20 April 2009

16 minute read

Beef/Cattle Trade: U.S. beef exports are expected to fall 4 per cent in 2009 as foreign demand is affected by the global recession and a stronger U.S. dollar makes U.S. beef relatively more expensive. Imports are forecast to increase 9 per cent, as the relatively stronger dollar and weak global demand will bring additional supplies to the United States.

Cattle and Beef: Low milk prices have driven dairy cow slaughter to levels that are offsetting declining beef cow slaughter. Cumulative weekly beef production is about 4 per cent below this time last year, as reduced steer and heifer slaughter is offsetting increased dressed weights and increased dairy cow slaughter.

Dairy: Milk production is forecast to decline in 2009 on the basis of smaller herd size and a scant yield increase over 2008. Domestic demand may have stabilized at a lower level and some export interest remains in dry products. Prices were raised slightly from last month.

Beef/Cattle Trade

A Stronger Dollar in Many Beef Importing Countries and Weaker Foreign Demand Cause Exports To Fall in 2009

U.S. beef exports are expected to be 1.82 billion pounds in 2009, a decrease of almost 4 per cent from 2008. The weakening global economy has affected demand for beef around the world, and, consequently, U.S. beef exports. While total exports in January and February increased 8 per cent and 6 per cent, respectively, compared with last year, much of the increase reflects the reopening of the South Korean market. Shipments to most of the largest export markets have slowed or fallen thus far this year. The U.S. dollar has also strengthened against most major trading partners’ currencies, making U.S. beef relatively more expensive for foreign buyers.

U.S. exports to Mexico, the largest export market for the U.S. beef since 2004, fell 15 per cent in the first 2 months of 2009. Exports to Mexico have continued to fall as macroeconomic conditions depress demand and weakening of the Mexican peso increases the cost of U.S. beef. The exchange rate has averaged over 14 pesos to the dollar in early 2009, after ranging from 10-11 pesos for the first three quarters of 2008.

Exports to Canada have also decreased in 2009, falling by 22 per cent over the first 2 months of the year compared with last year. The weaker Canadian dollar not only makes U.S. beef more expensive, but also makes Canadian beef more competitive in the export market. Canadian cattle exports to the United States have declined and Canadian feedlot placements have increased, which should result in more Canadian beef production, particularly in the second and third quarters of 2009. This increased production should further pressure the market for U.S. beef in Canada.

South Korea was the fourth largest market for U.S. beef exports in 2008, despite U.S. beef exporters only having regained access to the market for the second half of the year. After the initial third-quarter 2008 surge of U.S. beef imports, U.S. beef sales have slowed since November 2008. Exports of South Korean manufactured products have declined significantly since late 2008, impacting many South Korean industries and South Korean consumers’ disposable incomes. One of the adjustments consumers have made is reduced spending at restaurants. The restaurant sector accounts for the majority of meat sales and has been particularly impacted by the economic slowdown, resulting in declining demand for U.S. beef.

The South Korean won has also depreciated against the U.S. dollar, raising the price of U.S. beef in Korea. With a more competitive exchange rate, Australian suppliers have been able to maintain market share in South Korea.

As in South Korea, exports of Japanese products have been sharply down, affecting many of Japan’s most important sectors. Consumers are expected to reallocate their meat expenditure and consumption, seeking value in their animal protein purchases. Although U.S. beef exports to Japan are still increasing year-over-year, the rate of increase is not as high as it was in the second and third quarters of 2008. Certain U.S. beef products, such as brisket and short plate used by many value-oriented restaurants, for instance, by beef bowl chains, could find a favorable place in the current market.

Higher priced U.S. beef cuts and products will have to compete with comparable pork and poultry products, which are generally less expensive. Unlike the currencies of most countries, the Japanese yen has strengthened against the U.S. dollar. However, the yen has also strengthened against the Australian dollar, allowing Australia to maintain its market share of beef in the Japanese market.

Imports Expected To Increase as Global Demand for Beef Declines

The United States is expected to import 2.77 billion pounds of beef in 2009, a 9- per cent increase from 2008. Total U.S. imports in January and February were 12 per cent higher than January and February 2008. Last year’s 2.538 billion pounds of imports was the lowest since 1997, driven by high cow slaughter domestically, a weak U.S. dollar, and strong global demand for foreign producers’ beef. This year, a stronger dollar and weak global demand should direct more foreign beef to the United States. While domestic supply is expected to remain high as cow slaughter continues at relatively high levels, the United States remains one of the strongest markets for foreign beef producers during the global recession.

U.S. imports from Australia, which historically has vied with Canada as the largest supplier of foreign beef for the U.S. market, should increase from last year’s 663 million pounds. Imports of Australian beef in January and February were 39 per cent higher than the same period last year. Production in and exports from Australia were lower in 2008 as producers began recovering from several years of drought. Australia had a surge of exports to Russia in 2008, accounting for 7 per cent of their exports. The Russian market is not expected to have the same demand that it had in 2008. While Australian production and exports are expected to be lower in 2009, the decline in Russian demand should cause a reallocation of exports to the United States, Japan, and South Korea— Australia’s three largest export markets. Relative exchange rates and beef demand in each country will determine how the reallocated exports will be distributed. Even if total exports decline in 2009, with a relatively strong U.S. dollar and decreased Australian beef, exports to the United States are expected to increase.

Beef from New Zealand, which accounted for 20 per cent of U.S. imports in 2008, will be affected by the international dairy market. After several years of dairy herd expansion due to high international market prices for milk and dairy products, there has been excess production since these prices collapsed in late 2008. Although beef production and total exports are forecasted to decline compared with last year, more exports to the United States are expected as New Zealand beef producers adjust to smaller market shares in Japan and South Korea.

Canada was the largest foreign supplier of beef to the United States in 2008. Beef imports from Canada are expected to increase in 2009. Canadian live cattle exports are expected to decline and feedlot inventories are expected to increase, leading to higher beef production and exports. The United States typically accounts for over 80 per cent of Canada’s beef exports. The weak Canadian dollar, which is making the Canadian market tighter for U.S. beef exports, should reduce the relative costs of feeding cattle in Canada and make Canadian beef more competitively priced in the United States.

Cattle Imports Expected To Decline as More Cattle Are Fed in Canada

The United States is expected to import 2 million head of cattle in 2009, a 13- per cent decrease from 2008. Last year the United States imported a large number of feeder cattle from Canada because the relatively weak U.S. dollar made it more economical for the United States to feed Canadian animals and export the beef. As the exchange rate moves closer to its historical level, more Canadian cattle are likely to be fed and slaughtered in Canada, with fewer Canadian cattle exported to the United States.

Imports of Mexican cattle in 2008 were the lowest in 20 years, at just over 702,661 head. Adequate precipitation and good pasture conditions late in 2008 may have resulted in some Mexican cattle being held longer than usual and being sent to the United States early in 2009. According to Agricultural Marketing Service figures, Mexican cattle imports have increased in the beginning of 2009, and are expected to increase overall this year. The magnitude of that increase will depend on the number of Mexican feeder cattle available for shipment to the United States.

Cattle and Beef

Dairy Liquidation Leads Cow Slaughtersounds rubbish

Above-normal levels of commercial cow slaughter thus far in 2009 are a continuation of above-normal beef cow slaughter that began in the first half of 2006, when dry conditions held sway over large portions of the Central, Mountain, and Southeastern United States. Beef cow slaughter has been influenced by intermittent drought in the West, Plains, and Southeastern United States since 1996. In addition, beef cattle prices have declined since 2005 and feed costs, while down significantly from their peaks, have been high since dry conditions and rapidly expanding ethanol production sparked grain price increases in late 2006. Declines in milk prices, compounded by dry conditions—especially in California and the Southern Plains—have also led to an increase in dairy cow slaughter since mid- 2008. More recently, rapidly declining milk prices, accompanied by the producerfunded Cooperatives Working Together (CWT) program, have been a key motivation for increases in dairy cow slaughter: The sixth round of CWT buyout since 2003 removed 50,630 dairy cows from production in the first part of 2009. Another round of CWT buyouts has been announced, with bids to close on May 1, 2009. While milk prices reached a peak monthly average price in November 2007, by March 2009 milk prices had declined by 48 per cent from that peak, including a 41-per cent decline since July 2008.

A number of other factors, either coincident to or a consequence of persistent dry conditions, have contributed to increases in both dairy and beef cow slaughter. Cow-calf operations have been caught between feeder calf prices that have trended generally downward since 2005 and 2006 and feed prices that trended upward from summer 2005 to a peak in summer 2008, but they have since declined somewhat. Cattle feeders have likewise endured an extended period of negative profit margins since May 2007. These adverse periods have reflected declining demand for beef both domestically and internationally, due first to BSE, then to high prices for beef, and, most recently, to the world economic slump.

A period of record-high prices for U.S. cow-calf operations began in May 2003, when a cow in Canada was confirmed with BSE and U.S. imports of feeder cattle from Canada were banned, coinciding with cyclically low U.S. cattle inventories. After peaking in November 2003 and dropping briefly in the few months following the first U.S. BSE case, feeder cattle prices fluctuated at record levels. Record (thus far) monthly average feeder calf prices occurred in 2005 (a monthly average price of $137.42 per cwt in May 2005 for 500-550 pound, Medium Number 1 steers in Oklahoma City) and 2006 (a monthly average price of $117.58 per cwt in September 2006 for 750-800 pound, Medium Number 1 steers in Oklahoma City). Since August 2008, feeder cattle prices have declined to pre-BSE levels observed in 2000 and 2001.

Annual commercial cow slaughter has increased year-over-year since 2005, with each year’s slaughter since 2006 being based on successively smaller January 1 cow inventories. High-cull cow prices during much of 2007 and 2008 helped ease the pain of culling in the face of dry conditions and increasing feed prices that set records in summer 2008. Cumulative weekly dairy cow slaughter through the first quarter of 2009 was 24 per cent higher than slaughter for the same period in 2008, helped in part by the CWT buyout.

Simultaneously, cumulative weekly beef cow slaughter was down by less than 3 per cent year-over-year. Cow herd inventory dynamics of this magnitude could lead to further reductions in the national cow herd. With normal beef cow slaughter rates for the remainder of 2009, beef cow inventories on January 1, 2010 could be below 2009 inventories. January 1, 2010 dairy cow inventories are also expected to be lower if the CWT program increases dairy cow slaughter. Overall reductions in the total U.S. cow inventory could be significant through the year.

Reductions in total cow inventories could result in proportionally reduced calf crops, which would have implications for fed beef production and cattle and beef prices for at least 2010-12. This would occur because calf crops in 2009, 2010, and possibly 2011 would likely be smaller than 2008’s calf crop by several per centage points. These smaller calf crops would lead to reduced placements of feeder cattle in feedlots at least through 2012. Feeder cattle imports from Canada and Mexico could alter this result somewhat, but Canada’s cow herd is declining similarly to that of the United States. Pasture and weather, exchange rates, and economic conditions have modified Mexican exports somewhat, and year-over-year increases in feeder cattle exports to the United States through the end of March are likely the result of cattle held from last year and current dry conditions, pushing cattle off pastures and into the United States. Rules and practices related to the new Countryof- Origin labeling requirements have yet to be worked through, and these changes could also modify the cattle-import scenario that is shaping up for the remainder of 2009 and beyond.

If prices for fed cattle and beef rise late this year, as expected in response to expected lower fed cattle numbers and with typical price responses, incentives could motivate heifer retention above that necessary for national cow inventory maintenance. Added heifer retention would have two effects on inventories: First, the number of feeder cattle available for placement on feed in the shorter run would be reduced, which would further reduce the number of heifers contributing to beef supplies. Second, it would lead to an increase in the number of breeding age females added to the national cow inventory, which would eventually begin to increase calf crops and future beef production. The sooner added heifer retention occurs, the more condensed the scenario will become, but given current inventories, the earliest that heifers could be expected to produce a larger year-over-year calf crop would be in 2011. The bulk of these calves would not reach feedlot placement size until late 2011 or more likely 2012.

Placements of feeder cattle in feedlots of 1,000-head-or-larger capacity will likely be somewhat lower during the second half of 2009. Again, this will occur because of smaller calf crops and any increases in heifer retention from actions to increase national cow herd inventories. From January 1, 2006 through January 1, 2009, heifers have represented slightly increasing portions of total cattle on feed in lots of 1,000 head or more—another indication that heifers are not yet being retained at levels sufficient for herd building. USDA’s Cattle on Feed report to be released tomorrow (April 17) will provide further information on the number of heifers on feed.

Wholesale Choice beef cutout values have declined about 5-6 per cent since the beginning of 2009. Since March 1, there have been several days when the Agricultural Marketing Service’s 5-day moving-average cutout value for Select beef was higher than the average Choice beef cutout value.

This Choice-Select inversion is not common and is indicative of declining demand in the food service (restaurant) sector, where consumers purchase much of the highend Choice-and-better beef, and increasing beef purchases at the retail grocery counter as consumers respond to adverse economic conditions.

Dairy

Dairy Herd Contraction, Already Underway, Is Having an Impact on Prices

Dairy cow slaughter surged ahead of year-earlier levels for the third month in a row in February, aided in part by the sixth Cooperatives Working Together (CWT) buyout since 2003, which removed over 50,000 cows from the dairy herd, mostly in the first quarter of 2009. According to recent Livestock Slaughter reports, dairy cow slaughter had moved ahead of year-earlier levels for much of 2008. The liquidation has been especially notable in the mountain western states. For the country as a whole, slaughter was 17 per cent above year-earlier levels in February, 19 per cent in January, and 12 per cent in December. However, by region, slaughter exceeded year-earlier levels by 46 per cent in December and 118 per cent in January for region six, which includes New Mexico, Oklahoma, and Texas. January and February slaughter exceeded year-earlier levels by 83 and 49 per cent, respectively, in region ten, which includes Idaho, Oregon, and Washington. Other regions also recorded double-digit increases in cow slaughter. Although The CWT program is expected to remove additional cows from the herd by this summer, these data suggest that herd liquidation is well underway. The liquidation appears to be strongest in those regions that expanded most rapidly in the last few years. USDA forecasts that the dairy herd will contract to an average 9.2 million cows in 2009, compared with 9.3 million in 2008. The contraction is expected to continue throughout the year; by the fourth quarter of 2009, the number of dairy cows will likely average about 300 thousand fewer than those on hand in the fourth quarter of 2008.

Expected corn and soybean meal prices have been revised upward from earlier forecasts. Higher feed costs will likely continue to pressure producer profits. Milk per cow will climb only incrementally in response to poor producer returns. The yield increase is expected to be less than one-half of 1 per cent this year, adjusting for leap-year, continuing the trend toward smaller year-over-year increases that began in 2006. The outcome from these adjustments is a decline in milk production in 2009 to 187.1 billion pounds from 190.0 billion pounds in 2008.

Cheese production rose slightly in February after adjusting for the extra day in February 2008. Production of cheddar and mozzarella showed declines even after adjustment. Overall production was higher because of increases in Hispanic cheeses, Italian types beside mozzarella, and other cheeses. February stocks of all cheeses were 11 per cent above year-earlier levels. Commercial disappearance for all cheese was down only slightly in January compared with a year earlier, the last month for which figures are available. Market adjustments so far have led to cheese prices increasing from the lows observed earlier in 2009. The decline in milk production is expected to cause further declines in cheese production. Declining retail cheese prices that have lagged falling wholesale prices are finally beginning to boost consumption. Lower prices compared with last year will likely continue to boost consumption. Lower milk production and somewhat higher domestic use will likely raise prices toward the end of 2009. For the year, prices are expected to average $1.270 to $1.320 per pound.

The year-over-year decline in butter production was a scant 0.9 per cent. Butter stocks declined in February compared with a year earlier. According to Dairy Market News, international demand for butter is weak. Since the first of the year, the Commodity Credit Cooperation (CCC) has contracted to buy 4.6 million pounds of butter, but higher prices are expected to preclude additional butter purchases this year. The domestic demand outlook for butter is similar to that for cheese except that Government purchases have helped ease commercial stocks of the former somewhat. The price scenario for butter is similar to that for cheese, as reduced milk production could boost prices toward the end of 2009. The butter price is expected to average $1.155 to 1.235 per pound for the year.

With nonfat dry milk (NDM) prices near support levels, domestic use appears to be strengthing. However, since the first of the year, about 100 million pounds of NDM have moved into CCC inventories, but the pace of removals has slowed. There is some increased foreign demand because production from Oceania, although improved over recent drought years, did not reach expectations. However, a weaker world economy may limit demand. Prices for NDM are forecast to remain above support, averaging 83.0 cents to 87.0 cents per pound in 2009.

Whey production for human consumption continues to lag year-ago levels. Output in February was down 3.7 per cent from a year ago (adjusting for leap-year in 2008). Whey production has been below year-earlier levels for over a year. Whey prices are still below those of recent years, but reduced supplies and improving export demand have led to a slightly higher price forecast than earlier in the year. Whey prices are expected to average 17.0 cents to 20.0 cents per pound for the year.

As a result of slightly higher than expected product prices, the prices for Class III and Class IV milk have been raised slightly to $10.65 to $11.15 per cwt and $9.95 to $10.55 per cwt, respectively, for 2009. The all milk price is expected to average $11.85 to $12.35 per cwt in 2009.

Further Reading

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April 2009