early 1950s. Feeder cattle supplies outside feedlots, up less than 1 percent, are in line with recent numbers for the same time of year. However, these supplies may also reflect the light March through May placements of feeder cattle. Cumulative weekly data through August 8, 2008, show that calf slaughter continues to run about 7 percent higher slaughter through the same week in 2007, and with (estimated) calf dressed weights running 9 percent below year earlier (actual), veal production continues to run below year-earlier levels by about 8 percent. This relatively higher calf slaughter suggests a reduction in potential feeder calves now through 2009 and perhaps beyond. Greater calf slaughter at lighter weights often accompanies situations characterized by relatively high grain prices and low feeder calf prices, a combination that sends male and excess female dairy calves to veal markets rather than their continuation into stocker programs.

The combination of liquidation in the U.S. herd and renewed imports of live animals from Canada has resulted in near-record 2008 first-half U.S. beef supplies of 15.794 billion pounds. While Canadian over-30-month cattle and beef have been contributing to U.S. beef supplies since November 2007, imports of Canadian cattle have been much higher than earlier anticipated, more than offsetting unexpectedly lower imports of feeder cattle from Mexico.

Possibly the most surprising number in the Cattle inventory report, released by USDA’s National Agricultural Statistics Service (NASS) on July 25, 2008, was that the number of beef heifers kept for replacements was down only 2 percent, compared with average industry analysts’ expectations of being down almost twice as much. This number, and an estimate of heifers entering the herd during the first half of the year that was up 8.5 percent over 2007’s first-half entrants, suggest the possibility that some producers kept heifers and sold cows, heifers being relatively cheaper to feed. It also suggests that liquidation may not be as severe as originally thought, and may suggest that the 2009 calf crop could be larger than previous cow and heifer inventory expectations suggested.

Feedlot Returns Could be Volatile During the Last Half of 2008

July 1, 2008, U.S. inventories of steers and heifers on feed in 1,000-plus head feedlots were 4 percent below July 2007 inventories. Cattle on feed in feedlots of 1,000-plus head remain weighted toward those cattle that have been on feed for 120 days or more, a measure of expected near-term marketings. The July 1, 2008, inventory of cattle that have been on feed for 120 days or more, at 3.888 million head, was less than 1 percent below July 1, 2006’s 3.922 million head, which was the only other instance that the July 1 inventory of cattle on feed for 120 days or more has been exceeded for the series that began in 1996.

Placements of cattle weighing less than 600 pounds, were larger than placements of those weighing 800-plus pounds from October 2007 through January 2008. Those under-600-pound feeder calves started going to slaughter in May 2008 and could continue through the fall 2008. The 800-plus-pound feeder cattle could come out as early as 100 days after being placed on feed. To the extent that heavy calves are placed during the remainder of the year in “bunches” because of seasonal grazing patterns, marketings during the remainder of the year could also be bunched up, a recipe for some volatility in prices.

Other signals suggest that cattle could be beginning to back up in feedlots: The first indications are the recent weekly gyrations in fed cattle prices from their early-July 2008 peaks in both Nebraska and the Southern Plains. Second, steer and heifer slaughter weights are 10 and 8 pounds per head heavier than 2007 weights for the same periods. Finally, the weekly share of steer and heifer slaughter grading Choice or better is 4 percentage points above both last year’s share and the 5-year average.

Demand Drives Wholesale and Retail Prices

Packers appear to have shifted their management strategies away from one of competing for market share to focusing more on the spot market. Despite the recent increases in prices, wholesale prices may have reached a high, at least temporarily, with the Choice and Select cutout values reached in mid-July. The spread between Choice and Select beef cutout values has also stabilized, at least for the moment, suggesting that either ample supplies of Choice beef are available or that supplies of Select beef are tight. There are some indications that consumers are showing some preference for lower-quality beef and cuts, like Select cuts and ground products. July beginning cold storage stocks of beef increased slightly, 4 percent from June 2008 and 2 percent from July 2007 beginning inventories, while July 2008 veal stocks declined 7 percent from June 2008 and 2 percent from July 2007.

The real driver behind retail beef prices is demand. Total demand is being fed by new and expanded customer countries purchasing U.S. beef and old customers, like Vietnam, Thailand, Japan, Korea, India, and China, slowly returning to the U.S. beef export market. Despite near-record first-half 2008 U.S. beef production, U.S. beef imports were below first-half imports last year, and first-half U.S. beef exports increased, resulting in a decline in net imports (first-half 2008 down by 5 percent from first-half 2007). The net effect of these supply and demand factors is reduced total U.S. domestic beef disappearance and a decline in per capita disappearance— first-half 2008 down by 2 percent from first-half 2007.

Despite these demand factors and given current byproduct values and spreads, recent cattle feeding costs of as much as $105 per cwt or more suggest retail prices closer to the mid $4.40 per pound range. Retail Choice beef prices at this level would be about 3 percent above the most recent monthly estimate of $4.34 for July 2008, which was a new record high monthly average price, and about 8 percent above the July 2007 average price. Retail prices below breakeven levels eventually lead to losses to cattle feeders. Such losses work back through the system and, combined with pressures on feeder cattle prices due to cattle-feeding losses, could suggest a continuation of cow-herd reductions like we’ve seen over the last couple of years.

Beef/Cattle Trade

Beef Imports Down through First Two Quarters of 2008

According to the latest official trade update, beef imports were 1.299 billion pounds through the first two quarters of the year, a 21-percent decrease from 2007, as a weak dollar and high U.S. cow slaughter continues to make foreign beef less competitive at home, while abroad, drought and competing import markets are contributing to the decrease. Last year’s total beef imports totaled 3.052 billion pounds according to the annual revisions released earlier this month.

Beef imported from Australia, the largest foreign supplier of beef in the United States, through the first two quarters has fallen 28 percent from last year. Australian beef producers supply mostly lean trim to the United States used for grinding. This decline follows multiple years of drought, which has led to poor grazing conditions and cow liquidation. While precipitation has improved only marginally for most of the year, there was above average precipitation in July. However, it should not have an effect on exports to the United States this year. Even if Australia were to see enough rainfall to significantly improve pasture conditions, exports from Australia would most likely decrease as herd rebuilding would limit the number of animals sent to slaughter.

Beef imports from Uruguay and other South American countries have declined substantially as those countries have reallocated their exports to Europe and Russia. Compared to last year, beef imports in the first two quarters have fallen 25 percent from Brazil, 37 percent from Argentina, and 87 percent from Uruguay.

In addition, high U.S. bull and cow slaughter has provided large domestic supplies of processing beef for items such as hamburger meat. The combination of ample domestic supplies, difficult weather conditions over the past few years in Australia, competing export markets, and exchange rates causing foreign products to be relatively more expensive has led to the dramatic decline in imports so far this year.

For 2008, 2.552 billion pounds of beef are expected to be imported, a 16-percent decline from last year. Next year, imports are expected to increase to 2.835 billion pounds, which would be the first increase in 5 years, as U.S. cow slaughter is expected to be below this year’s levels.

Exports of U.S. beef increased 31 percent as of the end of June compared with the same period last year. Second-quarter exports were 471 million pounds, a 29- percent year-over-year increase. U.S. exports to Japan continue to have a larger seasonal increase than last year. The latest official trade update showed a 67- percent increase year-over-year in beef exports to Japan for the month of June, which indicates stronger growth potential in Japan for 2008. According to the Foreign Agricultural Service’s weekly U.S. Export Sales Reports, U.S. exports should continue to be above last year’s levels through July as well. U.S. beef exports to Canada also account for a large portion of the export growth so far this year. While exchange rates have made it more expensive to import foreign beef into the United States, it has made U.S. beef relatively less expensive to overseas consumers. The weekly reports also showed exports going to Korea in late July. The Korean market provides additional growth potential for U.S. producers.

However, how quickly U.S. beef will regain market-share there will become clearer as official trade numbers become available in the future.

Annual trade revisions showed U.S. beef exports totaled 1.434 billion pounds in 2007. U.S. exports are expected to increase 20 percent in 2008, to 1.725 billion pounds. Next year’s exports are expected to increase again to 1.915 billion pounds as trade to Asia and Canada continues to expand.

Cattle Import Conditions from Canada and Mexico Differ Greatly

U.S. imports of live cattle totaled 1.245 million head through June this year. Mexico and Canada, the two major exporters of cattle to the United States, have had very different stories so far this year. Imports from Mexico have totaled 355,999 head according to official trade statistics, a 34-percent decrease from last year. Weekly AMS numbers show a continuation of this pattern through July. However, ample precipitation this summer and good grazing conditions, particularly in eastern Mexico, allow for the potential of above-average imports later in the year. Historically, the fourth quarter has the highest amount of imports from Mexico. Evidence of whether or not cattle have been kept in Mexico due to the good grazing conditions will most likely not become evident until the fall.

Imports of Canadian cattle, on the other hand, have been 46 percent above last year’s totals through June. This has primarily been driven by the increase in feeder cattle from Canada; a trend that began in the fourth quarter of last year. Increased feed costs, a strong Canadian dollar, and a comparative disadvantage in the Canadian packing industry have created an environment where feeding cattle in the United States is more economical. However, weekly AMS reports show a decrease in U.S. imports of feeder animals in July. Historically, imports of Canadian cattle have exhibited an annual trough in June and July, before increasing again in August through the end of the year.

This year’s total U.S. imports of cattle are expected to be 2.65 million head, an increase of 6 percent. Next year’s imports are expected to fall to 2.5 million head, because of fewer Canadian feeder cattle expected.

Dairy

Lower Feed Prices and Lower Milk Prices Maintain Milk Output

Milk production estimates for 2008 are unchanged from last month at 189.5 billion pounds. Forecasts for 2009 call for production to be up fractionally to 190.3 billion pounds. USDA projects cow numbers to average 9,255 thousand head for 2008 and step back to 9,225 thousand head in 2009. Production per cow is expected to advance 1 percent in 2008 to 20,470 pounds per cow and 0.75 percent in 2009 to 20,625 pounds.

The Cooperatives Working Together buyout will likely remove about 25,000 dairy animals from the herd. Also, the July Livestock Slaughter report showed dairy cow slaughter up slightly year-over-year. However, cow prices climbed in the second quarter of the year. The price strength for cows suggests demand for dairy replacements. The buyout removal is likely removing lower productivity animals from smaller operations while replacement cow prices suggest some operators, most likely larger ones, are replacing older cows with newer stock. This move is likely to boost productivity and feed efficiency and is a calculated response to earlier season high grain and alfalfa hay prices.

Strong dairy product exports, aided by a weak dollar and a slowly growing domestic economy, will limit the year-over-year rise in domestic use in 2008. With lower export sales forecast for 2009, the increase in domestic use should rebound from this year’s slower growth rate. Milk prices are expected to be lower this year than last, and relatively higher feed prices, especially for corn, will likely stress profitability for some producers.

Demand has favored the butter-powder sector in recent weeks as demand for both butter and powder have been strong both domestically and internationally. Strong exports of nonfat dry milk and skim milk powder (NDM/SMP) have kept stocks from building. Stocks for butter are below those for a corresponding level in 2007. As a result, butter prices have shown remarkable strength in 2008 and are expected to average $1.415 to $1.455 per pound for the year. The average would be higher except for the weak first-quarter performance. Butter prices are expected to continue high in 2009 averaging $1.355 to $1.485 per pound. Nonfat dry milk (NDM) prices, although lower than in 2007, have strengthened of late and are expected to average $1.385 to 1.405 per pound in 2008 and $1.485 to $1.555 per pound in 2009. Robust export sales of dry milk products continue to buoy this market. Cheese prices as reported by the National Agricultural Statistics Service (NASS) peaked in early June and then declined until a slight uptick in early August according to NASS, closing at $2.05 per pound for barrels and $1.97 for blocks on August 2. Cheese prices will likely remain unsettled into the fourth quarter as softness in the U.S. economy works through the market. Cheese prices are expected to average $1.920 to $1.940 per pound for 2008 and decline modestly in 2009 to $1.855 to 1.955 per pound. Whey prices have been declining throughout 2008 as demand has flagged. Prices in 2008 are projected to average 27.0 to 29.0 cents per pound. Prices in 2009 are expected to improve slightly to 30.0 to 33.0 cents per pound.

Administrative changes to the make allowances, beginning in September, will push class prices lower relative to changes in product prices. The Class III price is expected to average $17.85 to $18.05 per cwt in 2008 and slide to $17.10 to $18.10 per cwt in 2009. The Class IV price, in contrast, is forecast higher next year than this year. The price is expected to average $15.95 to $16.25 per cwt in 2008 and rise to $16.40 to $17.50 per cwt in 2009. Slightly higher production is forecast to tip the all milk price lower into next year. The all milk price is projected at $18.85 to $19.05 per cwt this year, declining to $18.25 to $19.25 per cwt next year.

Further Reading

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You can view the full report by clicking here.