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Livestock, Dairy, and Poultry Outlook

17 November 2008

USDA Economic Research Service

US Cattle Prices are declining and so are beef export sales, but milk production is expected to rise into 2009, reports the United States Department of Agriculture Livestock, Dairy and Poultry Outlook.

Beef Exports Decline as Dollar Strengthens and Global Economy Weakens


Cattle: Fed cattle prices have declined by almost 9 percent since their high in August 2008, and wholesale cutout values have declined by 15 percent from their peak in July 2008. Commercial cow slaughter is increasing seasonally into the fourth quarter of 2008, and cow prices are declining. Higher interest rates and equity requirements could adversely affect wheat pasture grazing opportunities as well as demand for lighter feeder cattle, thus affecting feeder cattle prices.

Beef/Cattle Trade: FAS Export Sales Reports show declines in U.S. beef exports, likely affected by a strengthening of the dollar, declining global demand for more expensive cuts of grain-fed beef, and obstacles in financing due to tightening credit markets. Cattle imported into the United States from all sources are expected to decline 12 percent from last year to 2.2 million head. Cattle from Mexico are still well behind historical levels.

Dairy: Milk production will advance slightly in 2009 on yields as cow numbers decline modestly. Weakening demand, especially exports, presage lower prices across the board in 2009.

Cattle

Cow Slaughter Continues at High Rate

Establishment of wheat pasture is beginning to be hampered by lack of rain in some areas. Producers in some localized areas are expressing reluctance to turn cattle out on wheat that has temporarily stopped growing due to lack of moisture. While credit appears to be available, some rural banks are requiring extra equity for agricultural loans, and interest rates have crept upward over the last several weeks. These factors could affect wheat pasture grazing if current economic conditions persist into the fall and adversely affect the demand for lighter feeder cattle, and thus feeder cattle prices as well.

Commercial cow and bull slaughter is increasing seasonally into November 2008 and continues at a high rate, despite being an atypically large share of the U.S. cow herd. Despite uncertainty over mandatory country-of-origin labeling and appreciation of the U.S. dollar vs. the Canadian dollar, an increase in imports of Canadian cows and bulls is contributing to the seasonal increase in U.S. commercial slaughter. Cow prices have declined 20 percent from July 2008 highs. The continuing high cow slaughter will likely have implications for the January 1 estimates of cow inventories in the National Agricultural Statistics Service’s Cattle report to be released January 30, 2009.

Calf slaughter also continues at a high rate, and calf slaughter weights remain low relative to recent years. The light slaughter weights reflect low or negative profit margins for calves, along with producers’ responses to relatively high feed prices, despite recent declines in feed prices and improved feed cost prospects into 2009. For the 6-week period ending November 8, 2008, weekly data indicate declines of 13 percent in average dressed weights of calves and vealers from the same period in 2007.

Estimated feeder cattle supplies outside feedlots on October 1, 2008 were 1.5 percent above the 2007 number. However, feeder cattle supplies in 2009 are likely to be relatively low because of the small 2008 calf crop. In addition, high calf slaughter will likely reduce the availability of feeder cattle into 2009 as perhaps as many as a fourth of calves slaughtered could have become feeder cattle rather than vealers. The reduced feeder-cattle supply in 2009 and 2010 will be exacerbated by fewer imports of Canadian feeder cattle coming into the United States than were imported in 2007.

Average federally inspected dressed weights appear to have peaked seasonally. Heavier weights for slaughter steers and heifers have accounted for most of the increases in average dressed weights in 2008. In addition, average weekly federally inspected dressed weights for steers and heifers for the 6 weeks ending November 1, 2008 were fractionally higher than year-earlier weights for the same 6-week period. Cow weights were 1 percent under year-earlier averages for the same period. The heavy live and dressed weights of steers and heifers may be an indication of increasing weights of feeder cattle previously placed on feed. It may also be an indication that most of last fall and winter’s lightweight placements have been marketed. This rationale is consistent with monthly NASS Cattle on Feed estimates by weight group and reflects the positive relationship between fed-cattle slaughter weights and corresponding placement weights.

Heavier average slaughter weights for fed cattle may also indicate that most of the feeder cattle placed on feed last fall and winter at atypically lighter weights, due partly to limited availability of wheat-pasture, have been marketed. If so, marketings from now into 2009 could consist of placements of cattle at heavier weights. These heavier cattle could be marketed in varying volumes, potentially creating some price volatility as marketings fluctuate between periods of high and low supplies of market-ready fed cattle. Year-over-year reductions in net placements since March 2008, except for July 2008, will reduce supplies of fed cattle for the remainder of 2008 and likely into 2009 and will likely support prices.

Prices for fed cattle and feeder cattle had weakened in recent weeks, declining as much as 7 percent for fed cattle (Nebraska) and 13 percent for feeder cattle (Oklahoma City) from their summer 2008 highs. Cattle marketed for at least the rest of 2008 will likely have been fed relatively high-priced feed, with breakeven prices for fed cattle well over $100 per cwt. Despite recent improvement in fedcattle prices, these costs are not likely to be covered by fed-cattle prices at levels anticipated during fourth-quarter 2008. Recent declines in feeder cattle prices reflect these negative cattle-feeding profit margins. For the moment, at least, prices for feeder cattle, feed grains, and fed cattle are consistent with one another in terms of typical cattle-feeding breakevens, primarily at the expense of the cowcalf producer.

Total commercial cattle slaughter is declining compared with recent months, primarily because steer and heifer slaughter is declining as a result of wholesale cutout values. Despite recent improvements in wholesale cutout values due to reduced slaughter, cutout values have declined from their July 2008 highs due to current economic conditions, slight appreciation in the value of the dollar, and declining margins for packers. Byproduct values that contribute to packer margins have also declined, due in part to gains in the value of the dollar against other currencies. At-home beef consumption continues to increase, especially of the less expensive cuts and ground meat products, at the expense of higher-valued cuts and away-from-home consumption.

Beef/Cattle Trade

Beef Exports Decline as Dollar Strengthens and Global Economy Weakens

Weekly FAS Export Sales Reports show declines in U.S. beef exports, likely affected by a strengthening of the dollar, declining global demand for more expensive cuts of grain-fed beef, and obstacles in financing due to tightening credit markets. The reports have shown generally lower weekly export figures for the month of October, particularly to Mexico, Japan, and South Korea. The decline in outstanding sales to Mexico, the largest importer of U.S. beef, accelerated in September and continued through October, signifying that orders are slowing.

Shipments of U.S. beef began reentering South Korea in mid-July and grew quickly to make South Korea the third largest export market for U.S. beef in the 3rd quarter, behind Mexico and Canada. However, most major Korean retail stores are not yet selling U.S. beef, limiting retail sales. With Korean cold storage facilities filled to near capacity, future exports of U.S. beef will hinge upon higher volumes of retail sales and how quickly U.S. beef can regain market share. This could be difficult in the face of a downturn in the Korean economy due to the worldwide deterioration in credit conditions.

Beef exports in the third quarter were 609 million pounds, which was 43 percent higher year-over-year. However, the outlook for the 4th quarter does not support growth continuing at such a high rate. Exports for 2008 are expected to be 1.841 billion pounds, a 28-percent increase from last year. Next year, exports are expected to increase only 4 percent, to 1.92 billion pounds, as demand for Mexico and other smaller and emerging markets is expected to decline.

U.S. imports of beef in the third quarter fell 24 percent year-over-year, totaling 584 million pounds. U.S. Imports of beef from Australia, which have generally been the largest supply of foreign beef to U.S. markets, have fallen 32 percent through the third quarter. Drought-induced herd liquidation over the past few years has subsided as Australian ranchers attempt to rebuild their herds. The Australian winter saw ample precipitation in the northeastern areas, while the southeastern region was a bit dryer. The beginning of the Australian spring season has been much dryer. If fragile pastures do not receive adequate rain, attempts to expand herds will be much more difficult. If the herd rebuilding efforts take hold in Australia, Australian exports to the United States could continue their short-term decline. Conversely, if producers were forced to liquidate, the increased slaughter could result in a short-term increase in beef exports to the United States.

In 2008, imports are expected to decrease 20 percent to 2.443 billion pounds. Next year, 2.595 billion pounds of beef are expected to be imported into the United States. This would be first time since 2004 that imports have increased.

Cattle Imports Expected To Decline in 2008 and 2009

Cattle imports into the United States from all sources are expected to decline 12 percent from last year to 2.2 million head. Cattle from Mexico are still well behind historical levels. Weekly AMS reports show imports from Mexico are 43 percent below 2007 levels through November 1, year-to-date. Mexico received ample rainfall through September, leaving pasture conditions very good, even with less rainfall in October.

Imports of Canadian cattle have not been as high as they were in the fall of 2007 according to AMS reports. One of the major factors in last year’s influx of imports was the strong Canadian dollar, which discouraged exports of Canadian beef. With a stronger U.S. dollar, Canadian beef exporters reap higher profits. U.S. imports of Canadian steers and heifers for immediate slaughter have not increased seasonally as much as usual over the past few weeks, according to AMS reports. Imports of Canadian feeder cattle have also been below 2007 levels over the past weeks. Canadian cows sent for immediate slaughter have begun to increase as they begin to be culled from herds as winter begins. Cattle older than 30 months were not able to be imported into the United States from Canada until November of last year. Since then, Canadian cows and bulls have contributed to the increase in U.S. cow and bull slaughter this year.

In 2009, 2.1 million head of cattle are expected to be imported into the United States. Exchange rates and relative profit margins of U.S. and Canadian cattle feeders and packers will affect demand for live animals.

Dairy

Lower Demand, Both Foreign and Domestic, Combine with Slightly Higher Production To Pressure Prices in 2009

Milk production is expected to inch ahead through the fall quarter as both cow numbers and yield are slightly higher on a year-over-year basis. Cow numbers are expected to retreat through the balance of 2008 and into 2009. However, feed costs have plummeted and alfalfa prices have fallen, but proportionally less than either corn or soybean meal. Lower feed costs will likely help boost feeding rates hence yields. Milk production will likely increase about 1 percent next year, reaching 191.5 billion pounds in 2009. The projected rate of growth is well below rates of increase in recent years. Slightly higher production will encounter weaker demand, both foreign and domestic, pressuring prices.

While August exports showed a rebound from July, the most recent export data, September, show a month-over-month decline, with butter declining sharply. Cumulative exports of cheese, butter and nonfat dry milk (NDM) are ahead of year earlier levels except for whey exports, which are well behind last year. Export demand is expected to weaken through the fall quarter and into 2009. New Zealand and Australian milk production is expected to climb above year earlier levels in 2009. Increased supply from major competitors and a weakening global economy will curb exports next year. Both foreign and domestic demand is adversely affected by the onset of economic slowdown.

Prices across the board are showing weakness, especially for whey and NDM. NDM prices have declined through October according to NASS and averaged 91 cents a pound by the end of October. By early November, the Commodity Credit Corporation (CCC) had agreed to purchase of 48 million pounds of NDM at the 80 cent per pound support price.

Butter prices have fared best during October and have increased by over 2 cents per pound since early October. As butter exports are expected to weaken in the coming months, butter prices should fall. Prices for cheese declined about 5 cents per pound in October and will likely decline gradually into next year. Prices for all milk powders and whey are expected to decline in 2009. Forecast milk equivalent stocks have been adjusted downward on a skims basis as lower prices should boost domestic use.

Prices are forecast lower next year for all major dairy products. Cheese prices are expected to average $1.880 to $1.890 per pound this year and $1.675 to $1.765 per pound in 2009. Butter prices should average $1.455 to $1.485 per pound in 2008 dropping slightly to average $1.390 to $1.510 next year. NDM prices are expected to average between $1.225 to 1.245 per pound and drop to 90.0 to 97.0 cents per pound in 2009. Whey prices, which declined sharply in 2008, are expected to average 24.5 to 25.5 cents per pound this year and 19.0 to 22.0 cents next year.

Falling product prices will have their expected impact on milk prices. Class III milk, which is expected to average $17.30 to $17.40 per cwt in 2008, is forecast to decline to $14.75 to $15.65 per cwt in 2009. Class IV milk prices are forecast to decline from an average $14.75 to $14.95 per cwt in 2008 to $11.50 to $12.50 per cwt in 2009. The all milk price, which is expected to average $18.30 to 18.40 per cwt in 2008, is forecast to slide to $15.30 to 16.20 per cwt in 2009.

Further Reading

- You can view the full report by clicking here.

November 2008

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