23 November 2007

8 minute read

Cattle/Beef: The cattle and beef sectors are responding to downward pressures, partly seasonal, but also in response to more abundant, lower priced competing meats. These price declines, along with high feed prices and the growing prospect of reduced winter wheat pasture, are also affecting feeder cattle prices. Any price changes will be influenced by changes in U.S. beef trade status.

Dairy: Milk production continues its above-average rise into 2008. Production and stocks of butter and nonfat dry milk have risen in response to higher prices, although stocks have been building. Exports remain strong in the face of tight global supplies and a weak dollar and are expected to limit price declines for the balance of 2007 and into 2008.

Cattle/Beef

Cow Slaughter Above Year Earlier

Weekly total federally inspected cow slaughter continues at rates above year-earlier rates. By itself, this slaughter rate does not appear too unusual, especially in the context of inadequate precipitation in the Southeast United States. Producers there are facing the prospect of overwintering cows on inadequate pastures and of increased prices for scarce harvested forages and other supplemental feeds. However, in the context of a relatively small total cow inventory, and following on the heels of last year’s (2006) weekly slaughter that ranged around 15 percent above 2005 weekly slaughter rates for the same 6-to-9-week period, current slaughter rates imply a potential reduction in total cow inventories. The extent to which inventories may have declined will become known with the January 1, 2008 Cattle inventory estimates.

Calf slaughter weights have remained at relatively low levels, although the rate of calf slaughter has declined. The combination of corn prices, generally well above last year’s prices, lower year-over-year prices for fed cattle and the beef complex in general, and an apparent decline in wheat pasture available for fall and winter grazing, are exerting downward pressure on feeder cattle prices.

Although still almost $5 per cwt above their June 2007 lows, fed cattle prices appear to be slipping from their favorable position relative to wholesale beef cutout values. Other signs of potential downward price pressure are the rapid rise in the percentage of cattle grading Choice or better, record dressed weights, the slightly more rapid decline in the price of 50-percent lean trim vs. fresh 90-percent lean trim, and the relatively large number (the largest for October since 1996) of cattle that have been in feedlots for more than 120 days.

Wholesale beef prices have declined significantly since their April 2007 highs, twice as much as fed cattle prices have declined over the same period, implying heavy declines in packer revenues. Retail beef prices also appear to be responding to downward pressure from more abundant supplies and lower prices for competing meats.

Policy and Exchange Rate Affect Cattle and Beef Trade

The United States imported 1.6 million head of cattle through the third quarter of 2007 according to recently released trade statistics. Cattle imports into the United States in the third quarter were almost 11 percent higher than the same period last year. Cattle imports to the United States are projected to be about 2.6 million head in 2008, up 8 percent from this year’s projection of 2.4 million, due primarily to increased imports expected from Canada.

Weekly reports show that about three times as many feeder cattle have entered the United States from Canada since the end of August compared with the past 2 years. Increased feed costs in Canada and the Canadian dollar’s appreciation against the U.S. dollar encourage producers to sell feeder cattle rather than finish them. With higher feed costs and the strong Canadian dollar expected in 2008, feeder cattle should continue to come from Canada at high levels. The new U.S. Minimum Risk Region policy is scheduled to be implemented on November 19, 2007, allowing age-verified Canadian cattle over 30 months of age born after March 1, 1999 to cross the border into the United States. The new policy will further increase the number of cattle imported, in particular slaughter cows. Expansion of the U.S. dairy herd could lead to replacement dairy heifer increases as well.

Mexico has had good grazing conditions for much of this year, the result of 2 years with adequate precipitation levels. As producers have kept cattle on grass, imports from Mexico have been below last year’s levels since the summer. Producers are expected to take advantage of the good grazing by expanding the herd size, which will limit imports of Mexican cattle into the United States in 2008.

Beef imports appear to be affected by a depreciating dollar. In particular imports from Australia, New Zealand, Canada, and Uruguay — the top four countries providing U.S. imports — trailed off at the end of the third quarter as the U.S. dollar depreciated substantially. Imports from Canada to the United States are anticipated to increase in 2008. The new import regulations regarding Canadian beef from animals over 30 months of age should increase Canadian cow beef imported into the United States. Some of this gain will be offset by decreases in imports of Canadian fed beef into the United States due to increasing feed costs, a strengthening Canadian dollar, and labor concerns for the Canadian meatpacking industry in the western provinces, the same conditions that are behind more Canadian cattle coming into the United States. Severe drought in Australia continues to induce substantial liquidation of their cow herd. If weather conditions in 2008 return to normal, Australian beef exports to the United States may decline as they rebuild their herd. Third-quarter beef imports were 774 million pounds, up 6 percent from last year.

United States exports for the third quarter of 2007 were 424 million pounds, 38 percent above the same period last year. Increased exports to Japan and Canada exceeded the decline in exports to Mexico. A weak U.S. dollar is expected to continue encouraging beef exports in 2008. Lower forecasts reflect the suspension of exports to South Korea pending successful negotiation of new import protocols. Next year’s export levels are expected to increase as U.S. beef continues to regain markets lost due to BSE in 2003.

Dairy

Higher Feed Prices Begin To Curtail Production Expansion, Inventories of Butter and Whey Build, and Exports Remain Strong, Providing Support for Prices

U.S. milk production rose 3.5 percent in October from September’s robust increase, according to the November 16th Milk Production report. Increases in both U.S. cow numbers and production per cow were reported. Higher feed prices, relatively tight supplies of quality alfalfa hay, along with other non-feed inputs, are pushing up costs. In order to maintain expansion, milk prices must remain high. However, inventories of butter and nonfat dry milk (NDM) are above last year, and higher retail prices have softened fluid milk sales.

Dairy cow slaughter in the third quarter averaged about the same as 2006 but increased in October. The milk-feed price ratio, while still showing a profitable situation, likely will retreat in 2008 from its estimated third-quarter high of 3.17. Cow prices remain high, implying continued strong demand for cows, but producers may be using this situation to retire older, less productive animals to reduce costs and gird for somewhat lower milk prices in 2008. However, higher forecast feed prices may exacerbate the cost squeeze and slow the production expansion. USDA is projecting 2007 milk production at 185.3 billion pounds and at 190.1 billion pounds in 2008.

Commercial use of dairy products continued upward in 2007 and is expected to rise again in 2008. Exports are figuring more prominently in overall commercial use. Cheese production in September trailed that of September 2006. Total cheese stocks have been behind year-earlier levels since June. Cheese demand has been strong, and this has firmed cheese prices, especially in the fourth quarter. Increased milk production and less fluid use should make more milk available for cheese production. As a result, cheese prices are forecast to decline into 2008. The cheese price is expected to average in the range of $1.715 to $1.725 per pound in 2007 and decline to $1.605 to $1.695 per pound next year. Limited imports and relatively strong demand should keep prices from dropping precipitously.

Third-quarter butter production was 17 percent ahead of third-quarter 2006. Although stocks declined slightly in September compared with August, they remain 27 percent above September 2006. Butter prices are forecast to average in the $1.330 to $1.360 per pound range in 2007 and the $1.190 to $1.310 per pound range next year as supplies remain large. World butter prices are above current U.S. prices, and butter exports have been on an upward trajectory throughout most of 2007, except for June. The small month-over-month drawdown in stocks suggests that manufacturers are working off inventories.

Nonfat dry milk (NDM) remains in short supply globally, and thus prices for now remain strong. NDM prices are projected to average in the $1.720 to $1.740 per pound range in 2007 and to decline to average in the range of $1.645 to $1.715 per pound in 2008. It is in this sector that higher production to date and next year should ease tight supplies, in both the domestic and export markets.

Dry whey prices rose high enough in 2007 that price-sensitive users cut back on purchases. It appears that prices in the 40-cent-a-pound range will increase whey demand as a feedstuff. Greater availability of whey should keep prices in that range for most of 2008. Whey prices are forecast to average 59.0 to 60.0 cents a pound in 2007 and 43.0 to 46.0 cents a pound in 2008.

The forecast decline in dairy product prices will translate into lower milk prices in 2008. Although higher than in recent years, prices should begin to decline from 2007 highs. The Class IV price is projected to average in the $18.45 to $18.65 per cwt range in 2007 and to decline to average in the range of $17.35 to $18.35 in 2008. Likewise, the Class III price is expected to average from $17.80 to $17.90 per cwt this year and to soften to from $15.75 to $16.65 per cwt next year. The all milk price will average from $18.95 to $19.05 per cwt in 2007, with a decline to between $17.70 and $18.60 per cwt expected in 2008.

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