Summary

Beef/cattle: Lower inventories, especially beef cows, beef replacement heifers, and feeder cattle available for placement in 2008, pave the way for reduced beef supplies in 2008. Domestic economic weakness will contribute to negative pressure on the beef and cattle sectors. Weather and trade will play significant roles in domestic supply and price volatility.

Beef/cattle trade:Beef imports decline as heavy cow slaughter and a weak dollar lower the demand for foreign beef. Exports have also slowed in part due to global economic conditions. Imports of live cattle from Canada continue to be strong in 2008.

Dairy:Milk production will continue upward through most of 2008 lowering prices. However, a weak dollar and the small number of competing suppliers should help US dairy exports and keep demand firm, despite some weakening in domestic demand.

Beef/Cattle

Lower Cattle Inventories Point to Reduced Beef Supplies

January 1, 2008 total cattle and calf inventory estimates, released February 1, 2008 in the National Agricultural Statistics Service’s Cattle report, remained virtually unchanged from both the January 1, 2007 and January 1, 2006 inventories. Cow inventories declined for the second year, attributable to declines in the beef herd, as dairy cow inventories increased by about 2 percent since January 1, 2006. A smaller calf crop in 2007, combined with some anticipated heifer retention in 2008, suggests that fewer cattle may be available for placement on feed during 2008.

However, many of the feeder cattle that would have been placed in 2008 were placed during the last quarter of 2007 when anticipated winter forage sources failed to materialize. Other factors contributing to a negative outlook for cattle inventories include declining prices throughout the beef and cattle complex due to abundant supplies of both pork and poultry, weak economic growth due to higher fuel and food prices, and continuing economic concerns.

Cattle cycles can be defined as total inventories from peak to peak or from trough to trough as used here. Each cycle consists of an expansion phase, a consolidation phase, and a liquidation phase. Historically, and prior to the current cycle, the shortest expansion phase, of 3 years, occurred from 1980 to 1982 when inventories increased by 4 percent from their low. This expansion followed a liquidation that lasted 8 years from 1983 to 1990, when inventories declined by 17 percent. The next cattle cycle peaked in 1996, increasing 8 percent from its 1990 low—a 6-year expansion. This was followed by an 8-year, drought-extended liquidation that saw inventories decline by 8 percent and left a 2004 cattle inventory about a million head lower than the January 1, 1990 trough. The shortest liquidation phase in historical terms occurred during the cattle cycle that began in 1959, peaked in 1965, and bottomed in 1967—a 2-year liquidation. The expansion phase of the current cattle cycle began in 2005 and peaked in 2007. With the January 1, 2008 inventory report, U.S. inventories are 1 year into a liquidation phase. Declines in both beef cow inventories (down 1 percent) and beef heifer inventories (down 4 percent) suggest that further declines are in store for January 1, 2009.

A number of factors in the future could fuel a continuation of the current inventory liquidation. Weather patterns, especially drought, will play a key role under any set of circumstances. Dry conditions have contributed to the weak expansion observed in the current cattle cycle. Other factors supporting further liquidation are the escalating demand for corn due to the congressionally mandated Renewable Fuel Standards for ethanol through the next 15 years; the ethanol-related effects on corn prices and other grains; and competition among various crops for acres. Roughages for cellulosic ethanol production will, at some point, amount to another acreagecompetitive crop. Increased foreign demand for corn and other grains will exacerbate the domestic cattle-grain sector picture. Sustained higher energy prices will increase costs across the board, from basic farm-level production to transport of final retail products. The relatively high value of beef and the much quicker turnaround characteristic of other livestock species will put them at the forefront of any responses to increased demands for meats.Not all factors the cattle sector is facing are necessarily negative. Normal weather would provide some flexibility to the cattle sector, particularly with respect to placement of cattle in feedlots and heifer retention. Relatively abundant pasture could lead to reduced beef production during the latter half of 2008, if feeder cattle could be kept on pasture until they reached heavier weights, thus shortening feeding periods and potentially spreading placements into the future. The impetus for longer grazing will come from cattle feeders themselves because they will face higher feed costs when they do place cattle on feed. Longer pasturing this summer could help alleviate the lower cattle feeding-beef production expectations for 2009, when inventories could be even lower, by pushing placements so far into the future that cattle would not become market-ready until 2009. Increases in trade with Japan and a resumpiton of trade with Korea would strengthen demand and prices for beef that would trickle down to the cattle sector and provide support for live cattle prices.

Cow-Calf Sector the Last To See Returns Deteriorate

Profits in the cow-calf sector continue a steady decline from their 2003 highs, when drought-induced liquidation and disruptions in the flow of Canadian cattle and beef to the United States resulted in low cattle inventories and high cattle and beef prices. Conditions that motivated cow slaughter during the last half of 2007 have eased somewhat this winter, but heavier cow slaughter than is consistent with the January 1 cow inventory could continue through the first quarter of 2008. The slaughter-inducing conditions are high and increasing feed prices, including high prices for poor-quality hay, absence of winter pasture, and a positive but deteriorating profit picture for cow-calf producers.

Beef from cull cattle will offset expected declines in beef from fed cattle slaughter. Cull slaughter has been especially heavy, particularly since Canadian cows and bulls have not contributed their roughly 300,000 head annually to U.S. cull cattle slaughter numbers since May 2003. Cull cow and bull slaughter for the 5 pre-BSE years 1999 through 2003 averaged about 6.4 million head per year and for 2004 through 2007 has averaged 5.8 million head. Average annual total commercial cattle slaughter for the 4-year period is about 3.5 percent below average annual levels for the 5 pre-BSE years. Total commercial beef production is about 1 percent below pre-BSE levels. This relationship between changes in slaughter and beef production is largely due to the United States allowing Canadian beef to be imported after August 2003 and cattle 30 months of age and under to be imported for slaughter (or feeding for slaughter) after July 2005, although it is in addition to trendline weight increases.

There likely will be some increase in Canadian cull cattle and fed cattle exports to the United States, and some shifts between imports of beef from cattle 30 months and younger and cattle older than 30 months (born after March 1999). Canadian packers have some incentives to maintain their packing industry above some minimum level. The strong Canadian dollar also makes exporting lower priced culled animals/beef to the United States more economical than exporting the more expensive under-30-month beef/animals. Higher quality beef can be sold to other countries where Canada has a more favorable exchange rate.Some recent movement of cattle from Canada to the United States has also been weather- and market-driven. Overall U.S. beef production from all sources probably won’t change much as a result of Canadian cattle-beef sector activity.

Feedlot Sector Squeezed in 2008

A smaller calf crop in 2007, combined with some heifer retention in 2008, suggests fewer cattle will be available for placement on feed during 2008. Many cattle that would have been placed in 2008 were placed during the last quarter of 2007. These early placements will be subject to higher feeding costs because of the longer feeding periods required for the cattle to reach market weights, although marketings will likely be shifted only slightly forward. The early placements could result in lower placements later in 2008, because some of the cattle placed early would normally have been overwintered without gaining much weight and then pastured at least part way through the summer before placement later in the year. Feedlot placements will also be affected by the smaller 2007 calf crop.

Cattle feeders will likely face wide feeder cattle-fed cattle price margins and higher feeding costs in 2008. This squeeze will be due to competition this spring for feeder cattle between pasture demand and feedlot demand. Feeder cattle prices could pair with higher prices for corn and other feeds—due to increased demand for corn for ethanol and competition for crop acreages—to generate tight or negative cattle-feeding margins. Fed cattle prices will face pressure from the wholesale beef sector because of excess slaughter capacity, abundant pork and poultry supplies, and the expected lackluster retail sales outlook associated with the weak overall U.S. domestic economic picture.

Fed cattle prices could reach lows both in the near term and during the latter part of the year. Near-term pressure will come from packers being squeezed between wholesale beef cutout values, which are challenged by the current overcapacity, and possible building inventories of market-ready cattle, although evidence for a cattle buildup is mixed. Factors indicating some inventory buildup include the slightlyhigher-than-seasonal values for the percentage of slaughter cattle grading Choice or better, large placements of heavy cattle throughout the fall and winter (2007/08), which should begin to go to slaughter, and recently announced discounts by at least one packer for heavy carcasses. Factors indicating tight supplies of fed cattle include the ability for cattle feeders to maintain relatively high fed cattle prices in the face of current packer margins and abundant supplies of competing meats and the relatively high drop values.

Monthly average wholesale Choice and Select beef cutout values for the last several months have been about even with values for the same months a year earlier, ranging from 2 percent below (Select, October 2007 over 2006; Choice, January 2008 over 2007) to 6 percent above (Select, December 2007 over 2006). Monthly farm-to-wholesale margins have been narrower than a year earlier by as much as 47 percent (July 2007). Although they have improved substantially in recent months (December 2007 down by 14 percent from December 2006), wholesale beef cutout values appear to be insufficient to provide enough revenue for packers to offset losses encountered over the last several months.Offsetting some of the pressure from too-narrow margins, drop values—again approaching record levels (weekly basis as of February 2, 2008)—are favorable to packers, and have been for much of the last year.

Retail Choice beef prices averaged 5 percent higher for December 2007 over December 2006 prices. The annual average retail beef price for 2007, at $4.16, was also 5 percent over 2006 and exceeded the previous 2005 record of $4.09. With total meat disappearance at 83.8 billion pounds (carcass-weight-equivalent), or 221 pounds retail weight per capita, and down fractionally from 2006’s 222 pounds, it will be hard for retail beef prices to maintain these levels in the face of abundant pork and poultry supplies and their concomitant declining prices.

Beef/Cattle Trade

Beef Imports Slow at the End of 2007

Exchange rates and cow slaughter continued to affect beef imports in the final quarter of 2007. Heavy cow slaughter late last year increased the supply of processing meat used for products such as ground beef. Most foreign beef imported into the United States is processing meat. The weak dollar has effectively raised the price of foreign beef. The combination of increased domestic supply and more expensive foreign products has substantially decreased the demand for imported beef.

U.S. beef imports from nearly every major trading partner fell in the final months of 2007. The forecast for 2007 is 3.048 billion pounds of imported beef, which would be the third straight year of declining beef imports. The decline in imports is anticipated to continue, particularly early into 2008, as the resultant meat from the heavy domestic cow slaughter works its way to the marketplace and the dollar remains relatively weak. A slowing economy and the availability of competing meats should also contribute to weaker imports in 2008.

U.S. beef exports also slowed in the fourth quarter of 2007. After accelerating in the second and third quarters, U.S. exports to Japan appear to have since weakened. Domestic wholesale prices of high-value beef have been increasing, potentially affecting export markets. Concerns of a global economic slowdown may also be a major reason for the slower growth in U.S. beef exports, despite the weak dollar, which would make U.S. beef more competitive. New markets have been developing, however. Weekly export sales reports over the past few weeks have shown Vietnam becoming a larger market for U.S. beef. Vietnam joined the WTO in 2007 and has since reduced tariffs on beef. Total export forecasts in 2007 and 2008 are lowered to 1.431 billion pounds and 1.670 billion pounds, respectively, as the developing markets will not eclipse the decline in major export markets.

Based on AMS reports, cattle imports into the United States remained strong through the end of 2007. Cattle imports for 2007 are estimated to have been 2.5 million head, up from 2.289 million head in 2006. Official data will be released on February 15, 2008. The increase was mainly due to feeder cattle from Canada, although imports of slaughter cattle were above those of last year. Policy changes allowing cattle older than 30 months to cross the border also contributed to the increase in total imports.

According to weekly import reports for early 2008, the number of feeder cattle entering from Canada is similar to the past 2 years. This is in contrast to the end of last year, where imports of Canadian feeder cattle were several times higher than in 2006. This year will be the first full year since 2003 that slaughter cows and bulls, as well as breeding males and females, are eligible to be exported to the United States from Canada, which should keep 2008 imports above those of 2007. The forecast for cattle imports into the United States for 2008 is 2.6 million head.

Dairy

Higher Milk Production in 2008 Softens Prices; Exports Bolster Demand

Milk production is forecast to rise 2.7 percent in 2008 over 2007, reaching 190.6 billion pounds. The increase comes as cow numbers are forecast to rise just over 1 percent in 2008. The Cattle report indicated that on the first of the year, dairy cow numbers were 1 percent above the previous January 1st. Operators expected to retain 3 percent more heifers, and heifers expected to calve in 2008 were also 3 percent above a year earlier. This projected herd increase comes in the face of soaring feed prices. Corn is expected to average $3.75 to $4.25 a bushel, and soybean meal is forecast to average $305 to $335 a ton for the 2007/08 marketing year. Alfalfa hay prices will depend on improved weather and producers’ planting responses to high grain prices. Lower milk prices and higher feed costs will likely dampen herd expansion later in 2008. Although production per cow will likely be affected by feed costs and hay availability, output per cow is projected to rise 1.6 percent to 20,605 pounds in 2008. Milk production growth will likely begin to slow in the second half of 2008.

The value of dairy exports set a record in fiscal year (FY) 2007 and is expected to set another in FY 2008. However, expansion is expected to be less robust, and international prices have softened. U.S. cheese exports are forecast to climb 5 percent above 2007’s record 95,000 metric tons. Australian cheese exports are expected to decline again in 2008. Although Australia has finally received some rain, the amounts have been insufficient to overcome lingering drought.

U.S. butter exports should also benefit from the overall tightness in global supplies.

In the European Union, butter production is being sacrificed for increased cheese production, both to meet domestic demand and for export, mostly to Eastern European countries and Russia. With Australia sidelined and a weak dollar, prospects for U.S. butter exports are favorable.

The same favorable conditions hold true for nonfat dry milk (NDM) and other dry milk products, and export prospects remain good for these products. High world prices for skim milk powder have fueled U.S. exports throughout 2007 and could continue to do so in 2008. In 2007, limited domestic availability of the product curtailed exports. In 2008, although there will be more milk, cheese demand could still limit supplies of NDM.

Whey exports soared in early 2007, but then declined and prices fell. In 2008, low prices could stimulate demand, but exportable supplies could be affected by domestic demand for low-fat cheeses.

Prices for U.S. dairy products should be somewhat lower in 2008. Cheese should show the least decline from 2007, with prices averaging $1.635 to $1.705 per pound. Butter prices are expected to average $1.185 to $1.285 per pound in 2008.

Sharper declines are in store for NDM and whey, as prices for them are expected to average $1.380 to $1.440 and 33.5 to 36.5 cents a pound, respectively.

Lower product prices will result in lower milk prices in 2008. The Class IV price is forecast at $15.05 to $15.85 per cwt, substantially below 2007’s average of $18.36 per cwt. The Class III price is expected to decline to $15.45 to $16.15 per cwt, down from 2007’s $18.04 per cwt average. The all milk price is forecast to average $16.85 to $17.55 per cwt, a drop from $19.13 in 2007.

Further Reading

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February 2008