24 January 2009

14 minute read

Beef: Both commercial cow slaughter and calf slaughter remained at high levels throughout 2008 relative to total U.S. cow inventories. These slaughter levels will likely result in lower production for 2009 and beyond, potentially providing support for fedcattle prices. Lower prices for energy and feed could mitigate cow and cattle-feeding inventory declines to some extent, while increased exports of U.S. beef could provide further support for cattle and beef prices.

Beef Trade: Exchange rate fluctuations have been a driving factor in imports of Canadian cattle. Beef exports increase in November, although many large markets show a decline or signs of weakening demand. Beef imports increase as demand around the globe decreases.

Dairy: Milk Production is expected to rise incrementally in 2009. However, weaker demand, especially for exports, will force prices sharply lower for all products. The Government will support prices for the first time since 2006.

Cattle and Beef

Less Beef for the Future?

Indications are that total U.S. commercial cow slaughter for 2008 was 6 percent above 2007, after adjusting for Canadian cow imports and despite a January 1, 2008 U.S. cow-inventory base that was smaller than the January 1, 2007 cow inventory. Banned since the May 2003 Canadian BSE discovery, Canadian cows were again allowed into the United States in November 2007. As a result, U.S. commercial cow slaughter contained only U.S. cows from May 2003 until mid-November 2007. Dry conditions in many parts of the United States, high feed costs and prices for cows throughout most of 2008, and declining feeder cattle prices played roles in increasing cow slaughter. In addition to boosting total 2008 beef production, these higher slaughter levels will almost certainly lead to a reduced January 1, 2009 total U.S. cow inventory and will affect beef production through 2010-11. USDA’s National Agricultural Statistics Service (NASS) will release its January 1 Cattle inventory estimates on January 30, 2009.

Federally inspected (FI) calf slaughter in 2008 also exceeded 2007 levels, which in turn had been 7 percent above 2006 slaughter. Cumulative FI calf slaughter through the week ending December 27, 2008, the last full week in 2008, was 25 percent above calf slaughter through the week of December 29, 2007. It is also significant that increasing calf slaughter in both 2006 and 2007 were based on larger calf crops than the calf crop available for slaughter in 2008. While a number of these calves would have gone for veal production under any scenario, some would have been incorporated into the stocker-feeder system and eventually been slaughtered as fed cattle. This level of calf slaughter will likely lead to a slight reduction in supplies of feeder cattle in 2009 and could contribute to lower feedlot placements into 2010. Despite the large increase in slaughter in 2008, lighter dressed weights of the calves slaughtered has led to only a 3-percent increase in veal production for the year.

Veal is largely consumed in restaurants and hotels in the United States. Except for some cyclical increases, notably in the 1950s, 1970s, 1980s, and 1990s, total annual commercial calf slaughter and veal production have generally declined over at least the last 50 years. Calf slaughter reached a low in 2006, and while veal production in 2008 was up slightly, it was not up enough to significantly interrupt the general long-term downward trend. Partly as a result of the increased calf slaughter, stocks of veal in cold storage facilities increased from a low of just over 1.6 million pounds on June 1, 2005 to an October 1, 2008 high of 7.9 million pounds.

One result of higher U.S. commercial cow and calf slaughter and lower numbers of feeder cattle available for placement on feed during 2008 is the expectation that beef production in 2009 and beyond will be less than 2008 production levels. Increased cow slaughter over the last 2 years could translate into fewer calves born in 2009. In turn, this could lead to decreased beef production in 2010 and beyond, until such time as cow inventories again reach a level supportive of larger calf crops, from which feeder cattle are drawn for feedlot placements.

Cow inventories are increased by retaining sufficient numbers of heifers for breeding from each calf crop. As a result—assuming no external factors, such as weather, distort normal patterns—fewer heifers will be available for placement in feedlots, which reduces cattle-on-feed inventories and subsequent beef production.

While there are some potentially offsetting tradeoffs among the numbers of fed cattle slaughtered, the ratio of steers to heifers, and dressed weights, reduced inventories of cattle on feed will likely lead to reduced fed beef production in the first year or 2 of cow inventory increases. Reduced beef supplies normally translate into higher prices from the ranch to retail—good news for producers, bad news for consumers. As cow inventories increase, successively larger calf crops and feedlot placements will result in successively larger beef production. Increased beef production will likely then result in declining prices—bad news for producers, good news for consumers. The speed at which this scenario unfolds could be modified by continued recovery of post-BSE export markets for U.S. beef.

2008 Ends with Negative Cattle-Feeding Margins

Prices for feed grains and proteins, except for alfalfa hay, peaked during the summer 2008 and trended downward through the harvest season. As a result, feeding costs appear to have peaked, at least for the near term, for cattle fed through the summer and marketed in October 2008 (data from High Plains Cattle Feeding Simulator). However, cattle feeding margins continued to show heavy losses through December 2008, more a result of declining fed cattle prices than the feed price declines for cattle marketed during the last quarter of 2008. With the exception of July, monthly net placements of feeder cattle in 1,000-headplus feedlots were lower, year-over-year, for March through November 2008.

Despite the reduced placements, unpublished data indicate that after April 2008, monthly average placement weights were likely heavier than year-earlier weights. Consistent with a positive correlation between placement weights and slaughter weights, monthly federally inspected dressed weights for steers and heifers averaged above weights for the same months in 2007 through October 2008. November 2008 weights, below their year-earlier average, were an exception.

In 2008, total commercial cow slaughter made up a larger-than-normal share of total commercial cattle slaughter. Dressed weights for cows are generally lighter than steer and heifer weights. Further, the higher-than-usual 2008 cow slaughter resulted in even lighter dressed weights for cows compared with the same months in 2007. As a result, average dressed weights for all cattle slaughtered were above year-earlier weights from February through June 2008 and then below year-earlier weights through November. Correspondingly, monthly beef production in 2008 was above 2007 beef production for most of the first half of 2008 and below 2007 levels for the second half. The net result is that 2008 beef production is shaping up to be virtually unchanged from 2007 production.

Retail Prices Slow To Follow Wholesale Prices Downward

By July 2008, Choice beef cutout values had climbed to levels not seen since the supply-induced October 2003 peak, just prior to the December 2003 U.S. BSE discovery. As the economic downturn became more serious in 2008, beef purchasing patterns shifted from restaurant and hotel dining to shopping for increased home consumption. As a result, two trends could be identified: First, second-half 2008 Choice cutout values declined as retail demand shifted away from hotel-restaurant consumption. Second, demand for Select beef and ground products for at-home consumption increased.

The combination of these two trends meant that the spread between Choice and Select beef cutout values narrowed to a spread that was generally well below both 2007 levels and the 5-year average throughout most of 2008.

Retail Choice beef prices began 2008 at $4.10 per pound and climbed steadily to a new record of $4.53 per pound in August. Choice retail beef prices have been slow to decline since the August high compared with declines in wholesale cutout values over the same period. While Choice cutout values declined by 14 percent from July 2008 to December, Choice retail beef prices remained at a near-record $4.51 per pound in both September and October before declining to a December low of $4.38.

Beef Trade

Canadian Live Cattle Imports Decrease in Second Half of 2008 with Changing Exchange Rates

Live cattle imports from Canada in the final quarter of 2008 were below levels seen in 2007, according to AMS reports. Total weekly imports, which were running above year-earlier levels in the first half of the year, were generally lower in the second half. Imports were most significantly affected by feeder cattle imports, which began increasing in September 2007, primarily driven by the increased cost of feed and a strengthening Canadian dollar.

A strengthening Canadian dollar in late-2007 and early-2008 made beef produced in Canada more expensive for U.S. customers. The United States accounts for nearly all of the Canadian export market. Concurrently, a relatively weak U.S. dollar encouraged beef exports from the United States and increased the cutout value, most likely leading to a counter-intuitive increase in U.S. imports of Canadian cattle during this period. Producing beef in the United States was more profitable than producing and then exporting beef from Canada. According to CanFax, Canadian feedlot inventories show a year-over-year decline beginning in September of 2007, which corresponds to the increased number of Canadian feeder cattle being sent to the United States. According to official trade data, fourth-quarter 2007 cattle imports from Canada increased 63 percent year-over-year, contributing to a 36- percent annual increase in 2007.

The increased number of Canadian feeder cattle continued through the spring of 2008 as the exchange rate between the U.S. and Canadian dollars remained relatively stable. Historically, the summer months have light volumes of cattle trade, as it is the peak grazing season. The year-to-year increase in feeder cattle imports narrowed seasonally in the summer 2008, but then began increasing again in September, consistent with patterns observed in 2006 and 2007. However, in late September and into October, feeder cattle imports declined, diverging from their earlier pattern. It was at this time that the U.S. dollar dramatically strengthened relative to the Canadian dollar, and feed costs for barley in Canada and corn in the United States fell from the summer highs. These conditions, which were the antithesis of those that initially encouraged feeder cattle imports, made Canadian beef more competitive for U.S. buyers.

Slaughter steer and heifer imports, which did not see as dramatic an increase as feeder cattle from the fourth quarter of 2007 through the second quarter of 2008, also declined in the second half of the year. Some of the decrease is likely due to the implementation of mandatory Country-of-Origin-Labeling (COOL) in the United States, which went into effect in September of 2008 and is applicable to cattle imported after July 15, 2008. As a result, packers must segregate the production of foreign animals and presumably alter their purchasing patterns for fed cattle of Canadian origin. However, the more dramatic decrease in steer and heifer imports came in October 2008, again during the period where the U.S. dollar strengthened against the Canadian dollar. Canadian feedlots saw higher placements in the fourth quarter, and inventories have recovered to the levels seen in 2006. This should lead to increased marketings in 2009, which were lower in 11 of the 12 months in 2008.

Total annual U.S. cattle imports for 2008 are expected to be 2.25 million head, down 10 percent from 2007. Cattle imports should continue their decline as the relatively weaker Canadian dollar makes exporting beef to the United States more profitable. In 2009, 2.1 million head of cattle are expected to be imported into the United States from all sources.

U.S. Beef Exports Continue To Increase, but at a Slower Rate

Trade data from November showed 136 million pounds of beef exported by the United States, a 12-percent year-over-year increase. While total U.S. beef exports have increased, exports to the top two importers of U.S. beef, Canada and Mexico, declined year-over-year in November. Exports to Japan increased 17 percent in November compared with last year, much lower than the 44-percent increase in September and the 51-percent increase in October. Exports to South Korea fell by more than half compared with the previous month. Limited storage capacity, a weakening economy, and a depreciating Korean currency all affected U.S. exports to Korea in November. Exports to Vietnam, the Middle East, and the EU have increased from last year, making up for some of the declines in the major markets.

Beef exports are expected to be 1.875 billion pounds for 2008. Exports are expected to increase to 1.92 billion pounds for 2009. Reduced demand from major importers, including Mexico, Japan, and Korea, is expected to continue into 2009. The financial crisis and global economic downturn will likely dampen sales of U.S. high-quality, grain-fed beef in those countries.

Beef Imports Increasing as Global Demand Falls

U.S. beef imports were 206 million pounds in November, an 11-percent increase year-over-year. Imports from Australia were still lower year-over-year, but the drop was less than those seen in the past few months. Australian exports to Russia have decreased since their mid-year peaks as the Russian economy weakens after being very high in the first half of the year. Australian beef has also had to compete with U.S. beef in the South Korean market since July. With reduced demand in other countries, the U.S. remains a solid export market for Australia. U.S. imports of Canadian beef have also continued to increase, partially as a result of the strengthening U.S. dollar.

In 2008, 2.482 billion pounds of beef are expected to be imported by the United States, a 19-percent decrease from 2007. Imports are expected to increase 8 percent in 2009, to 2.68 billion pounds. Reduced demand in both developed and emerging markets should mean that more foreign production is sent to the United States.

Dairy

Cow Numbers Trend Downward in 2009 as Production Adjusts to a Weaker Market and Lower Prices

Despite lower feed costs, flagging demand will likely continue to depress prices and producer profitability in 2009. A lower milk-feed price ratio suggests that weaker prices hold the upper hand over lower feed costs and are pressuring profitability. The U.S. dairy herd is forecast to decline modestly during in 2009 and to average 9.2 million for the year. Output per cow is forecast to inch upward to 20,620 pounds per cow in 2009, less than a 1-percent increase over 2008 and the second year of about a 1-percent growth rate in yield, after adjusting for the 2009 leap day. Despite the lower herd size, the slight yield increase will nudge milk production up to 190.5 billion pounds in 2009, compared with 189.6 billion in 2008. Although down from mid-year peaks, corn prices remain relatively high, while milk prices have dipped. This divergence of feed and milk prices has left dairy producers with a seriously deteriorating profit situation. The milk-feed price ratio in 2009 is forecast to be the lowest since the 1980s.

In light of the recessionary economy, domestic demand is expected to weaken. Restaurant sales are down, and sales of value-added and premium products have also fallen. To the extent that dairy products fall into these categories, demand will be affected. On the other hand, if dairy products become a larger portion of meals consumed at home, there may be some support.

Production in 2008 of all major dairy products, except whey, are above year-ago levels, and inventories are high. The central problem is that domestic demand is insufficient to absorb the increased production, and export prospects are dim. Global recession, higher production abroad, and a stronger dollar are expected to combine to curtail dairy exports in 2009. Commercial exports are projected at 6.7 billion pounds (fat basis) in 2009, a drop from 9.1 billion estimated for 2008. On a skims-solids basis, exports are projected at 23.5 billion pounds this year compared with an estimated 26.5 billion in 2008. Lower prices will likely prompt some additional domestic commercial use in 2009.

Prices for dairy products are sharply lower and will remain so into 2009. Recovery for most products is not anticipated until mid-year. Nonfat dry milk (NDM) producers have shifted production from export to sales to the Commodity Credit Corporation (CCC). Butter movement into CCC has already begun, and some cheese sales to CCC are expected. Higher prices will depend on lowering production to be more in line with demand. Milk Income Loss Contract payments to some producers will boost farm income, but could slow production adjustment.

Dairy product prices will be lower in 2009. Cheese prices are forecast at $1.260 to $1.340 per pound in 2009, down from $1.895 in 2008. Butter prices are forecast at $1.160 to $1.270 per pound this year, compared with $1.436 last year. NDM prices will likely average between 84.0 and 90.0 cents per pound, down from an average $1.226 per pound in 2008. Dry whey prices dropped in 2008 and are forecast to decline further, averaging 18.0 to 21.0 cents per pound in 2009 after averaging 25.0 cents per pound last year. Some price recovery could come in mid-2009, but is largely dependent on adjusting milk production to weaker demand prospects.

Milk prices will decline this year in the wake of product price declines. The Class IV price is forecast to average $10.00 to $10.90 per cwt this year, down from 2008’s $14.65 per cwt average. The Class III price is forecast to average $10.60 to $11.40 per cwt, down from $17.44 per cwt last year. The all milk price is expected to average $11.80 to $12.60 per cwt in 2009, a drop from $18.34 in 2008.

Further Reading

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January 2009