22 September 2008

7 minute read

Cattle: Recent rains may have kept feeder cattle on pasture longer and to heavier weights prior to feedlot placement than would otherwise have been the case. High feed costs, dry conditions remaining in some areas, and imports of Canadian cows are contributing to increased commercial cow slaughter. Fed cattle prices are holding in the upper $90s per cwt, ahead of year-earlier prices, while feeder cattle prices are below year-earlier levels and retail Choice beef prices set another record high.

Dairy: While milk production continues to rise, the increases are small compared with recent years. Cow numbers should decline in 2009; production increases will come from slightly higher expected yields. Commercial use should pick up in 2009 compared with 2008, but export prospects will be limited. Class III prices are forecast lower, while Class IV prices should climb slightly. The overall impact is for a slightly lower all milk price in 2008 compared with last year and a lower price in 2009 compared with this year.

Cattle

Cattle and Beef Sectors Continue to Adjust To Volatile Weather and Prices

While devastating to producers directly in hurricane paths, the rains that have come with this year’s hurricanes have improved conditions for winter wheat seeding and pasture conditions in many areas. Crop progress for corn and most other crops is behind last-year and 5-year averages. Dry conditions remain in the Southwest and the northern Appalachian mountains, which continue to challenge pasture-based producers. Prices for feed grains and proteins continued their declines of the last couple of months, but are forecast to average higher for 2008/09.

Beef cow slaughter continues at a level higher than would be expected with July 1 cow inventories and more typical slaughter patterns. Imports of Canadian cows and bulls are contributing to the relatively large numbers of cows and bulls going to slaughter. The July 2008 ratio of heifers in feedlots of 1,000-plus head capacity to total steer and heifer marketings from those feedlots was the highest since July 2003, during the last year of an 8-year liquidation before inventories began to temporarily increase again in 2004.

Despite higher prices compared with year-earlier prices for most categories of live cattle (feeder cattle being a notable exception) and increasing beef exports, the continuing levels of beef cow slaughter, lower beef heifer retention, and a high proportion of heifers on feed demonstrate the potential for further reductions in the U.S. beef breeding herd. This situation is likely a direct result of the much higher costs, primarily for feed and energy, faced by producers. It also portends the likelihood of higher cattle prices in 2009.

Price spreads between heavy- and lighter-weight feeder cattle prices have narrowed significantly in the last several weeks. In August 2008, prices for large and medium number 1 heifers at Oklahoma City weighing 700-750 pounds averaged almost a dollar per hundredweight (cwt) higher than 450-500-pound heifers, an inversion of the more typical pattern of discounts for heavier cattle. The spread between heavy and lighter placement-weight large and medium number 1feeder steers at Oklahoma City, those weighing 750-800 pounds versus 600-650-pounders, has narrowed to $1.29 per cwt, versus $6.79 for August 2007. Rainfall since mid-July has likely kept feeder cattle on pasture longer than might have been the case otherwise, and with hurricane-fed rainfall continuing, prospects for wheat pasture are improving.

Increasing steer and heifer slaughter weights, a decline in the number of cattle on feed for more than 120 days (one indicator of how “current” feedlot inventories may be), and a decline in the percent of carcasses grading Choice and better are three factors that suggest cattle feeders are finally working out from under inventories of cattle placed last fall and winter at light weights due to the lack of wheat and other cool-season pasture. With July 2008 net placements up only 3.5 percent over July 2007 net placements, the stage is set for some larger placements of heavier cattle this fall and early winter, and again in late winter and early spring. Cattle feeders have been able to maintain prices in the upper $90s per cwt, despite declining cutout values. However, breakeven values for fed cattle are still above current selling prices.

Setting yet another record for monthly average prices in August 2008, retail prices for Choice beef were 4.4 percent higher than the July 2008 estimate. August average retail prices for Choice beef were $4.53 per pound, which was almost 9 percent over the August 2007 average.

Increased exports of U.S. beef are providing increasing support for U.S. cattle and beef prices. Exports of U.S. beef have increased, partially as a result of apparent pent-up demand by South Korea and despite some strength in the U.S. dollar. Prices of imported processing beef have declined since mid-July, partly as a result of the increasing value of the dollar against other currencies, particularly the Australian dollar. The declining prices for imported processing beef could begin to exert downward pressure on cull cow prices if the declines continue.

Dairy

Milk Production Increases Will Be Slight in 2009; Demand Increases Are Limited by a Slowing Economy and Lower Export Prospects

The milk production forecast was raised slightly in September from last month as cow numbers were adjusted to continued herd growth. Cow numbers are projected to average 9,260-thousand head for 2008. Next year, herd size is forecast to contract to 9,235-thousand head. The forecast decline is based on expected higher feed costs and lower milk prices. Cow slaughter is higher than a year ago and replacement prices lower. Production is expected to rise incrementally to 190.8 billion pounds in 2009, less than a 1-percent rise from 2008’s estimated production. The increase is based on gains in production per cow, which are estimated to average less than 1 percent in 2008. However, the milk per cow increase forecast for 2009 will be the smallest since 2004. It appears that higher feed prices and lower product prices are continuing to have an impact on the rate of increase in milk production, since the rate of increase in output per cow has been declining since 2005. That the impact has not developed more rapidly suggests that many larger operators may have lowered breakeven points in recent years.

Demand growth across all major products appears to be slowing. Cheese and butter production in 2008 lead last year’s totals on a year-to-date basis. This month’s forecast shows higher expected stock levels on skim-solids basis, indicating softening demand for butter and powder products. A slowing domestic economy has stressed the restaurant sector, which—along with higher food and energy prices—is dampening cheese demand. Butter and nonfat dry milk (NDM) had benefited from strong export sales, but exports are forecast to taper off toward the end of 2008 and decline slightly in 2009. A slowing global economy, the dollar strengthening against the Euro and other currencies, and increasing foreign production underpin the export forecast. Of special note, is that declining oil prices may affect a number of major NDM importers (Mexico and Algeria among others).

While slower milk production growth should limit price declines, softening demand both domestically and internationally contributes to lower prices for the balance of 2008 and into 2009 compared with 2007. The cheese price is forecast at $1.905 to $1.925 per pound this year and to decline to $1.840 to $1.940 per pound in 2009. Butter prices, which have been near record highs this year, are projected to average $1.405 to $1.445 per pound in 2008 and decline to $1.350 to $1.480 per pound next year. Slower exports take a toll on NDM prices both this year and next, as the annual price is expected to average $1.375 to $1.395 per pound in 2008 and $1.455 to $1.525 per pound in 2009. Whey prices, in the doldrums after 2007 highs, are expected to average 26.0 to 28.0 cents per pound this year and increase fractionally in 2009 at 26.0 to 29.0 cents per pound.

The Class III price is expected to average $17.65 to $17.85 per cwt in 2008 and slide to $16.75 to $17.75 per cwt in 2009. The Class IV price, in contrast, is forecast higher next year than this year. The price is expected to average $15.80 to $16.10 per cwt in 2008 and rise to $16.10 to $17.20 per cwt in 2009. These price projections apply the new make allowances. The new allowances are planned to go into effect on October 1, pending the outcome of ongoing litigation. Slightly higher production is forecast to tip the all milk price lower into next year. The all milk price is projected at $18.65 to $18.85 per cwt this year, declining to $17.85 to $18.85 per cwt next year.

Further Reading

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