24 August 2010

9 minute read

2009

Annual and Semi

2008

Annual

Semi-Annual

2007

Annual

Semi-Annual

Cow Herd Continues To Dwindle

While cattle cycles can be defined as total inventories of cattle and calves from trough to trough—as used here—or from peak to peak, the cattle cycle behavior that persists is largely due to dynamics in the beef cattle sector, since dairy cows have not exhibited cyclical behavior since about 1947. Other ways to look at cattle cycles are by cow inventories or by beef cow inventories. Each cycle consists of an expansion phase, a consolidation phase, and a liquidation phase.

Historically, and prior to the current cycle, the shortest expansion phase, of 3 years, occurred from 1980 to 1982 when inventories increased by 4 per cent from their low point. This expansion was followed by a liquidation that lasted 8 years from 1983 to 1990, during which, inventories declined by 17 per cent. The next cattle cycle peaked in 1996, increasing 8 per cent from its 1990 low—a 6-year expansion. This was followed by an 8-year, drought-extended liquidation that saw inventories decline by 8 per cent and left a 2004 cattle inventory about a million head lower than the January 1, 1990 trough. The shortest liquidation phase in historical terms occurred during the cattle cycle that began in 1959, peaked in 1965, and bottomed in 1967—a 2-year liquidation.

The expansion phase of the current cattle cycle began in 2005 and peaked in 2007, due in part to a short-lived upturn in dairy cow inventories. With the July 1, 2010 inventory report, US inventories of cattle and calves are 4 years into liquidation. If one looks solely at January 1 beef cow inventories, the decline that began in 1996 has been continuous except during 2005 and 2006. Declines in both July 1, 2010 beef cow inventories (down 1 per cent) and beef heifer inventories (down 2 per cent) suggest that a further decline is likely in store for 1 January 2011 beef cow inventories.

A number of factors drive inventory dynamics. Weather patterns, especially drought, can shift inventories into or extend liquidation of the cow herd. Profit margins can also affect retention or liquidation decisions. Current cow prices appear to be sending significant numbers of cows to slaughter, reducing the total cow inventory from its already low levels.

Increased demand for corn and other grains in international markets will also continue to play a role in feed grain price dynamics. Prices for energy and other inputs will likely increase, raising breakeven costs at all levels of the cattle and beef industries. These factors, combined with the much longer production cycle for beef cattle compared with other livestock species, enables producers of other species to more quickly respond to changes in demand for final meat and poultry products.

With current Cattle report estimates of the calf crop in 2010 below 2009 by more than 400,000 head, or 1 per cent, competition for feeder cattle in 2011 is expected to be severe. This competition could intensify if heifers are retained for replacements, further reducing feeder cattle supplies. Under such a scenario, feeder cattle prices would be well-positioned for significant support at higher levels.

1 July 2010 dairy replacement heifer inventories were up by 3 per cent. Given that the number of heifers for dairy replacement as a share of the cow herd was record high for July, we can anticipate continued dairy cow slaughter at relatively high levels.

Feeder Cattle Supplies Tight for Foreseeable Future

National Feeder and Stocker Cattle Summaries (SJ_LS850) indicate that feeder cattle sales have been well above year-earlier levels. At the same time, feeder cattle supplies outside feedlots, down by almost 3 per cent, are the lowest since the series began in 1996. Further, the latest Cattle On Feed report released 23 July indicated that the ratio of over-700-lb June feeder cattle placements to total placements was lower than last June's and almost the same as in 2008. Should these placement levels continue, the stage is set for heavy fed cattle marketings at the end of the year and into the first and second quarters of 2011.

With almost a million fewer feeder cattle outside feedlots on July 1, 2010 compared with 2009, cattle appear to be "pulled forward" (placed on feed earlier than would be considered typical) to take advantage of the current profit potential and to utilize feedlot pen space. Continued increases in grain prices could counteract the pulling forward of feeder cattle placements, which could be supportive for feeder and later fed cattle prices.

Mexico has been rebuilding its cow herd after a series of extremely dry years. As a result, Mexico should be in a good position to export feeder cattle to the United States. This will offset anticipated reductions in exports of feeder cattle from Canada where large numbers of cows going to slaughter will reduce this and next year’s calf crops, and thus, future feeder calf supplies.

Feedlot Picture Could Dim

Second-quarter 2010 net placements were 14 per cent above second-quarter 2009 placements and 6 per cent above 2008 placements. May-June 2010 placements could come to market in the fourth quarter in sufficient numbers to exert some downward pressure on prices. July placements have the potential to add further to winter marketings. Marketings for 4 of 6 months thus far in 2010 are above year earlier.

Currently forecast corn and soybean prices—combined with feeder cattle prices near historical highs—will result in fed cattle breakeven prices above current levels. Fed cattle prices at or above these levels could be difficult to achieve in the face of competition from cheaper poultry and a slow-paced economic recovery through the remainder of 2010, although lower pork supplies would provide positive price support. Small or negative cattle-feeding margins would result in some negative pressure on feeder cattle prices, adding to existing reluctance among cow-calf producers to expand cow herds.

Above-average summer temperatures have also negatively affected cattle feeding. In addition to some reported heat-related death losses, the extreme heat has resulted in reduced feed consumption by feedlot cattle, which negatively affects their performance, increases costs of weight gain, and contributes to the lower dressed weights observed thus far in 2010.

Increased cattle slaughter has not been sufficient to offset reduced beef production because of persistently lower dressed weights thus far in 2010. Dressed weights were down during the second quarter: cattle down 13 lbs (1.7 per cent), steers down 15 lbs (1.9 per cent), and heifers down 13 lbs (1.7 per cent). Through 14 August, 2010, year-to-date total federally inspected beef production is down by .6 per cent, with slaughter up by 1.3 per cent.

Despite July Choice beef cutout values being almost 11 per cent over year-earlier prices, packers were caught between relatively strong fed cattle prices (supported by feedlot marketings that are up to date (current)) and declining retail prices. Relatively high byproduct values, currently running about $2 per cwt higher than third-quarter 2009, and increased July farm-to-wholesale margins, up by 24 per cent, are providing some relief to packers. On the other hand, retail prices for Choice beef declined from 4.49 in June to $4.44 in July, about a 1-per cent decline.

More Milk Both This Year and Next Will Counter Higher Exports and Domestic Commercial Use, Keeping Next Year’s Prices In Line With This year

The most recent USDA forecasts indicate that feed prices will likely be higher next year than in the current year. The corn price forecast is $3.50 to $4.10 per bushel for the 2010/11 crop year, a rise from current year projected prices. However, soybean meal prices are forecast slightly lower, at $250 to $290 per ton, for the 2010/11 crop year. The feed price outlook will keep the milk-feed price ratio for both the balance of this year and into next year below a level that usually signals expansion.

The most recent Milk Production report showed that although producers added cows during the first half of the year, the number of US milk cows remains below 2009 on a year-over-year basis as milk per cow continues to increase. The most current USDA forecast continues the trend of lower cow numbers that has been more than offset by increased output per cow in 2010. Output per cow is expected to rise by 2.5 per cent compared with 2009, pushing current-year production to 192 billion pounds. This trend is expected to continue in 2011 as cow numbers decline fractionally, and production per cow is forecast to rise by 1.5 per cent. On balance, milk production in 2011 is projected to reach 194.6 billion pounds.

Milk equivalent imports on both a fats and skims-solids basis are projected to decline this year, totaling 4.2 billion pounds on a fats basis and 4.6 billion pounds on a skims-solids basis. For next year, imports are expected to remain very near 2010 levels. Higher domestic production and a slow domestic economic recovery will limit imports. Milk equivalent exports have staged a strong recovery in 2010 from last year on both a fats and skims-solids basis. In 2010, exports are expected to reach 6.3 billion pounds on a fats basis and 28.8 billion pounds on a skims-solids basis. Next year, exports are expected to be lower as production in competing countries, notably Australia and New Zealand, is expected to increase. Also for next year, exports on a fats basis are forecast at 5.6 billion pounds and 28.0 billion pounds on a skims-solids basis. In 2011, domestic commercial use on both a fats and skims-solids basis is expected to show above-trend growth. Domestic commercial use is forecast to reach 192.9 billion pounds, a 1.8 per cent year-overyear increase on a fats basis, and reach 170.6 billion pounds, a 2.1 per cent yearover- year increase on a skims-solids basis. Growth in both domestic commercial use and exports will result in tighter ending stocks this year and next on a fats basis. Ending stocks on a skims-solids basis will be near 2009 levels this year and tighten by the end of 2011.

Butter stocks have been below 2009 in the first half of 2010 and are below 5-year trend on a seasonally adjusted basis. Lower production and rising domestic commercial use have tightened stocks and sharply increased butter prices. Butter prices are forecast at $1.610 to $1.650 per pound this year. Next year’s butter prices, expected to moderate because of greater expected milk production, are forecast at $1.435 to $1.565 per pound. Cheese prices are expected to remain relatively high for the balance of 2010 on the basis of stronger exports and competition for milk from higher butter prices.

Cheese prices are expected to average $1.500 to $1.520 per pound this year and climb slightly to $1.505 to 1.605 per pound in 2011. A stronger export forecast, as well as domestic commercial use, could offset expected greater milk production. Nonfat dry milk (NDM) prices are sharply higher this year compared with 2009, mostly on stronger export projections. NDM prices are forecast to be $1.145 to $1.165 per pound in 2010 and rise slightly to $1.175 to $1.245 next year. Whey prices have been part of the overall recovery in dairy product prices this year and are projected to average 36.0 to 38.0 cents per pound; however whey prices are not expected to change much next year, averaging 35.5 to 38.5 cents per pound in 2011.

The tightness in the butter market has precipitated the unusual situation of the Class IV price climbing above the Class III price. The Class IV price is expected to be $14.50 to $14.80 per cwt this year, moderating slightly to $14.00 to $15.10 per cwt in 2011. The Class III price is expected to average $14.15 to $14.35 per cwt this year and rise to $14.15 to $15.15 in 2011. The Class III price is expected to rise above the Class IV price next year, restoring the more typical price relationship. The all milk price is expected to be $15.90 to $16.10 per cwt this year and to change very little next year, averaging $15.55 to $16.55 per cwt in 2011.

Further Reading

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