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US Beef and Dairy Outlook Report -December 2009

Thursday, December 17, 2009

USDA Economic Research Service

Lower demand for beef, heavier cattle and increased dairy cow slaughter pushed beef prices down throughout 2009, and they are unlikely to pick up. Lower milk production and an increase in dairy product exports is expected to improve dairy and milk prices in 2010 according to the USDA Economic Research Service outlook.

Beef Summary

In 2009, economic recession, high unemployment, and abundant supplies of pork and poultry adversely affected demand for beef. As a result, demand was insufficient to maintain cattle and beef prices throughout 2009, which led to sluggish feedlot marketings, heavy dressed weights, and ample beef supplies, despite relatively low cattle inventories. Atypically high cow slaughter, driven by low milk prices and producer-funded dairy herd buyouts, contributed to beef supplies and downward pressure on beef and cattle prices.

2009: A Hard Year for Cattle and Beef Sectors

Despite favourable weather and ensuing favourable pasture and range conditions, 2009 has not been a stellar year for the beef complex. The economic recession, high unemployment, and relatively abundant supplies of pork and poultry and have had a significant adverse impact on domestic beef demand. The worldwide extent of the economic downturn and its impact on international demand for US beef and the US dollar, combined with ongoing effects from North American BSE cases, have resulted in limited export growth of US beef.

While weekly cow slaughter has remained mostly above 5-year-average levels thus far in 2009, it has exceeded 2008 levels only intermittently after being above 2008 levels for most of the first quarter. Except for early in 2009, beef cow slaughter remained below 2008 levels and only recently again exceeded 2008 levels. On the other hand, dairy cow slaughter exceeded both 2008 and 5-year levels for most of 2009, falling below only during some weeks in spring and early fall. These levels of dairy cow slaughter can be attributed to low milk prices and several rounds of Cooperatives Working Together program whole-herd buyouts.

More recently, cows have made up a significant proportion of total US commercial cattle slaughter, averaging 21 per cent of the slaughter mix for November 1 through November 28. During the same period, steers were averaging about 46 per cent of the slaughter mix, compared with their more typical 50 per cent. This increased proportion of cows in the slaughter mix, especially the generally lighter weight beef cows--which were well represented in the slaughter mix--has tended to reduce average dressed weights.

While heifers accounted for close to their typical 30 per cent of the total commercial slaughter mix, their share of feeder cattle placements, ultimately for slaughter, is larger. The heifer share of cattle placed on feed has been generally increasing, yearover- year, on a quarterly basis, since 2005. More heifers can be placed on feed when fed cattle prices increase to levels at which producers trade current profits for future profits, as they did in mid-2003 when BSE disrupted the flow of beef and cattle from Canada at a time when US inventories were at low levels. More heifers can also be placed on feed when the profit picture is sufficiently dismal to discourage herd-inventory maintenance or building, as appears to be the case at present. Drought can also result in the placement of heifers in feedlots.

The heifer share of feeder cattle placements on feed has implications for future cow inventories, calf crops, and beef production. As more heifers are placed on feed, two things can happen: short-term beef production can increase, and replacement heifer inventories can decline. In the absence of increased demand for beef, increased beef production can translate into lower prices throughout the beef/cattle complex. Reduced inventories of replacement heifers can lead to reduced cow inventories, calf crops, and fed cattle inventories for several years, which can translate into higher prices in the beef/cattle complex over the longer term. The fallout from these multi-year biological lags contributes to the inventory dynamics referred to as cattle cycles. Other factors, like drought, macroeconomic gyrations, and animal disease outbreaks, can shorten or lengthen inventory cycles.

Despite the high proportion of cows in the slaughter mix this year, average dressed weights of all cattle, which ordinarily peak about mid-October, appear to be declining seasonally, but signals are mixed. This suggests that steer weights, which have been above both year-earlier and 5-year-average levels until recently dropping below 2008 levels, may not be decreasing as rapidly as the first couple of weeks of decline might suggest. Heavier weights contribute to beef supplies, as may a disproportionate number of heavy cattle from the Central Plains and Corn Belt— which also tend to be heavier than their southern counterparts—in the slaughter mix.

Despite earlier expectations for reduced supplies of feeder and fed cattle and at least periods of higher cattle prices, lackluster domestic and international demand for beef has resulted in pressure on feeder and fed cattle prices throughout 2009. Feeder cattle prices in 2009 have remained below 2008 levels, and, with few exceptions, both years were below 5-year averages. Fed cattle prices in 2009 have also been below 2008 levels and below 5-year averages, although prices in 2008 enjoyed a period of relatively higher levels during late spring, summer, and early fall. The lower feeder cattle prices and relatively lower, at least compared with year-earlier, prices for corn have not been enough to establish positive feeding margins in 2009 other than during April and July, and reached only near-breakeven levels during June and November. While most months showed negative feeding margins in a broad range of around $50-$60 per head, these followed January 2009 losses in the $300-per head range (High Plains Cattle Feeding Simulator).

Ordinarily, higher byproduct values allow packers to bid more for cattle. Byproduct values have risen more than 70 per cent from their low in March-April 2009. However, these are not ordinary times, and demand for beef is such that even positive or near-positive packer margins are not enough to motivate increased slaughter beyond an occasional year-over-year increase in weekly slaughter levels. As a result, total federally inspected cattle slaughter has remained below yearearlier levels for most of 2009, with year-to-date estimated cumulative slaughter running almost 4 per cent below 2008 levels through the second week in December.

Except for a brief period early in the year, 2009 weekly Choice cutout values have remained below both 2008 levels and 5-year averages. With a few more exceptions scattered throughout the year, the same has been true for weekly Select cutout values. So far in 2009, between 61 and 65 per cent of graded carcasses were graded Choice or better, higher than levels in 2008, and averages in both years were above the 5-year average. The weekly Choice-Select spread has ranged generally close to year-earlier levels and well below 5-year-average levels, until recently dropping below both 2008 and the 5-year average.

Retail prices were slow to reflect wholesale beef price declines. Retail prices for Choice beef started the year at monthly record levels, which held until June when prices dropped below 2008 levels. September prices dropped below 2007 prices, and prices through October remained below both 2008 and 2007 levels. There is little reason to expect retail prices to recover for the rest of 2009.

Beef/Cattle Trade

US beef exports are expected to decline two per cent compared with last year, but stronger sales to Asia have helped exports overall. Beef imports have trended downward relative to last year, as a weakening dollar has made foreign beef more expensive. Live cattle imports are expected to be 17 per cent lower than last year. Decreased imports from Canada are expected to eclipse increased imports from Mexico.

Sales to Asian Markets Improve US Beef Export Outlook in 2009 and 2010

The United States is forecast to export 1.846 billion pounds of beef in 2009, a 2- per cent decline from last year, but an improvement from the outlook earlier in 2009. Through October, year-to-date US beef exports are more than 5 per cent below 2009. However, strong sales to Japan, Hong Kong, Vietnam, and Taiwan, as well as improving sales to South Korea, have helped buoy exports against declines in the two largest export markets, Canada and Mexico. In 2010, beef exports are expected to increase almost 8 per cent, as a weak US dollar will make US beef relatively less expensive in the recovering global economy.

US beef imports this year are expected to be 2.703 billion pounds, a 6.5-per cent increase from 2008. The strong US dollar earlier in the year, combined with weak economic conditions in competing markets, resulted in large quantities of beef imports from Australia. However, imports have declined as the weakened dollar has made foreign beef relatively more expensive. In 2010, US beef imports are expected to increase 3 per cent.

Live Cattle Imports from Mexico Improve in Fourth Quarter

The United States is expected to import 1.9 million head of cattle in 2009, a 17- per cent decrease from last year. Canada and Mexico, the two significant foreign markets for live cattle, have different outlooks. Good weather conditions this summer and fall that kept cattle in Mexico have led to an increase in imports in recent weeks, as conditions are now becoming drier. In contrast, US imports from Canada have been much lower than in the past few years, as lower beef demand in the United States and a stronger Canadian dollar have taken away the higher potential returns for Canadian producers marketing in the United States.

According to weekly AMS reports, US live cattle imports from Mexico have been strengthening since early November. Most Mexican cattle are imported into the United States in the fourth quarter as pasture in Mexico begins to deteriorate seasonally, and are marketed to US stocker operations and feedlots. After morethan- adequate rainfall in late summer and early fall in Mexico, drier conditions in November likely initiated the increase of Mexican cattle entering the US market. Through October, year-to-date imports are 40 per cent higher than 2008, which was an exceptionally low year due to unusually good weather conditions in Mexico. Year-to-date imports are 19 per cent lower than 2007 imports, which is a more comparable year in terms of weather conditions.

In 2009, the United States has seen fewer cattle imported from Canada, relative to the past couple of years. Through October, year-to-date imports are 35 per cent lower than 2008. Decreased demand for beef in the United States and a relatively strong Canadian dollar have led to smaller returns for Canadian producers considering marketing their feeder or fed cattle in the United States. Typically, stronger demand for cattle in the United States and a better return with a stronger US dollar provide incentives for Canadian producers to market in the United States. According to weekly AMS reports, the price difference between Canadian and US markets—in US dollar terms—is the smallest in 3 years.

As a result, fewer Canadian cattle have been exported to the United States this fall, particularly feeder cattle.

Even with concerns of dry weather in prominent Canadian cattle feeding regions and the threat of low forage supplies, indications are that more feeder cattle are staying in Canada. CanFax reports show increased feedlot inventories in Alberta and Saskatchewan relative to last year’s levels. Feedlot placements were weaker in the spring months compared with the same months in previous years, perhaps as significant changes in exchange rates affected the prices of imported feedstuffs and the potential returns for exported cattle and beef. Consequently, marketings in Canada have begun to trend downward in the fourth quarter. This should continue through the duration of this year and into the first quarter of 2010. However, the increased placements this fall should result in more Canadian production, and potentially more exports, by the second quarter of 2010.

Dairy Summary

Lower forecast milk production in 2010, combined with continued recovery in dairy product exports, is expected to lift milk and dairy product prices in 2010.

Slightly Less Milk Production and Firm Global Demand Combine To Raise 2010’s Milk Price Forecast

Feed costs have fallen substantially in 2009, but are unlikely to fall as much next year. The benchmark 16-per cent protein ration value is projected to average in the mid-$7.00 per cwt range this year compared with over $9.00 per cwt in 2008. In 2010, the price should continue to fall, but not by nearly as much. Falling soybean meal prices will constitute a large share of the drop. Corn prices for the 2009/10 crop year are forecast to decline to $3.25 to $3.85 per bushel compared with the 2008/09 crop year average of $4.06 per bushel. Soybean meal prices are forecast to decline from $331 per ton average in 2009/10 to a forecast $260, with $310 per ton in 2010/11.

The US dairy herd is forecast to continue to contract in 2010, with most of the herd reduction coming in early 2010 and attenuating later in the year. The US dairy herd is expected to average 8.97 million next year and is expected to average below 9 million cows in each of the four quarters of 2010. The forecast decline in herd size will represent a 2.5-per cent decline year-over-year. This decline follows a 1.3-per cent decline in 2009. In contrast, milk production per cow is forecast to rise to 20,950 pounds, a 1.84-per cent year-over-year increase and slightly ahead of the 5-year-trend increase. In light of lower feed prices and improving milk prices, the short-term response is to produce more milk per cow as rations are improved. This will occur before producers undertake any herd expansion, which requires investment in livestock.

Commercial disappearance is forecast to rise by less than half-a-per cent next year on a fat basis and to be virtually unchanged from 2009 on a skims-solids basis. World markets remain firm, and the export forecast remains unchanged from last month. Product exports are projected to continue to rise next year, especially for nonfat dry milk (NDM) and whey products. Exports of NDM will help draw down stocks next year on a skims-solids basis, but stocks on a fats basis will be drawn down less. Imports are forecast to decline slightly next year on a fats basis but to rise slightly on a skims-solids basis.

Product prices across the board will be higher next year. Cheese prices will likely average $1.290 to $1.300 per pound in 2009 and rise to average $1.615 to $1.695 per pound in 2010. Butter prices are projected to average $1.195 to $1.225 per pound and average $1.430 to $1.540 per pound next year. After averaging 91.0 to 93.0 cents per pound this year, NDM prices are forecast to climb to average $1.245 to $1.305 per pound in 2010. Whey prices are projected to average 25.5 to 26.5 cents per pound in 2009 and rise to 35.0 to 38.0 cents per pound next year.

The higher price prospects for dairy products both this year and next will boost milk prices as well. After averaging $11.30 to $11.40 per cwt in 2009, Class III prices are forecast to rise to average $15.15 to $15.95 per cwt next year. Likewise, Class IV prices are expected to climb from $10.75 to $10.95 in the current year to average $14.60 to $15.50 per cwt in 2010. The all milk price is expected to average $12.70 to $12.80 this year and rise to average $16.35 to $17.15 in 2010.

Special Box: Effects of the 2008-2009 Cooperatives Working Together Herd Retirements on Milk Production and Cow Slaughter, and Near-Term Effects of Sexed Semen Technology

The Cooperatives Working Together (CWT) herd retirement program is one element of a voluntary industry-led initiative available to dairy producers, intended to provide support for milk prices by removing milk cows from production (click here). Depressed milk prices prompted five “rounds” of CWT herd retirements during 2008-09. Two rounds occurred in the second half of 2008 and, with the 1 October 2009 announcement of another herd retirement, three rounds will have occurred in 2009. According to the CWT, the first two CWT rounds in 2009 led to the removal of 175,153 dairy cows representing about 3.5 billion pounds of milk production. The announcement of accepted bids in the third 2009 round on October 15 indicated that just over 26,000 more cows will be retired in 2009. Totals from the 2008-2009 series of retirements reported by the CWT are over 250,000 dairy cows and 5 billion pounds of milk removed from production, equivalent to about 2.7 per cent of annual output. The purpose of this article is to explain why the CWT may have less effect than expected on both milk production and dairy cow slaughter prices. Because CWT is a whole herd buyout, new technology like sexed semen did not have a major impact in short run expansion because new facilities will be required as CWT has removed farms from the dairy industry.

The CWT buyouts have contributed some price support for dairy producers during 2009. An independent economic analysis indicated that milk prices have increased by $1.54 per cwt as a result of CWT activities that included both herd buyouts and dairy product export assistance (http://www.cwt.coop/impact/impact_index.html). The dairy herd is expected to continue to decrease and is forecast to fall below 9 million head during 2010, making it one of the smallest herds in recent years. However, milk production is forecast to only decline by less than half a per cent in 2009 from 2008. And, although the all milk price is forecast to increase to $14.95- 15.15 per cwt for the fourth quarter of 2009 and to $16.35-17.15 per cwt for 2010, prices are still below estimated costs of milk production for many producers, not as high as many in the industry had hoped. While the buyout-induced decline in milk production has not been as significant as many in the industry would have preferred, the effect on prices of culled animals has also not been as depressing as some in the beef cow sector have feared.

In the absence of a removal program dairy producers typically cull about one-fourth of their cow herds, as indicated by a 2007 AHPIS survey, and mostly replace them with heifers that have calved. Dairy cows are culled for reasons associated with their inability to profitably produce high-quality milk and calves. Milk fat production begins to decline when cows reach their prime, at about 6 years of age (Tyler and Ensminger, Dairy Cattle Science, p. 217); thus, cows tend to be culled when their productivity begins to decline after 3 or 4 lactations, or when they are 5 to 6 years old. Reproductive and udder/mastitis problems are also significant reasons dairy cattle are culled.

However, the impact of low milk prices would likely have driven some producers to increase culling or exit the industry by liquidating entire herds in the absence of CWT. The average rate of change in January 1 dairy cow inventories since 1965 has been a decline of 1.3 per cent over a range of changes from a maximum decline of almost 6 per cent (1966) to a gain of just over 3 per cent (1986). According to NASS January 1 dairy cow inventory data, dairy cow inventories have increased every year the CWT program has been a factor since its inception in 2003 except 2004, when the net decline was 154,500 cows. The dairy herd is forecast to decline in 2009, a situation that was expected prior to any 2009 CWT announcements (see Livestock Dairy and Poultry Outlook M-177, 18 March 2009). The effect of the CWT herd buyout on dairy cow inventories is likely less than the number of cows actually “bought out,” as a proportion of these animals would have been culled due to economic conditions.

A second reason that milk production and dairy cow slaughter may have been less than expected as a result of the CWT culling is that to the extent that each successive CWT herd buyout was expected to provide stronger milk prices, incentive existed for nonparticipating producers to increase or maintain production at the higher expected prices. Production practices might have been altered to be more in line with higher anticipated, but ultimately never realized, prices than those that would typically be seen in a period of oversupply.

Finally, a third reason that milk supply may not have declined as much as expected is because typically the less productive cows are culled. Year-over-year increases in milk per cow have been maintained in 2009 at a rate near to increases of the past 20 years. For all of 2009, production per cow is forecast to be 20,553 lbs, up from 20,396 lbs in 2008. When calculated on a daily basis, accounting for the extra milking day (leap year) in 2008, output per cow is forecast to increase from 55.7 lbs per day in 2008 to 56.4 lbs per day in 2009. This 1.3 per cent year-over-year increase is below the 1.8 per cent average since 1989, and may be more than many expected, given that milk prices failed to cover feed costs for producers in much of the country from fall 2008 until fall 2009.

There have been concerns that increased use of sexed semen technologies may partially offset the intended milk production-reducing effects of the recent CWT herd buyouts (or any other culling actions) due to fears of additional heifers being introduced into the dairy herd. However, sexed semen is a longer term issue and did not have an impact on offsetting CWT removals on short-run expansion. While the use of sexed semen can increase the number of heifers from which replacements could be selected, it is not likely to have a great near-term impact on milk production or milk prices. There are two reasons for this: The CWT was a whole herd buyout and facility expansion would be necessary for major expansion. In addition, it takes about 3 years between the time that a cow is impregnated until the calf is producing milk. Nevertheless, in the longer term, with circumstances of high milk prices and high replacement cow prices and/or decreasing costs associated with the technology, widespread use of sexed semen could become a greater factor in milk supply, particularly if heifers with greater genetic merit are a consequence of improvements in the technology.

Further Reading

- You can view the full report by clicking here.

December 2009

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