25 May 2007

14 minute read

Cattle/beef: Despite recent precipitation, a large increase in cattle inventories seems unlikely. Heavy cow and calf slaughter, early placement of feeder cattle in feedlots, and the potential for reduced heifer retention as a result of poor fall and winter pasture conditions—along with reduced forage stocks and ethanol-demand-driven high grain prices—are setting the stage for a slower rate of growth in cattle and calf inventories on July 1, 2007 and January 1, 2008.

Dairy: Higher milk and dairy product prices are in the offing for the remainder of 2007 and into 2008. Forecast higher prices could spur increased production in 2008.

Cattle/Beef

Most calves in the United States are born in the spring and weaned in the fall. After weaning, some are put on wheat pasture or other cool-season pasture, some are placed in feedlots, and some are maintained in other ways, primarily native pasture, through the winter. Wheat pasture calves are placed on feed after the first of the year, usually February or March, and fed for about 150 days, going to slaughter at about 17 to 20 months of age. Calves placed on feed at weaning will gain well during their 210 to 240 days on feed, and are marketed at about 15 to 18 months of age. Calves on native pasture during the winter grow some frame, but don’t gain a lot of weight. They will be placed on pasture at about 12 months of age, pastured for 4 to 6 months, then placed on feed. They will remain on feed for about 150 days before going to slaughter. Calves born in the fall have the same options, but are weaned during the next summer, shifting their production phases by 6 to 9 months. In 2006, this normalcy was turned on its head and, at the margins, could affect cattle and calf inventories in 2008 and 2009.

The total cattle inventory on hand January 1, 2008 is expected to be 97 million head, little changed from a year earlier because of poor grazing and forage conditions during 2006 and the winter 2006/07. During the summer, fall, and winter of 2006/07, large numbers of feeder cattle were placed in feedlots earlier than is typical because of reduced pasture and harvested forage supplies. This could result in marginal shifts in beef production and inventories. These lighter cattle were or will be fed for longer periods before slaughter. Despite this delay, they will reach typical final weights.

Had feeder cattle not been placed in feedlots prematurely because of poor pasture conditions, they would have ordinarily gone on feed sometime in 2007. Some would not have been placed on feed until sometime in 2008 after spending their first winter and the next summer on native pasture. Instead, most of these early-placed cattle will be marketed in 2007 and will not be included in the cattle-on-feed inventory for January 1, 2008, thus reducing the total inventory.

Another factor that will contribute to likely lower total cattle inventories on January 1, 2008 is the large numbers of calves sold as bob veal or other veal during the winter 2006/07 and spring 2007. These sales were made because high feed costs were perceived to outweigh their potential value as feeder cattle. Some of the calves sold were undoubtedly beef calves sold at the same time as their dams because of inadequate winter pastures and harvested forages. But the bulk of the animals sold were more likely dairy calves, because growing them into heavy vealers or stocker cattle was considered too costly.

As of May 2007, roughly a fourth of calves that could have eventually become fed cattle were slaughtered instead for veal. Evidence for this is the weekly cumulative calf slaughter through May 11, 27 percent above the same period in 2006, and average weights of calves slaughtered that were 9 percent below weights for the same period in 2006. Under normal conditions, most of these calves would have been included as feeder cattle or cattle on feed on January 1, 2008.

Commercial cow slaughter, 15 percent above first-quarter 2006 and 18 percent above 2005, has also been heavier than that expected under more normal pasture and forage conditions through the fall and winter. Because of the dry pasture conditions, extremely low forage stocks during the winter, and the dairy “Cooperatives Working Together” buyout program, heavy cow slaughter and reduced heifer retention could also prevent much of an increase in July 1, 2007 and January 1, 2008 cow inventories.

Any significant heifer retention will have to come mainly from the 2007 calf crop. These heifers will not be bred until 2008, will not have calves until 2009, and the calves will not be slaughtered as fed cattle until 2010. Increased heifer retention could also limit beef production in 2008 if a larger-than-normal share of heifer calves from the 2007 calf crop is retained for breeding.

Feeder cattle prices remain strong and 9 percent above April 2006 prices (April Oklahoma City feeder steers, Medium number 1, 750-800-pounds). Feeder cattle price strength is due to improved pasture prospects for 2007 resulting from significant precipitation over wide cattle-producing areas during late winter 2006/07. Price strength is also supported because feeder cattle supplies outside feedlots on April 1, at just over 22 million head, were 2 percent above April 1, 2006 supplies and virtually even with 2005 estimates. Fed cattle prices have held up very well, 20 percent above year-earlier prices (April Nebraska Direct Steers, 65-80 percent Choice), with cattle feeders potentially making profits for most of spring 2007.

April monthly average wholesale Choice beef prices were 15 percent above April 2006 prices. The weekly spread between Choice and Select cutout values is below both the value for this time last year and the 5-year average. Average April farmto- wholesale spread in retail beef prices, at $0.42 per pound, are 1 percent below the April 2006 spread. The average April wholesale-to-retail in retail beef prices, at $1.77 per pound, is 2.5 percent below the April 2006 spread of $1.81. The average monthly Choice retail beef price in March, at $4.18, was the highest since June 2005 and was 4 percent higher than the March 2006 price. The April average monthly Choice retail beef price, at $4.29, was also up 6.6 percent from the April 2006 average of $4.02, and is second only to the $4.32 record set in November 2003. These values, combined with variable slaughter rates observed recently, may be indicative of some resistance to prices at the consumer level.

Cattle/Beef Trade

Cattle imports from Mexico during the first quarter totaled about 258,000 head, according to the most recent Commerce Department data, down about 30 percent from the same period in 2006. However, weekly Agricultural Marketing Service (AMS) reports show a year-to-year decline of 22 percent for imports from Mexico through the first week of May, suggesting at least some recent strength. Favorable grazing conditions in most of northern Mexico appear to have kept some cattle there longer than expected in spite of attractive feeder cattle prices in the United States. The Animal and Plant Health Inspection Service (APHIS) recently banned imports of cattle originating in the Mexican border state of Coahuila from entering the United States due to inadequacy of screening for tuberculosis in cattle there. This should have a limited impact on total imports from Mexico, as cattle from Coahuila represented less than 5 percent of all U.S. imports from Mexico.

Cattle imports from Canada during 2007, in contrast, are well ahead of the pace of a year ago. Imports during the first quarter totaled nearly 371,000 head, up 8 percent from the same period last year. Weekly AMS reports through early May show imports from Canada up over 6 percent. Imports of slaughter steers and heifers are up nearly 8 percent over last year, according to AMS, while feeder cattle imports are up by nearly 4 percent. Strong fed cattle prices in the United States appear to account for this overall pattern, with the price differential between Alberta steers and Nebraska Choice Direct steers reaching over US$18/cwt during March. However, since that time Canadian cattle prices have rallied and the Canadian dollar has appreciated about 5 percent against the U.S. dollar, leaving Alberta steers less than $5/cwt below Nebraska prices in the latest AMS report.

Forecast 2007 cattle imports remain unchanged from last month, at 2.2 million head. The current forecast incorporates the expectation that most of the shortfall in Mexican cattle seen so far in 2007 will be offset by higher volumes from Mexico through the rest of the year. The initial forecast of 2008 cattle imports was also released this month. Imports are expected to be down next year, to 2.1 million head, as both the Canadian and Mexican cattle herds are expected to be smaller.

Beef imports during the first quarter of 2007 totaled 770 million pounds, down nearly 9 percent from the first quarter of 2006. Domestic cow slaughter remained well above year-ago levels throughout early 2007, and domestic lean beef prices remained attractive vis-à-vis import prices through most of the period. U.S. cow slaughter has remained high to date, but pasture and forage conditions appear to be off to a good start in 2007 in most regions and should relieve the pressure to cull animals. Beef imports for the remaining three quarters of 2007 are therefore expected to be above year-earlier levels. Notably, first-quarter imports from Australia were down 14 percent from the same period in 2006 and are expected to remain below typical historic levels for some time. Beef production in Australia is expected to be down over the next several quarters as the country attempts to recover from an extensive drought. The Australian industry has moved toward more short-fed production (animals on concentrated grain rations for 90-120 days) to better serve the Japanese and South Korean markets, and Australian exports to these markets have been strong so far in 2007. However, resumed competition from U.S. beef in those Asian markets could pressure Australian feeders to consider other markets in the future.

U.S. imports from Uruguay continue their recovery from the trough experienced through most of 2006. The Uruguayan industry does not expect to defend all of the gains it realized in other markets in 2006 at the expense of Brazil and Argentina, and the U.S. market is likely to absorb much of Uruguay’s product displaced by other South American exporters from Russia, the EU, Chile, and elsewhere. It appears Argentine beef exports will continue to suffer as the Argentine industry struggles with domestic policies that both discourage production and limit exports.

Forecast U.S. beef imports for all of 2007 were reduced to 3.24 billion pounds, an amount still up about 5 percent from the 2006 total. The initial forecast for 2008 imports is 3.30 billion pounds, 2 percent higher than the 2007 forecast. U.S. domestic cow slaughter is expected to decline in 2008 because attractive cattle prices should encourage cow retention, weather permitting. Also, gradual movement of U.S. beef back into Asian markets should displace at least some exports from Australia and New Zealand. However, limited world supplies of lean processing beef make larger year-to-year increases appear more difficult.

U.S. beef exports in the first quarter of 2007 totaled 269 million pounds, up 21 percent from the same period in 2006. Exports to Mexico are not maintaining the pace set in the second half of 2006, which contributed to an annual record for U.S. exports to Mexico last year. Likewise, exports to Canada have fallen from the levels of late 2006, although they are still ahead of year-ago levels. While the U.S. dollar has been depreciating against most currencies over the past few months, the surge in U.S. cut-out beef prices during the same time period has more than offset the currency movement, leaving U.S. beef more expensive. Forecast U.S. exports are also reduced from 320 to 305 million pounds for the second quarter.

Developments in the Japanese and South Korean markets offer some prospects for higher exports in the second half of 2007. In particular, South Korea has altered its customs inspection rules to reject only those boxes of beef found to contain bone fragments, rather than rejecting the entire shipment. To date, a few U.S. beef shipments have already passed inspection and have entered the market. However, the demanding inspection process, which includes X-raying every box to check for bones, suggests slow growth, at least in the near term.

U.S. beef exporters are waiting for the World Organization for Animal Health (known by its French acronym, OIE) to classify the United States as a “controlled risk” country at its annual meeting in late May. This would mean beef produced in the United States would be considered safe for export in OIE’s view, since BSE control measures such as feed bans and removal of specified risk materials result in negligible risk to humans consuming beef produced in such countries. U.S. exporters believe such a classification lends additional weight to U.S. claims of food safety as the United States attempts to negotiate broader access to Japanese, South Korean, and other markets.

Total U.S. beef exports for 2007 are forecast at 1.28 billion pounds, virtually unchanged from last month’s total, although distributed differently throughout the year. The initial beef export forecast for 2008 is 1.52 billion pounds, up almost 18 percent from the 2007 forecast. This increase should come largely through expanding U.S. exports into the major Asian markets. The 2008 forecast total is still only about 60 percent of the record level of exports recorded in 2003.

Dairy

Milk production continues to increase as higher product prices counter higher feed costs. The increase is expected to be only about 1.3 percent for 2007. Cow numbers are expected to move below 2006 levels in the second quarter and are expected to end 2007 slightly below 2006 levels. Production per cow in 2007 is expected to rise 1.4 percent above 2006. As a result, milk production is projected to be 184.2 billion pounds in 2007. In 2008, cow numbers are forecast to be virtually unchanged from this year’s projection. However, output per cow could accelerate slightly in 2008 to 2.0 percent above 2007. Initial forecasts for 2008 place milk production higher at 187.7 billion pounds.

Higher feed costs are being offset by much higher than expected prices for dairy products in the balance of 2007 and into 2008. The bellwether milk-feed price ratio stood at 2.38 for the first quarter of 2007, but could average above 2.5 for the year because of higher dairy product prices and an easing in alfalfa and grain prices. The projected higher milk-feed price ratio could prompt some expansion in both cow numbers and milk per cow in 2008.

Commercial disappearance of butter for January and February 2007 is up 20 percent over the same period in 2006. Commercial disappearance of all cheese is up 3.5 percent, comparing the same two periods, with most of the increase occurring in other than American cheese. While butter disappearance is unlikely to maintain the January-February pace, year-over-year disappearance is expected to increase for both butter and cheese, keeping prices in 2007 above those in 2006.

Butter prices are expected to average $1.325 to $1.405 per pound in 2007. Cheese prices are expected to average $1.475 to $1.525 per pound for the year. The slightly higher production forecast for next year could help ease prices in 2008. Initial forecasts for 2008 place the average butter price at $1.330 to $1.460 for the year and at $1.435 to $1.535 per pound for cheese.

Prices for nonfat dry milk (NDM) are projected to average sharply higher in 2007 than in 2006 and higher still in 2008. While export demand for dry milk products remains strong, demand for low-fat high-protein cheeses is keeping some NDM in domestic uses. Global NDM and other dry milk product supplies will remain tight through the balance of 2007 and into 2008. NDM prices are projected to average $1.375 to $1.415 per pound in 2007 and are forecast to average $1.410 to $1.480 per pound in 2008. NDM prices are expected to begin declining in 2008, however, from highs reached in late 2007. Whey prices are expected to average 68.0 to 71.0 cents a pound in 2007 and 66.0 to 69.0 cents a pound in 2008, driven in part by expansion of new products and uses.

Forecasts, for both this year and next, are for higher milk prices across all classes. The Class IV milk price is expected to climb throughout 2007, averaging $15.60 to $16.20 per cwt for the year. The Class III price is projected to rise to an average $16.05 to $16.55 per cwt for the year. The reported all milk price is expected to be sharply higher in 2007 and will likely average $17.05 to $17.55 per cwt for the year. Strong milk prices will likely continue into 2008. The Class IV price is forecast to average $15.90 to $17.00 per cwt and the Class III prices $15.50 to $16.50 per cwt. The all milk price is forecast to average $17.00 to $18.00 per cwt for 2008.

Further Information

For more information view the full Livestock, Dairy and Poultry Outlook - May 2007 (pdf)

May 2007