27 February 2010

10 minute read

Beef Summary

Another year of liquidation leaves the national cow herd at low levels not seen since 1951. This, combined with total replacement heifer inventories at levels virtually unchanged from 2009 levels, sets the stage for a potential reduction in beef production in 2010 and beyond. However, lower forecast corn prices could lead to more placements of feeder cattle in feedlots, possibly at lighter weights than might otherwise be the case. If enough feeder cattle are pulled forward, both slaughter and beef production could be higher than previously anticipated. The implied longer feeding periods resulting from lighter placement weights could mitigate to some extent any increases in slaughter, though without necessarily resulting in decreased beef production, which is a function of both placement levels and dressed weights.

Increased Retention of Breeding Heifers May Not Translate into Herd Expansion

USDA’s National Agricultural Statistics Service released its Cattle inventory report on January 29. Changes in inventories of replacement heifers were mixed, but were net up only 1/10th of 1 per cent. Both beef and dairy replacement heifers expected to calve in 2010 were up 1 per cent, but total inventories of replacement heifers were down 2 per cent for beef, while up just over 2 per cent for dairy. A clearer picture is seen from the numbers: Beef cow numbers declined by 336,000 from 1 January 2009 to 1 January 2010, and only 18,000 more beef heifers are expected to calve this year than calved in 2009. Dairy cow inventories declined by 252,000 cows, while dairy replacement heifers expected to calve in 2010 increased by 32,000 head compared with the 2009 estimates. The slight increase in all replacement heifers expected to calve is not expected to significantly increase total cow inventories by 1 January 2011.

The decrease in cow inventories and the relatively minor uptick in replacement heifer inventories were not as extensive as had been expected, and so were perceived by industry analysts as somewhat bearish for the longer term. This bearish tone implies negative pressure on future cow-calf profit margins, which also reduces the likelihood of an increase in 1 January 2011 cow inventories. The 2009 calf crop was over 200,000 calves larger than previously expected. The upward revision in the 1 January 2009 cow inventory means that the 2010 calf crop is also likely to be slightly higher than previously expected and will slightly mitigate the potential for reduced beef production in 2011.

Daily federally inspected cow slaughter continued heavy through January (ranging around 20 per cent cows in the slaughter mix). However, the share of cows in the slaughter mix was lower as of 6 February, perhaps indicative of a beginning decline in cow slaughter. Normal culling during 2010, based on the reduced 1 January 2010 cow inventories and given the relatively high slaughter rates in 2008-09, imply reduced commercial cow slaughter for 2010 compared with last year. However, it is difficult to see how beef cow slaughter could continue into 2010 at the same rate as in 2009, even if imports of Canadian cows for slaughter continue at or near year-earlier rates—weekly year-to-date imports of Canadian cows were 39 per cent above comparable year-earlier levels through 6 February. In addition, feeder cattle prices and margins do not provide much incentive for beef cow-calf producers to expand, or perhaps even to maintain cow herd levels. Likewise, dairy producers will undoubtedly take a further look at culling marginal cows, given the increase in inventories of dairy heifers expected to calve in 2010 and the implied pressure on milk prices.

1 January 2010, supplies of feeder cattle outside feedlots—consisting of steers and heifers over 500 pounds and calves under 500 pounds, minus cattle on feed—are essentially unchanged from January 1, 2009. Cattle on feed were down by 214,000 head, the steers-over-500-pounds inventory was down by 329,000 head, other heifers over 500 pounds were up by 79,000 head, and calves under 500 pounds were up by only 1,000 head. These changes amount to a net 463,000 fewer head either already on feed or available for feeding in 2010 compared with 2009, a further indication of beef production likely being reduced in 2010. However, there are some caveats.

With virtually no alternative other than beef production, steers over 500 pounds and the steer half of the calves under 500 pounds will eventually enter feedlots. Heifers, on the other hand, are a bit of a wild card. Some could be retained as replacement heifers, or some of the heifers reported as intended for replacements could still go to feedlots. The final heifer decisions will depend on producer responses to feeding margins, feeder calf prices, summer pasture conditions, and some other factors. For example, increased feeding margins could pull some replacement heifers into feedlots as a means of increasing incomes in 2010. Higher feeder calf prices, especially for heifers, could cause producers to respond in one of two ways: They could retain some heifers in the “other” category for breeding in anticipation of future profits, or they could place some heifers (currently categorized as replacements) on feed in anticipation of short-term profits. A dry year could also send more heifers to feedlots rather than retaining them for any purpose.

Inventories of cattle grazing on small grain pasture in Kansas, Oklahoma, and Texas on 1 January 2010 were 16 per cent above the 1 January 2009 estimate. Because of recent precipitation in the Southern Plains, these cattle are more likely to remain on winter pasture until mid-March. To the extent that these cattle do actually remain on wheat pasture until at least mid March, higher year-over-year net placements in mid-March 2010, when they finally are removed from winter pastures, are possible. This will increase the potential marketings from feedlots during late summer-early fall and ensuing beef production.

Cattle Feeding Margins Near Breakeven

Contributing to the potential for increased placement of feeder cattle in feedlots mid- to late-March and April is the current outlook for positive cattle feeding margins based on the recent run-up in futures prices (April futures in the $90- $93/cwt range) against costs in the mid-to-upper $80 range (High Plains Cattle Feeding Simulator). Feeder cattle could also be placed at heavier weights mid- March through April because favorable pasture conditions—until the recent spate of snowstorms—induced good weight gains. Despite reasonably good wheat pasture conditions, recent weeks of harsh winter weather could mitigate placement at heavier weights, especially if the harsh weather continues.

The Cattle on Feed report released 19 February indicated almost 3 per cent fewer total cattle placed on feed than in January 2009. This year-over-year decline in placements (a 2-per cent decline in net placements) likely represents a redistribution of placements rather than an actual decline. This, combined with the year-over-year decline in January 2010 600-699-pound placements, is indicative of the effects dwindling wheat pasture this time last year had on placements in January 2009.

Marketings of fed cattle are expected to continue to be relatively “current” for the foreseeable future. Marketings will likely be somewhat higher in first-quarter 2010 than would otherwise be the case because of high placement levels in third-quarter 2009, and, since placements were skewed toward the heavy-weight end, could lead to more cattle being slaughtered in the first rather than the second quarter of 2010. On the other hand, the recent winter storms likely slowed gains somewhat and could lead to some redistribution of marketings into the future. The larger placements of potentially heavier-than-typical wheat pasture cattle will begin going to market during the third quarter. There could also be some graze-out cattle because of the decline in wheat prices and quality over the last few years, which could also result in feedlot placements of heavier-than-typical feeder cattle in mid- to late May because cattle on graze-out wheat tend to gain well relative to cattle in other backgrounding programmes.

The extra 200,000+ calves added to the 2009 estimated calf crop will likely translate into slightly higher steer and heifer slaughter than previously anticipated. Most of these extra calves will be marketed from feedlots in 2010. As a result, total 2010 commercial cattle slaughter could be higher than previously estimated by the net of decreased expected commercial cow slaughter and increased expected commercial steer and heifer slaughter. However, total commercial beef production will depend on average dressed weights, which are expected to be lower in 2010 than 2009.

While wholesale prices of competing pork and poultry are again increasing, the seasonal decline in wholesale beef prices that began a few weeks ago were disrupted primarily by the series of winter storms that passed through cattle feeding areas, leading to temporary disruptions in supplies of cattle to packers. Retail Choice beef prices declined 3 per cent in January 2010, year-over-year, and declined 2 per cent from December 2009.

Dairy Summary

Milk production is forecast to decline slightly as yields increase but herd size contracts. A recovering export forecast will strengthen demand, raising prices. Domestic commercial use is expected to rise as economic recovery takes hold.

Dairy Herd Continues To Contract in 2010; Production Declines Slightly, but Lower Feed Prices Improve Producer Profitability

The US milk supply is forecast to decline slightly in 2010 as a continued response to low prices last year. The size of the US dairy herd is expected to decline from an average of 9,200 thousand head in 2009 to an average of 9,015 thousand head this year. A higher-than-expected 1 January dairy replacement heifer estimate suggests that the decline in herd size will be more gradual than earlier forecast. Milk per cow is forecast to increase 1.8 per cent this year, to 20,950 pounds from 20,576 pounds last year.

Feed prices will decline this year as the price of corn is expected to average $3.45 to $3.95 per bushel in the 2009/10 marketing year and soybean meal is forecast to average $270 to $320 per ton. These forecast prices represent substantial declines from $4.20 per bushel for corn and $336 per ton for soybean meal posted for 2008/09. The decline in feed prices will result in higher milk-feed price ratios in 2010. While the improved producer profit outlook is unlikely to launch an expansion, it could limit the rate of decline this year.

Year-ending stocks in 2009 were about 12 per cent higher on a milk equivalent fat basis than at the end of 2008, mostly due to especially high cheese stocks. On a milk equivalent skim-solid basis, stocks were about 3 per cent higher at the end of 2009 compared with 2008. The higher stock levels will limit price increases, at least through the first half of 2010, until they are drawn down.

USDA forecasts dairy product exports to rise substantially in 2010 compared with 2009’s depressed levels. Exports are projected to increase from 4.0 to 4.8 billion pounds on a milk equivalent fat basis and from 22.7 to 25.7 billion pounds on a milk equivalent skim-solid basis. Several factors combine to limit exports below 2008 levels. While Australian production is expected to fall 1 per cent because of drought and high feed prices, production in New Zealand and the European Union (EU) is expected to increase slightly. Also of concern is the ultimate disposition of EU intervention stocks, which stood at 168.4 million pounds of butter and 571.7 million pounds of nonfat dry milk (NDM) as of mid-December 2009. The economic recovery, although underway, is likely to be sluggish in the more advanced countries. The recovery is expected to be more vigorous in the developing countries. A stronger trade-weighted dollar, especially with respect to the Euro, could also limit exports. Domestic commercial use, on a skim-solid basis, is forecast to increase to 168.3 billion pounds in 2010 from 166.4 billion in 2009 and to rise to 188.8 billion pounds from 186.2 billion on a fat basis. Commercial use rose in 2009, mostly due to low prices, but the commercial use forecast this year will hinge more on the strength of economic recovery in light of higher expected prices.

Cheese prices are forecast higher in 2010, at $1.575 to $1.645 per pound. Likewise, butter prices will strengthen in 2010 averaging $1.395 to $1.495 per pound. Prices for dry products will also rise this year. NDM prices are forecast to average $1.175 to $1.235 per pound and whey to average 37.5 to 40.5 cents per pound in 2010.

Based on product price forecasts, milk prices will rise in 2010 from those of 2009. The Class IV price is expected to be $13.95 to $14.75 per cwt, and the Class III price is projected to average $14.90 to $15.60 per cwt. The all milk price is expected to be $16.20 to 16.90 per cwt in 2010.

Further Reading

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