US Beef and Dairy Outlook Report - December 2008

After strong exports for most of 2008, a weaker 4th quarter is expected, according to the USDA's Economic Research Service in its December 2008: Livestock, Dairy and Poultry Outlook Report.
calendar icon 18 December 2008
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USDA Economic Research Service

Cattle and Beef: Despite steep declines in feed grain prices, adverse effects from the current worldwide economic downturn are being felt throughout the cattle and beef sectors. In addition to declining grain prices, oil price declines are a plus for the sector. The appreciation of the dollar against most foreign currencies is making US beef more expensive internationally, dampening foreign demand.

Beef/Cattle Trade: After strong exports for most of 2008, a weaker fourth quarter is expected. This year’s exports are expected to be 30 per cent higher than 2007. The weakening global economic outlook and strengthening dollar will limit further growth in 2009. Beef imports are expected to decrease 20 per cent from last year. Growth in 2009 imports are expected to be limited due to high cow slaughter for 2008 and 2009.

Dairy: Milk production will inch upward in 2009 as lower feed prices help boost yields. However, softening exports, combined with the slightly higher milk production, will push prices downward in 2009. Domestic use is forecast to rise slightly despite overall economic weakness.

Cattle and Beef

Grain and Oil Price Declines Not Enough To Offset Negatives

Adverse effects from the current economic downturn are being felt throughout the cattle and beef sectors as the negative effects of declining beef demand overwhelms the positive effects of declining grain prices. Grain prices have declined over the last few months due to abundant, albeit low quality, worldwide wheat supplies and decreased demand by foreign buyers. In addition to wheat supplies, foreign demand for corn is declining due to the worldwide economic downturn and appreciation of the dollar against most other currencies. In the US, demand for corn is declining as falling oil prices impact the US ethanol sector. However, the declines in grain prices have not been enough to counter the downward pressures on feeder cattle prices brought on by the—thus far—lack of winter grazing demand, heavy losses to cattle feeding, and shrinking margins in the wholesale sector, all of which are ultimately tied to declining domestic and foreign demand for beef. However, prices for corn, feeder cattle, fed cattle, and live cattle futures are at levels commensurate to positive cattle feeding margins for cattle placed on feed now for marketing in the spring of 2009.

While the short-term outlook is not positive for the cattle and beef sectors, monthly placements of feeder cattle below year-earlier levels since August 2008 have increased bullish sentiment for the near-term fed cattle price outlook. This nearterm outlook is further bolstered by a shift from placements of relatively more heavy-weight (800-plus pound) feeder cattle in September to the seasonal placement of relatively more light-weight (under-600 pound) feeder cattle in October. While these heavier placements will go to market after about 130 to 160 days on feed, the lighter feeder cattle placements could still be on feed into next summer, meaning that relatively lower numbers of cattle could be available for market in the spring.

Cow prices have come under downward pressure as a result of higher-than-usual seasonal slaughter. Commercial cow slaughter, especially of beef cows, continues to be relatively heavy, even after accounting for imports of Canadian cows. The downward pressure on cow prices is exacerbated as the dollar appreciates against foreign currencies because it makes processing beef from Australia, New Zealand, and Uruguay more competitive.

Declines in fed cattle prices have not offset declines in byproduct values and cutout values, squeezing packers. Byproduct values are declining primarily because of a glut in the supply of hides and declining demand for leather products due to weakening economies worldwide. Hides are an important component of the byproduct value and account for about 70 per cent of the byproduct yield from cattle.

Monthly average retail prices have remained at near-record highs, following the record monthly price of $4.53 per pound set in August 2008. After remaining in the $4.51 range for September and October, prices in November, at $4.43, averaged 2 per cent below the August record.

Beef/Cattle Trade

Weak Fourth Quarter Expected for Beef Exports

After US exports reached a 5-year high in the third quarter, a cooling global economy slowed demand for US beef in October and November. October exports were 176 million pounds, which is a 29 per cent increase year-over-year, but a 12 per cent decrease from September. Over the past 5 years, total monthly exports in October have been above September, generally driven by exports to Mexico before the holiday season. Exports to Mexico, the largest importer of US beef, have been particularly weak in October according to official data and FAS weekly Export Sales Reports for November indicate continued weakness. Despite the weaker 4th quarter, annual exports for 2008 are expected to be 1.86 billion pounds, 30 per cent higher than last year.

Several of the largest Korean retail grocery stores agreed to put US beef on their shelves at the end of November. The stores had been hesitant to market US beef products after public concerns over the safety of imported US beef products led to public demonstrations last summer. Initial reports stated that large volumes of beef were sold from the popular retail stores. Sales in these stores make US beef more accessible for Korean, customers. The additional sales should relieve cold storage facilities in Korea which were near capacity from the initial surge of imports after the new agreement was reached. However, a deteriorating outlook for the Korean economy and a continually depreciating Korean Won are expected to temper exports of US beef.

Beef exports for 2009 are forecast to grow to 1.92 billion pounds, a 3 per cent increase. Exports will continue to be affected by slowed growth in the global economy spurred by the financial crisis. A stronger US dollar and weaker currencies for major producing countries will also limit the expansion of exports next year, as markets could substitute US beef for relatively less expensive in Oceania and South America.

Beef Imports Forecast to be 20 Per Cent Below 2007, Moderately Higher in 2009

Quantities of beef imported into the United States continue to be well below last year’s levels. Imports for the month of October were 19 per cent below last year. This year’s imports are expected to total 2.452 billion pounds, 20 per cent below last year and the lowest annual total since 1997.

US cow slaughter remains high, partly due to increased imports of Canadian cows for slaughter. The high domestic supply of processing meat used for items such as ground beef may limit demand for imported beef, even with the stronger dollar. The United States primarily imports trimmings and beef for processing.

The dollar has continued strengthening against the Canadian, New Zealand, and Australian dollars, as well as the Brazilian Real, making products from those countries relatively cheaper in US dollar terms. The appreciation of the dollar occurred during a volatile exchange rate market, which could negatively impact trade.

Imports of beef from Brazil were down significantly in October, most likely a result of a fluctuating currency and limited availability of credit for Brazilian slaughterhouses and exporters. While a strong US dollar makes foreign beef relatively cheaper, the volatility in prices in conjunction with limited credit could discourage imports in the short-term.

In 2009, beef imports are expected to increase to 2.595 billion pounds, almost a 6 per cent increase. This would be the first time in 5 years that imports increased. US Cow slaughter is expected to be lower than this year, but still relatively high by historical terms. As a result domestic supplies will remain high, limiting the amount of growth in imports. Foreign beef could be cheaper in 2009, due to reduced demand for beef globally. Many global exporters were able to market beef in countries with developing demand for beef in 2008. This new demand buffered global meat prices. However, the diminished demand from these emerging markets likely in 2009, could make foreign sourced beef more competitive with US beef.

Imports of Canadian Cows Increase, Steers and Heifers Down from Last Year

This year, the United States is forecast to import 2.2 million head of cattle. This would be a 12 per cent decrease from last year. In 2009, cattle imports are expected to decline 5 per cent to 2.1 million head.

Imports of Canadian slaughter cows have increased in November according to AMS reports, as ranchers in the US and Canada cull cows going into the winter. Canadian cows have contributed to an already high cow slaughter rate in 2008. Through 29 November, slaughter cows and bulls have accounted for approximately 14 per cent of cattle imports from Canada. In November of 2007, cattle over 30 months of age were permitted to be imported into the United States from Canada.

Slaughter steers and heifers and feeder cattle imports from Canada declined in October and November relative to last year. Feeder cattle came south in greater numbers in the fourth quarter of 2007 and continued to be above previous-year levels through the summer of 2008. In September, the number of imported feeder cattle broke from the pattern of continual increases. This coincided with the rapid depreciation of the Canadian dollar, making Canadian cattle relatively cheaper in US dollar terms, but also making Canadian beef more competitive on the export market. Feeder cattle have been remaining in Canada. Placements in Canadian feedlots increased significantly in October and November according to CanFax. Imports of slaughter steers and heifers from Canada also declined dramatically in September, driven by the same exchange rate conditions affecting feeder cattle. Additionally, the past increase in Canadian exports of feeder cattle would reduce the current supply of fed cattle in Canada to be marketed or exported, lowering the number of Canadian cattle sent to the United States for slaughter.

According to weekly reports, imported cattle from Mexico increased in November, following normal seasonal trends. However, cattle imports from Mexico remain low relative to historical levels. As of 6 December, year-to-date cattle imports from Mexico are about 38 per cent below the corresponding week last year.

Dairy

Slightly More Milk and Weakening Global Demand Combine for a Lower Price Forecast Next Year

Falling feed costs, which are likely to continue into 2009, will provide little relief for dairy producers. Milk prices are also declining and are expected to continue to do so into next year. Current USDA forecasts place the season-average corn price between $3.65 to $4.35 per bushel and the average soybean meal prices at $240 to $300 per ton in 2009. Falling milk prices leave the milk feed price ratio at a projected 1.9 for 2009. A ratio in this range suggests continued pressure for contraction. Cow numbers are forecast to decline slightly to 9,245 thousand head. However, yields are forecast to rise about 1 per cent to 20,700 pounds per cow, an increase well below trend. This small yield increase is sufficient to nudge milk production to 191.4 billion pounds in 2009, a below-trend increase of less than 1 per cent. In the face of weakening demand, domestically and especially internationally, milk and dairy product prices will continue to glide downward throughout much of 2009.

September commercial disappearance, all products milk equivalent fat basis, is up from a year earlier by 2.7 per cent. Butter had the largest upturn on a percentage basis. 2008 production continues to outpace last year’s for the major products. Commercial use on a fats basis is expected to climb in 2009 by about 2 per cent, which is about trend. What has changed the price outlook is softening export sales. Global dairy demand has been weakened by recession, and supplies of products from the United States, the European Union and the Oceania countries remain ample. Trade data are reflecting the fundamentals. In October cheese exports fell for the second straight month, with exports as a percentage of production falling to 2.5 per cent, the lowest share thus far in 2008.

The stronger dollar has also disadvantaged US producers. The outlook is for continued weakening exports into 2009, especially for dry products. Exports on a skims solids basis are forecast at 23.5 billion pounds, the lowest since 2005. On a fats basis, exports are forecast to slide to 6.7 billion pounds, well below 2008’s projected 9.1 billion-pound total. Butter exports held steady at low levels not seen since early 2008 and down about 25 per cent from the levels that prevailed through August. Nonfat dry milk (NDM) exports have fallen to the lowest level of the year, and to a near-record low as a percentage of production. Weaker exports next year, along with slightly higher milk production, will soften prices across all products and milk classes. Prices for the major dairy products have trended downward through November.

Prices for the major dairy products are forecast to decline in 2009. Cheese prices are forecast to average $1.655 to $1.735 per pound next year, a decline from 2008’s projected average of $1.890 to $1.900 per pound. Butter prices are expected to average $1.265 to $1.375 per pound next year compared with $1.420 to 1.450 this year. The price declines for dry products are expected to be steeper, with NDM prices falling to 87.5 to 93.5 cents per pound in 2009, a substantial drop from an average $1.215 to $1.235 per pound this year. Dry whey prices are forecast to average between 19.0 to 22.0 cents per pound in 2009, down from 24.5 to 22.5 cents a pound this year.

Lower product prices will lead to lower milk prices in 2009. The forecast Class III price is expected to slide to $14.50 to $15.30 per cwt from an average $17.40 to $17.50 per cwt this year. The Class IV prices are forecast to decline even more sharply next year to average between $10.75 and $11.65 per cwt, down from $14.55 to $14.95 projected for 2008. The all milk prices are expected to fall to between $14.95 to $15.75 per cwt next year, a drop from 2008’s expected $18.30 to $18.40 per cwt.

Further Reading

- You can view the full report by clicking here.

December 2008

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