16 October 2009

9 minute read

Cow Slaughter High for Second Year

In 2008, drought-motivated beef cow slaughter kept commercial cow slaughter high relative to 1 January inventories. In 2009, cost-driven dairy cow slaughter has kept commercial cow slaughter high. However, the increased commercial dairy cow slaughter has not offset the decline in commercial beef cow slaughter, leaving expected total commercial cow slaughter down by less than 1 per cent for the first 9 months of 2009. Beef cow slaughter could increase seasonally over the next several weeks as cow-calf producers cull their herds prior to winter supplemental feeding.

While well ahead of same-quarter commercial cow slaughter in 2007, and despite the two Cooperatives Working Together (CWT) program whole-herd buyouts so far completed in 2009 and aimed at reducing milk production, third-quarter 2009 commercial cow slaughter appears to have declined year-over-year. In 2009, according to CWT statistics, the CWT programs have accounted for 175,153 head of the total commercial cow slaughter thus far in 2009.

Dairy cow slaughter for the first three quarters of 2009 has been 14 per cent higher than the average for the last 10 years would indicate for typical culling. With the aid of some assumptions about culling rates and accounting for normal culling from CWT herds, about 6 of the 14 percentage points can be attributed to CWT cows. That is, assuming the last 10-year average culling rate would apply, dairy cow slaughter for the first three quarters of 2009 is projected to be about 8 per cent higher than culling might have been under ordinary circumstances.

Current prospects for winter wheat pasture and other cool-season grazing appear favorable everywhere except South Texas, where drought persists despite recent rains, and the Southwestern United States, which is again becoming dry. Thus far, prices for lighter weight feeder cattle are gaining little support from cool-season pasture demand, and prices for feedlot-placement-weight feeder cattle declined in September 2009 over both August 2009 (down 4 per cent) and September 2008 (down 12 per cent).

Wholesale Markets Pressure Feedlot Activity

Recent reductions in fed-cattle slaughter for third-quarter 2009 appear to have shifted some beef production into early 2010. Larger year-over-year August 2009 placements of feeder cattle in 1,000-head-or-larger feedlots will likely dampen the earlier expectation that fed cattle supplies would be inadequate to meet demand during the last part of 2009 and early 2010.

August 2009 placements were not only larger year-over-year, but feeder cattle placed on feed were in the heavier weight categories, especially the over-800-pound category. These heavier cattle will likely reach market weight sooner than would lighter weight placements, most likely coming to market during the first quarter of 2010. Along with the shift in fed cattle supplies into the future, dressed weights have been above seasonal trends and packers have been applying discounts to large carcases and live cattle likely to produce large carcases. These heavier dressed weights will continue to contribute to beef supplies, keeping downward pressure on cattle and beef prices.

Consumers willing to buy beef are benefiting from increased quality as a result of increases in the proportion of cattle grading Choice and higher due to heavier slaughter weights. At the same time, lack of consumer demand, largely due to the economic downturn, is driving the general stagnation in the cattle and beef sectors.

Weekly average Choice cutout values hit their most recent summer peak of $143.67 per cwt during the week of August 29 and have weakened since. Byproduct allowances have also declined by more than $1 per cwt since reaching an annual peak of $9.46 during the week of September 5. This has reduced packer margins, and, combined with slow beef movement at retail spilling into wholesale activity, has caused packers to reduce slaughter rates in recent weeks. September 2009 retail prices for Choice beef, at $4.13 per pound, were 2 per cent below those of August 2009 and 8 per cent below September 2008, continuing a general decline in retail prices that began after the August 2008 record high of $4.53.

Beef/Cattle Trade

Beef Imports Limited by Weak Dollar, but Continue To Increase from 2008

The United States imported 203 million pounds of beef in August 2009, 4 per cent higher than August 2008. Increased imports from Australia, which competes with Canada as the top foreign beef supplier to the United States, have been the primary reason for increased total beef imports. Imports from Australia have increased 46 per cent through August year-to-date. However, imports of Australian beef have been increasing at a slower rate than earlier in the year, as the US dollar has weakened against the Australian dollar since March.

The United States is expected to import 2.765 billion pounds of beef in 2009, nearly a 9-per cent increase from 2008. While weakening global demand is expected to continue to keep beef imports to the United States above last year’s levels, a weakening dollar will constrain the size of the increase compared with last year. In 2010, beef imports are expected to increase 4 per cent .

Growth in Beef Exports to Japan Continues

The United States exported 167 million pounds of beef in August, a 24-per cent decrease from last year. Total beef exports in August 2008 were particularly high, as it was the first full month that US beef was able to be exported to South Korea and high demand for beef in Russia caused a spike in beef exports there. Demand in Russia has fallen since the global financial crisis began. Exports to South Korea have also been affected by the financial crisis and a weak South Korean economy, which is affecting consumer spending and the strength of the South Korean won compared to last summer. In addition, a surge in exports to South Korea in the first few months after US exporters regained access has resulted in large inventories of US beef in South Korean warehouses. These conditions have continued to affect US beef exports and are responsible for most of the decrease in comparisons of year-over-year monthly totals.

Year-to-date, beef exports have decreased 4 per cent. Exports to Japan have increased 16 per cent year-to-date, as the Japanese yen remains strong against the dollar. Additionally Japanese demand for US beef is for more value-oriented dishes and for restaurants, such as beef-bowl restaurants, which would fare better than higher-end dining during the recession. Exports to Mexico and Canada, the two largest foreign markets for US beef, have decreased 18 per cent and 14 per cent year-to-date. Mexico has been particularly affected by the global recession. Through September, the Mexican peso had weakened by more than 20 per cent against the US dollar compared with last year. Demand for US beef has fallen, as increased US exports of pork and broiler meat to Mexico indicate that consumers have shifted toward less expensive animal proteins.

The United States is expected to export 1.73 billion pounds of beef this year and is forecast to increase shipments 6.7 per cent in 2010. The relative value of the dollar and beef demand in foreign countries will be the most important factors for US beef abroad. A weakening dollar would make US beef relatively less expensive overseas.

Dairy

Lower Milk Production and Improved Export Prospects Combine To Strengthen Prices in 2010

The September Milk Production report shows slight milk production declines in both July and August. The number of cows in the national herd has shown a month-over-month decline since January, and the year-over-year decline in cow numbers more than offset the incrementally rising output per cow in the second half of the year. The prospects for the rest of 2009 and 2010 are for cow numbers to continue to decline and for production per animal to continue increasing. In 2010, the US dairy herd is expected to average below 9 million for the year. The production increase per cow per day is expected to be about 1 per cent in 2009, well below the 5-year-average rise. In 2010, production per cow is expected to rise by 1.8 per cent during the year, above the 5-year average.

The recovery in production per cow next year is predicated on forecast lower corn and soybean meal prices in 2010. Alfalfa hay prices have retreated in 2009 from their 2008 highs and with normal weather next year, supplies should be adequate to keep prices moderate. Despite productivity increases, production in 2010 is forecast to decline to 187.2 billion pounds, down slightly from this year’s projected 188.9-billion-pound production. The expected smaller cow herd trumps the production per cow increase, resulting in the second year-over-year production decline.

Export prospects are improving. Economic recovery has exceeded expectations in several countries in recent months with the result that demand for dairy products has improved. Reportedly, an increase in exports to China and greater sales into North Africa and Middle Eastern markets has boosted world prices, especially for whole milk powder. US producers are in position to benefit as the dollar weakens relative to a number of foreign currencies. While still below 2008’s stellar levels, milk equivalent exports are expected to reach almost 4 billion pounds this year and improve to 4.3 billion in 2010 on a fat basis. Milk equivalent exports on a skims/solids basis are forecast at 21.5 billion pounds and 23.6 billion pounds for this year and next. The current forecasts represent an upward revision of earlier USDA export forecasts. Commercial domestic use on a fats basis is projected to rise 1.6 per cent from 2008 use. In 2010, commercial domestic use on a fats basis will be essentially unchanged from this year’s use. On a skims-solids basis, commercial use will increase about 2 per cent in 2009 and an additional 1 per cent in 2010.

Stocks of cheese and butter remain high compared with recent years; yet prices have continued to trend upward through 2009. Lower cheese production in the near term, along with improving export prospects into next year, should firm cheese prices for the remainder of 2009. Forecast lower milk production in 2010, along with strengthening exports, will likely lead to higher prices for both butter and cheese in 2010. Nonfat dry milk (NDM) and whey prices are forecast to increase as well, though not as much. Cheese prices are forecast at $1.265 to $1.275 per pound this year and will rise to $1.515 to $1.605 in 2010. High butter stocks should moderate butter price increases for the rest of 2009, despite sharply lower butter production as more milk moves to cheese production relative to butter/powder.

Butter prices will likely increase in 2010 from this year’s expected $1.165 to $1.195 per pound average to $1.400 to $1.520 per pound as lower milk production next year affects all dairy products. NDM and whey prices should also firm up in 2010. NDM prices, forecast to average 87.5 to 89.5 cents per pound this year, are expected to average 95.5 cents per pound to $1.025 per pound in 2010. Whey prices will likely average 24.5 to 25.5 cents per pound this year and climb slightly to 30.0 to 33.0 cents per pound next year.

Strengthening dairy product prices will lead to recovery in milk prices in 2010. The Class III milk price is forecast at $11.00 to $11.10 per cwt this year and $13.85 to $14.75 next year. The Class IV price is forecast at $10.35 to $10.55 per cwt this year and to firm to $12.00 to 13.00 per cwt in 2010. In the face of tighter milk supplies and improved demand, the all milk price is expected to rise to $14.70 to $15.60 per cwt next year after averaging $12.35 to $12.45 this year.

Further Reading

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October 2009