US Beef and Dairy Outlook Report - May 2010

Cattle and beef producers are enjoying a period characterised by a favourable pasture and feed situation and high cattle and beef prices. Despite this favourable situation, cow slaughter continues into the second quarter at a high level relative to 1 January cow inventories.
calendar icon 22 May 2010
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USDA Economic Research Service

Cattle and Beef Sectors Enjoy the Moment

The first 2010 reports of pasture and range conditions from the National Agricultural Statistics Service (NASS) indicate that pasture conditions are the best in possibly the last two decades. In addition, establishment of the corn crop is also well under way and ahead of previous years. These two factors indicate a steady feed price outlook for the immediate future, barring weather downturns, changes in export markets, or other supply/demand shocks. Despite the positive conditions observed in general, dry areas of varying sizes do exist in the northern Rocky Mountain region, the Upper Midwest, and the Appalachian Mountains. Expansion of these scattered areas of dry conditions could be cause for concern later in the grazing season.

Relatively high levels of federally inspected cow slaughter as a share of 1 January 2010 cow inventories, especially beef cows in the Midwest, Southern Plains, and Southwest, have continued into the second quarter of 2010, despite current calf price levels, profit margins, and pasture conditions. An explanation is that cow-calf producers may be marketing cull cows as the decision to cull them is made, thus capturing the high prices, rather than waiting until later in the year to sell them as a group and risking price declines.

Imported Canadian cows for slaughter are also contributing to the high cow slaughter numbers, but do not explain the whole picture. Recent weekly imports of Canadian cows represent about 2.5 per cent of total weekly federally inspected cow slaughter. Weekly federally inspected cow slaughter during the week ending April 3 through the week ending 1 May 2010 was 13 per cent ahead of slaughter for the same period last year. Adjusting for the Canadian cows still leaves US cow slaughter up more than 10 per cent above slaughter levels last year, which were also relatively high.

Feeder cattle prices at Oklahoma City have increased significantly above January/February levels. Average prices for April for 750-800 lb, No. 1 Large and Medium feeder steers were 18 per cent above January 2010 prices and 14 per cent above April 2009 prices. However, feeder cattle prices are at levels that—despite current projections for corn and feed prices—are rapidly narrowing cattle-feeding profit margins, indicated by current futures prices and USDA's projected prices for late summer and early fall. Feeder cattle inventories are expected to be tighter in 2011 than in 2010 because of the successively smaller calf crops that provide placements of feeder cattle. When heifer retention aimed at cow herd expansion occurs, in 2011 or whenever, feeder cattle placements will show additional declines.

The large proportion of lighter weight feeder cattle placements reported in the April Cattle on Feed report, has raised the question of whether there are heavier cattle still outside feedlots—perhaps on graze-out wheat—and, if so, when will they be placed on feed? The May and June Cattle on Feed reports should shed some light on this issue. In the meantime, receipts at the Oklahoma City Auction on 10 May included a large share of feeder cattle over 800 lbs, an indication that at least some of them exist.

Wholesale cutout values also continue at near-record levels. Byproduct values almost twice what they were this time last year are contributing to packer returns and providing some of the motivation for the recent increases in weekly slaughter levels compared with a year earlier. As a result, federally inspected beef production is above year-earlier levels on a weekly basis for the week ending 8 May, despite dressed weights significantly below year-earlier levels. While there is some support from the pork sector in terms of higher year-over-year pork prices and lower supplies, poultry prices that are relatively lower than beef and pork prices, along with larger poultry supplies, will be factors mitigating further beef price increases.

Beef/Cattle Trade Summary

US beef imports during the first quarter decreased 19 per cent from the same quarter last year, primarily due to decreased imports from Oceania. Firstquarter imports from Australia in particular, which has historically vied with Canada as the largest source of beef to the United States, were 41 per cent lower than first-quarter 2009 imports. A decline of a lesser magnitude for beef imports is forecast for the second quarter of 2010. Exports of US beef, however, look to maintain strength throughout 2010, particularly with regard to Asian export markets.

Decreased Beef Imports from Oceania Drive Outlook for 2010

US imports of beef in the first quarter totaled 573 million pounds, a 19-per cent decrease from the same quarter last year. This decline should carry over into the remaining quarters of 2010, as total US beef imports for this year are forecast at 2.5 billion pounds, a 5-per cent decline year-over-year. Tight exportable supplies from Oceania, coupled with a weakened US dollar relative to Oceania currencies, are the primary contributors for declining US beef imports.

First-quarter beef imports from Australia and New Zealand were down 41 and 18 per cent, respectively, from the same quarter last year. Indicative of lower exportable supplies, the Australian Lot Feeders’ Association and Meat and Livestock Australia report indicated the lowest number of cattle on feed in first quarter 2010 since the last quarter of 2008. Coupled with these tightened exportable supplies is the strong Australian dollar, which is raising prices in US dollar terms. In April the Australian dollar matched a high of 1.06 AUD/USD in its current uptrend, beginning early 2009, and remained near this mark throughout the month. To the extent the Australian dollar remains strong, importers will be forced to pay relatively high prices for Australian beef; however, any weakness in the currency could benefit importers. Upward price pressures for lean processing beef, as is imported from Australia, has been clearly evident in the domestic wholesale beef market, which shows no sign of weakening, at least in the near term.

Imports from our North American trading partners were up for first-quarter 2010, but not enough to offset declines from Oceania and South America. Most important, first-quarter beef imports from Canada were up 5 per cent year-over-year. US beef imports in 2011 are expected to total 2.79 billion pounds, almost a 12-per cent increase year-over-year, a reversal of the decline in beef imports forecast for this year.

Exports of US Beef Prove Competitive in the Global Marketplace

First-quarter exports of US beef increased 25 per cent from 2009. This growth largely stems from the increasing US sales in several Asian markets, namely in Japan, South Korea, Taiwan, and Hong Kong. First-quarter 2010 exports to Japan and South Korea improved 30 and 9 per cent, respectively, above year-earlier levels. The strength of the Australian and New Zealand dollars, coupled with strong US beef marketing campaigns in Japan and South Korea, has shifted some of the market share away from Australia and New Zealand, the United States’ primary competitors for these markets. The result is respective US market share increases of 54 and 31 per cent in Japan and South Korea, compared with the same quarter last year. Beef exports to Hong Kong increased 143 per cent.

First-quarter beef exports to the United States’ second largest export market, Canada, increased nearly 20 per cent from year-earlier levels. The US dollar continued its decline against the Canadian dollar throughout the first-quarter, fueling exports to Canada. US beef exports to all countries for 2010 are forecast at 2.1 billion pounds, an increase of more than 10 per cent from 2009.

Global demand for beef is anticipated to continue strengthening into 2011; however, supply constraints may prove to be much like this year’s. US and global beef supplies will continue to be very tight as herd rebuilding is either in progress (United States) or herd sizes are just beginning to increase as a result of heifer retention (Australia and New Zealand). Total beef exports for 2011 are forecast at 2 billion pounds, about a 3-per cent decline from the 2010 export forecast. The United States can expect an even smaller calf crop and total January 1 cattle and calf inventory next year before producers fully commit to rebuilding herds; this should be in lieu of high cow slaughter rates in proportion to cow inventory, as has taken place this year. Although global demand should be nearer to full recovery in 2011, reduced domestic supplies will inhibit larger amounts of beef from entering the US export market. Relatively higher prices for US beef may limit its competitiveness against products from Oceania and South America.

US Feeder Cattle Prices Provide Export Incentives to Trading Partners

The increase in Canadian slaughter cattle imports seen early in the first quarter has been shifting in recent weeks to feeder cattle imports. While first-quarter Canadian cow imports were nearly 30 per cent higher year-over-year, due to increased US demand for processing beef and reduced beef imports, AMS weekly reports for April show feeder cattle imports the largest since April 2009. Prices between Southern Alberta and Nebraska 700-800 and 800-900 pound feeder steers began widening late in March to a US-Canadian price differential not seen since January 2009. Imports of feeder cattle from Mexico demonstrated a strong surge beginning in March, which should carry over into the second quarter. In line with current Nebraska feeder price trends, Mexican producers are also receiving a high price at the border. The Las Cruces price for imported feeders in April averaged $112.20 per hundredweight (cwt) for 400-500 pound steers and $106.90 per cwt for 500-600 pound steers, prices not seen since September 2008.

Dairy Summary

Although the US dairy herd continues to show a gradual year-over-year contraction, higher output per cow continues to boost production. Demand, both foreign and domestic continues to improve as both the world and US economies recover. Prices for milk and dairy products are higher this year compared with last, but the prospect is for only modest price increases in 2011.

Improved Demand Expected for Dairy Products in 2011, but Higher Milk Production Will Limit Price Increases

The outlook is for producer returns to be higher for the balance of this year and into 2011. The improvement is expected to be gradual. The milk-feed price ratio has rebounded from 2009 lows and is likely to continue to improve modestly into 2011. Corn prices are forecast to average $3.50 to $3.70 a bushel for the current 2009/10 crop year, and initial forecasts call for further moderating prices in 2010/11, with prices expected to average $3.20 to $3.80 a bushel. Similarly, for soybean meal the price outlook is for continued moderation. The soybean meal price is expected to average $295 a ton for 2009/10 and is forecast to average $230 to $270 a ton in 2010/11. Alfalfa supplies should be adequate.

Although the US dairy herd continues to show a gradual year-over-year contraction, higher output per cow continues to boost production. The 2010 all milk price will average well above 2009, and some improvement is forecast for 2011. Modest improvement in both feed and milk prices, from the producers’ perspective, is not likely to ignite an expansion in US dairy herd size. The effects of poor returns to producers in 2008 and 2009 are expected to result in continued reductions in the number of dairy cows, both this year and next. The number of cows is projected to average 9,070 thousand this year and to continue a gradual decline in 2011, to average 9,040 thousand. On balance, the increased milk per cow during the year is expected to offset the decline in herd size, leading to higher milk production. Production is projected to be 190.2 billion pounds this year, less than 1 per cent above 2009. However, as the decline in the cow herd slows later this year and into next, milk production is forecast rise to 193 million pounds in 2011, an increase of about 1.5 per cent.

Prospects are for improved demand, both foreign and domestic, for dairy products in 2011. Higher domestic use is expected to support slightly higher imports next year. Meanwhile, global economic recovery is continuing apace, boosting international trade in dairy products. The continued economic recovery is forecast to support higher exports on both a fats and skims-solids basis. U.S dairy products are competitively priced on world markets, and production from Oceania countries fell short of early season forecasts. Also, there is no indication of the EU reinstituting export restitutions. These factors help strengthen the US dairy export outlook. However, skim-solid export forecasts for 2010 have been revised downward as nonfat dry milk (NDM) sales lagged early in the year, but the potential exists for NDM exports to quicken later in the year. Whey exports are higher. The outlook is for skims-solids exports to reach 25.3 billion pounds in 2010 and continue to rise next year to 27.0 billion pounds.

Domestic commercial use is expected to increase this year. A robust 1.2 per cent increase is expected in commercial use on a fats basis while growth in use on a skims-solids basis is projected at a slight 0.4 per cent rise. Stocks should tighten as use increases. Despite the improved demand outlook, prospects are for only modest price increases in 2011.

Cheese prices are forecast to trend higher both this year and next, averaging $1.480 to $1.530 per pound this year and $1.505 to 1.605 per pound in 2011. Higher prices are also expected for NDM and whey for the balance of 2010 and into 2011. NDM prices are forecast to average between $1.180 and $1.220 per pound in 2010 and to climb to average $1.210 to $1.280 per pound next year. Strong exports of whey products will raise prices to average 36.5 to 39.5 cents per pound this year, and they will rise slightly to average 37.5 to 40.5 cents per pound in 2011. Butter counters the trend; while prices will average higher this year compared with last year, $1.445 to $1.525 per pound, 2011 prices are forecast lower at $1.390 to $1.520 per pound. Butter prices are forecast lower next year because the higher butter prices forecast for the second half of 2010 are not expected to be repeated next year.

Milk prices are much higher in 2010 than in 2009, but the prospect is for only moderate price increases in 2011 as milk production continues to rise. The Class IV price is expected to average $14.15 to $14.75 per cwt this year and only slightly higher next year at $14.15 to $15.25 per cwt. Class III prices are projected to average $13.95 to $14.95 per cwt in 2010 and to climb to $14.25 to $15.25 per cwt next year. The all milk price will average $15.65 to $16.15 per cwt this year and rise to average $15.70 to $16.70 per cwt next year.

Note that USDA has revised imports on a milk equivalent basis back to 2003 on a fat basis and on a skim solids basis. The revisions include a number of tariff lines previously not included.

Further Reading

- You can view the full report by clicking here.

May 2010

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