20 March 2011

11 minute read

Beef/Cattle: Dry conditions in the Southern United States have reduced the March runs of feeder cattle from wheat pasture this year, moving some feeder cattle into feedlots earlier than is typical and shifting some cattle into summer grazing programmes. Tightness of cattle inventories at all levels is increasing the volatility in cattle and beef prices.

Beef/Cattle Trade: US beef exports for 2011 are forecast at 2.43 billion pounds and beef imports are forecast at 2.3 billion pounds, making the US a net exporter of beef again in 2011, and by a larger margin. Cattle imports from Mexico thus far in the year have been particularly strong; however, total cattle imports for 2011 are forecast lower year-over-year.

Dairy: Milk production is forecast to expand this year as the number of cows increases; milk per cow is also forecast to increase, albeit at a slower pace in 2011. High feed prices and softening milk prices may ultimately blunt the expansion in cow numbers, but through the first part of the year, strong export demand for all products and recovering domestic demand has supported milk prices, trumping higher feed prices for most producers.

Beef/Cattle

Dry Conditions in the South Affecting Grazing programmes

The expanding dry conditions in the Southern United States are causing pastures to deteriorate and dimming prospects for a wheat crop. According to some experts, sufficient precipitation could salvage the wheat crop. However, others think that it is already too late and that the crop is in too poor a condition for even that prospect. The dryness does raise the potential for some limited graze-out wheat pasture. If some wheat is grazed out, some feeder cattle could be placed in feedlots in late April-May. Otherwise, these cattle will move into summer grazing programmes in areas where adequate forage is available.

Despite a 39-per cent, year-over-year decline in cumulative year-to-date imports of cows from Canada for slaughter, total weekly federally inspected cow slaughter is up about 3 per cent over year-earlier slaughter on a cumulative weekly slaughter basis through February 26, 2011. Dairy cow slaughter, up 11 per cent, has continued unabated, and because dairy cows hang heavier carcasses than beef cows, is adding to average dressed weights for cows. Beef cow slaughter, on the other hand, has declined more than 4 per cent from year-earlier cumulative totals. As Southern pastures continue to deteriorate from the lack of precipitation and as cow prices continue to provide incentive to sell cows, the potential for further removal of cows from the area increases.

Despite the dry conditions in the South, demand for under-750-pound feeder cattle for summer grazing programmes remains high. Feedlot demand for placement-weight cattle, on the other hand, is losing its edge due to expected cattle feeding costs that will be above even the record-setting current cash and April-June 2011 futures prices.

January 1, 2011 supplies of feeder cattle outside feedlots, at 26.771 million head—3 per cent below supplies in 2010—were the lowest since the series began in 1996. At the same time, January 1 cattle-on-feed inventories (all feedlots) were higher than those in 9 of the previous 16 years and represented the third highest proportion of the previous year’s calf crop, exceeded only by ratios in 2007 and 2008.These two factors indicate there will be large amounts of beef in the first half of 2011, but very low numbers of feeder cattle for placement for marketing during the second half of 2011 and 2012. The ratio of heifers on feed on January 1 to total steers and heifers on feed—the highest January ratio since 2004—also indicates that there were only limited plans at best for either maintaining or increasing the beef cow herd. Current prices for all cattle make it difficult for producers to decide to retain either cows or heifers for breeding.

Positive Cattle Feeding Margins May Not Continue

Cattle feeding margins were positive during most of 2010 and the first quarter of 2011, despite high feeder cattle and feed costs. However, current equity requirements and financial commitments for cattle feeding are at record highs. Other uncertainties abound—the macroeconomic situation, ethanol and farm policy with respect to feedgrains, and exports and exchange rates, to mention a few. This combination of risk factors may dampen the expectation of future profits that would motivate herd rebuilding in the context of conventional cattle feeding.

With the very high per centages of carcasses grading Choice or better, the Choice- Select spread has all but disappeared recently and has inverted on several occasions. This implies that there is either plenty of Choice beef or not enough Select beef to meet demand. The latter situation is more likely, given the current market demand for ground products and the reduced imports of processing beef. Wholesale cutout values for Choice and Select beef continue to increase as packers work to push prices paid for fed cattle through to the retail level. At the same time, retail prices for beef have reached levels that are beginning to generate some consumer resistance.

Beef/Cattle Trade

US Beef Export Market Set for a Dynamic 2011

Many of the same dynamics in play in the US beef export and import markets in 2010 should continue this year. The weak dollar and strong economic recovery in the rest of the world, coupled with tightened supplies of competing beef, are factors allowing for upward momentum in the US beef export market. The US dollar has continued to decline against the currencies of major beef trading partners, markedly losing strength since the summer of 2010. The dollar is at its lowest levels against the Mexican peso and Korean won since late 2008, and in the final quarter of last year it hit new lows against the Japanese yen.

Global economies also continue to strengthen, as does demand for US beef. Strong growth is anticipated in US beef exports to Asia. The recent outbreak of foot-andmouth disease (FMD) in South Korea has raised expectations for even stronger growth of US beef exports to South Korea this year. The cattle sector in South Korea was only minimally impacted, however,, with an estimated 5 per cent of the cattle herd being culled. A more significant factor for increased US beef exports to South Korea this year would be the inevitably higher pork prices created as a result of the large swine cull. Faced with higher prices, South Koreans may switch to other protein sources, such as beef, to fill the pork supply gap. March 10 forecasts assume growth in beef exports to Japan, but the effects of the recent earthquake on the level and timing of shipments is uncertain.

First-quarter 2011 US beef exports are expected to outpace 2010 by 28 per cent, at 610 million pounds. In the second and third quarters of 2011, 9 and 3 per cent growth above 2010 levels is anticipated. Exports in the fourth quarter should decline below 2010 levels.

Total US beef exports this year are expected to sum to 2.43 billion pounds. This would be 9.3 per cent of US production, only fractionally below the record of 9.4 per cent set in 2000. Accounting for a further decrease in US beef imports, the United States would again be a net exporter of beef in 2011 on a quantity basis, as it was for the first time last year, and beef export levels in 2011 would also be only 3.7 per cent below the record—and pre-BSE outbreak— year 2003.

Beef Imports To Remain Squeezed

With decreases in beef production expected in major US beef exporting countries and a weak dollar expected to persist through 2011, downward pressure on US beef imports is continuing. The import forecast for this year is at 2.3 billion pounds, virtually unchanged from 2010. Supplies from Oceania are limited due to continued affects of herd rebuilding in Australia and New Zealand. Slaughter rates in those countries are expected to continue to decline in the first half of the year, as will production and exportable supplies.

Imported Australian processing beef prices (90 per cent lean frozen, East Coast) have also been quoted in the upper 190 cents-per pound (c/lb) range since the beginning of this year, averaging 198.14 (c/lb) through February. High Australian beef prices are also aggravated by the US/AUD exchange rate. These are the highest prices in several years, and they can be expected to climb higher.

Beef imports by the United States should remain below year-earlier levels through the first half of this year. In the first and second quarters, 495 and 601 million pounds are forecast to be imported, 14 and 12 per cent below the respective 2010 quarters. Beef imports should not rise above year-earlier levels until the final quarter of this year when more beef becomes available for export from Oceania.

Mexican Cattle Imports Start 2011 Off Strong

Cattle imports from Mexico are well above year-earlier levels. According to AMS weekly reports, imports of Mexican cattle through February are 54 per cent higher year-over-year. Cattle imports from Mexico in January were 67 per cent higher than last year.

Imported steer prices (imported 500-600 lb feeders, Las Cruces) took another jump in January relative to the comparable Mexico City prices (grass-fed steers, Mexico City). Conversely, total imports of Canadian cattle are 28 per cent lower. This is primarily due to year-over-year lower late-summer placements in Canada. Cattle imports in 2011 should not exceed 2010 levels, since the total cattle inventory in North America is even smaller than last year. The Mexican market, however, has proved to respond strongly to price incentives. Cattle imports for 2011 are forecast at 2.1 million head, 8 per cent lower.

Dairy

Cow Numbers Continue To Expand as Milk Prices Rise; Strong Demand Underpins the Market

Corn prices in 2010/11 are expected to be high by historic standards, averaging $5.15 to $5.65 per bushel for the crop year. USDA did not revise the corn supply, demand, and price forecast this month from last. The soybean meal price is forecast to average $340 to $370 a ton in 2010/11, and this month’s forecast was revised downward slightly from last month. Feed ingredient prices could push the 16- per cent mixed ration value up by more than $2 per cwt from the $7.25 calculated for 2010.

Countering this is the likelihood of higher milk prices this year. Despite much higher expected feed prices, higher milk prices are likely supporting the modest expansion in dairy cows that began last fall and could extend for at least the first half of the year. Later this year, pressure from projected high feed prices and softening milk prices could precipitate a modest downturn in cow numbers. USDA forecasts cow numbers to average 9.17 million in 2011.

Milk yield per cow rose by nearly 2.8 per cent in 2010 and is forecast to climb by only slightly more than 1 per cent in 2011, a rate much closer to long-term trend. Downward revisions in output per cow in late 2010 and slower than expected growth in January contribute to the forecast.

Along with this, dairy cow slaughter has been trending upward since last fall, based on year-earlier comparisons. The higher implied culling, along with an ample supply of dairy heifers, suggests that herd freshening may be underlying the expansion. The introduction of a greater number of heifers could also slow the growth rate in milk per cow in 2011.

The younger cows typically will not hit their production stride in the first lactation. Annual output per cow is forecast at 21,375 pounds. That forecast and the forecast cow population will lead to about 196 billion pounds of milk being produced in 2011, an increase of almost 2 per cent over 2010.

Milk equivalent imports are projected lower in 2011 on both a fats and skims-solids basis at 3.9 billion pounds and 4.7 billion pounds, respectively. Milk equivalent exports are also expected to decline in 2011 compared with last year. Milk equivalent exports are forecast at 6.7 billion pounds on a fats basis and 31.1 billion pounds on a skims-solids basis.

Although lower than last year, exports on both a fats and skims-solids basis have been revised upward slightly over the last few months, as global demand has appeared to strengthen.Recent strength in domestic cheese prices may erode US competitiveness in the world market. Very firm demand for nonfat dry milk and skim milk powder (NDM/SMP), along with a weak dollar, are the basis for the export forecast on a skims-solids basis.

US product prices are close to world prices, especially for powder products, but greater anticipated production from Oceania later this year, the result of expected large farm milk production, could limit exports. Domestic commercial use is forecast to climb in 2011 by 2.1 per cent on a fats basis, a sizeable rise compared with recent years. Domestic commercial use on a skims-solids basis is forecast to rise 2.8 per cent this year following last year’s contraction of 2.7 per cent.

Major dairy product prices are expected to go higher in 2011. Prices were revised upward this month from February’s forecasts. Export demand for cheese and NDM boosted prices as exporters competed with domestic demand.

Cheese prices are forecast to average $1.695 to $1.755 per pound for the year, and NDM prices are projected to average $1.365 to $1.415 per pound. Although seemingly high in light of reported cheese stocks, the high cheese price, along with exceptionally high December cheese exports, suggests that exports may be currently supporting the price. Extremely tight butter stocks are helping to support currently high butter prices.

Later this year, continued improvement in domestic demand for cheese and butter is expected to support prices as increased milk production and lowered export prospects from rising competition work to limit prices. The butter price is expected to average $1.735 to $1.825 per pound for the year. Whey prices are forecast to average 40.0 to 43.0 cents per pound. High NDM prices may be providing some support for whey prices. The higher expected prices for the major dairy products lead to rising forecasts milk prices.

Milk price forecasts will be higher this year than last, and the milk price forecast was raised in March from February projections. The Class IV price is estimated to average $16.95 to $17.65 per cwt and will average above the Class III price, which is expected to average $16.35 to $16.95 per cwt. The all milk price is forecast to average $18.10 to $18.70 per cwt in 2011.

Further Reading

-

You can view the full report by clicking here.

March 2011