US Beef and Dairy Outlook Report - November 2009

While the dairy export forecast for 2010 appears robust, total US beef exports are expected to decline compared to last year, according to the USDA's ERS November 2009 Livestock, Dairy and Poultry Outlook.
calendar icon 17 November 2009
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USDA Economic Research Service

Highlights

Placements of cattle on feed, cool-season pasture conditions, and other factors imply volatility in beef production and, likely, prices for cattle and beef well into 2010.

Beef/Cattle Trade: Live cattle imports have been lower in 2009 due to weak US prices for feeder and fed cattle. Imports from Mexico have been above last year’s exceptionally low levels, but well below historical figures. Imports from Canada are well below last year, as the price spread between the US and Canadian markets has diminished the incentive for Canadian producers to market in the United States. Beef exports are expected to decrease three per cent in 2009, but strong sales to Asian countries have helped totals. Beef imports are estimated to be seven per cent higher this year.

Dairy: Rising world demand for dairy products and lower than expected milk production, both internationally and in the United States, lead to tightening stocks and rising milk prices for the remainder of 2009 and into 2010.

Placements, Inventories, Crop Progress, and Buyouts Give Conflicting Signals

According to the 10 November 2009 National Agricultural Statistics Service Crop Progress report, winter wheat seeding and emergence rates are several points behind year-earlier status, but, with dry weather, are rapidly catching up in most areas, and general crop conditions are still considered to be excellent relative to normal conditions. However, wheat pasture in some areas could be behind historical averages, which could lead to delayed turnout of stocker cattle, or to no turnout in some cases. Prices for feeder cattle are in line with projected cattle feeding costs and recently observed fed-cattle futures prices. However, the oftobserved price support from cool-season pasture demand, especially wheat pasture, has been notably missing from both cash and feeder cattle futures prices, despite the favorable fall, but may reflect the late emergence and behind-average growth in some areas of the Southern Plains.

A third round of Cooperatives Working together (CWT) dairy herd buyouts was announced on 1 October 2009. According to the CWT, 175,153, cows were removed from herds in the first two retirements of 2009 and an additional 26,000 cows were included in bids accepted in the most recent round.

Given the stress from recent milk prices that are below production costs, some herds which went into the CWT retirements might have been liquidated even without the buyout programme. In addition, according to the Animal and Plant Health Inspection Service surveys, as recently as 2007, 36 per cent of cows are “permanently removed from dairy herds…in a 12-month period.” Thus, although the CWT did increase cow slaughter, it is likely that a higher than normal percentage of cows would have gone to slaughter even in the absence of the CWT. As a result, the additional slaughter of dairy cows removed or expected to be removed due to the CWT programmes is not likely to offset reduced beef cow slaughter in 2009, and will likely leave 2009 total commercial cow slaughter even with or slightly below 2008 slaughter. Cumulative commercial cow slaughter through the end of third-quarter 2009 was half-a-per cent below slaughter for the same period 2008.

According to the Agricultural Marketing Service Estimated Weekly Meat Production Under Federal Inspection for the 7-week period ending 14 November 2009, federally inspected calf slaughter declined by six per cent compared with the same period in 2008. However, due to increases in dressed weights of calves since mid-September, veal production for the same period was down by just over one per cent. Veal in cold storage at the beginning of October 2009 was almost 12 per cent above the year-earlier storage level. However, 1 October cold storage was down 19 per cent from the 1 September high of 10.9 million pounds, the highest since 1986.

Estimates released on 16 October in National Agricultural Statistics Service’s Cattle on Feed report have several implications for both near-term and longer term beef production. First, at 2.341 million head, net placements of cattle in feedlots during September 2009 were large by recent standards. Since September 2000 this total has only been exceeded by 2.361 million head in September 2007 and 2.411 million head in September 2003.

Placements for the third quarter of 2009, at 6.364 million head, were six per cent above the 2008 level and almost four per cent above the 5-year (2004-08) average of 6.17 million head. September 2009 total placements still consisted of a high proportion of heavier animals. Placements of 800-pound-plus cattle were 35.8 per cent of total placements, only slightly smaller than September 2008’s 38.6 per cent, and well above the 2004-08 average of 30.6 per cent.

Placements of 800-pound-plus feeder cattle for both the second and third quarters of 2009 made up a third of total placements (31.2 and 34.7 per cent). These placements of heavy feeder cattle imply either that steer and heifer slaughter over the next two quarters could remain somewhat burdensome relative to demand and/or that dressed weights could continue to be heavier year-over-year through the first half of 2010. However, these quarterly placement numbers include the second lowest May and June net placements since the series began in 1996, and, despite the burdensome outlook for the whole quarter, could lead to some supply relief—and some measure of price support—during November and/or December. Anticipated year-over-year reductions in imports of market-ready fed cattle from Canada into 2010 could also contribute to reduced near-term slaughter and offset some domestically sourced slaughter during the first half of 2010.

Second, the inventory of cattle on feed 1 October 2009 was five per cent above the 1 October 2008 inventory level. This level of feeder cattle placement left feeder cattle supplies outside feedlots on 1 October 2009 at two per cent below the 1 October 2008 level and the lowest October 1 supply of feeder cattle outside feedlots since the current series began in 1996. Reduced supplies of feeder cattle will likely lead to reduced placements in the months to come and the potential for reduced yearover- year beef production for at least part of 2010.

Finally, concerning the proportion of heifers, the 38.5-per cent of steers and heifers on feed, large by observed proportions for the last seven to eight years, further indicates a lack of potential for any near-term cow inventory expansion. This is reinforced by the recent announcement of a third 2009 CWT program dairy cow-herd buyout of an additional 26,000 head.

Cattle feeders enjoyed a recent seasonal uptick in fed cattle prices during late October and early November 2009. This price dynamic is often only a brief seasonal respite for cattle feeders because holiday-related turkey and ham demand begins increasing in November, generally at the expense of beef. At the same time, packers have reduced slaughter. While cattle prices often decline into winter, bottoming in January or February, much uncertainty exists at present. This uncertainty is due to the conflicting effects from the unusually large proportions of heavy-weight feeder cattle placements in the second and third quarters of 2009, the low level of net placements during the second quarter of 2009, and follow-through effects on retail demand as a result of the economic downturn and deepening unemployment.

Beef/Cattle Trade

Soft US Prices for Live Cattle Lead to Lower Imports

The United States is expected to import 1.9 million head of cattle in 2009, the lowest import total since BSE-related bans on Canadian cattle were in place in 2005. Imports from Canada and Mexico have been below recent year-to-date averages. Low prices for feeder and fed cattle, caused by lower demand for beef, and unfavorable currency exchange rates have diminished the incentive for foreign cattle producers to market their livestock in the United States. Imports are expected to increase in 2010 to 2.1 million head, as improved US prices should encourage the shipment of Mexican and Canadian cattle to the United States for further feeding or slaughter.

Mexican cattle imported into the United States are almost all cattle that have been fed on pasture and are being sold for further feeding, either in backgrounding operations or feedlots, in the United States. While year-to-date figures are above last year’s exceptionally low import levels, they are well below the 5-year historical average. Recent pasture conditions in Mexico have been mixed. Some areas near the Texas border have been experiencing the same dry conditions that have occurred in Southern Texas, while other areas further west and south have had better precipitation. Imports from Mexico have been lagging behind historical levels as feeder cattle prices in the Southern Plains remain low, partially as a result of drought conditions in Southern Texas.

Imports of Canadian cattle have also been dramatically lower year-to-date. According to AMS weekly reports, year-to-date feeder cattle imports have been down over 50 per cent and slaughter steers and heifers nearly 20 per cent. Price differentials between US and Canadian cattle markets have been lower than in 2008 and 2007, adjusted for the exchange rate. Both US and Canadian cattle prices have been lower than last year in US dollar terms. However, with a lower price premium than is typical in the United States for Canadian producers, there is less incentive for Canadian cattle producers to market animals in the United States.

Strong Sales to Asian Markets Help Boost Total Beef Exports

Total US beef exports are expected to be 1.825 billion pounds in 2009, a three per cent decline from last year. Despite the expected decline, stronger than previously expected year-to-date increases in sales to Japan, Vietnam, and Hong Kong, as well as steady monthly increases to South Korea, have offset some of the losses in sales to the United States’ two largest foreign customers, Canada and Mexico. With the US dollar continuing to weaken against the currencies of major beef-importing country currencies, US beef should be more competitively priced against Australian and New Zealand beef than earlier this year. US exports are expected to increase almost six per cent next year to 1.925 billion pounds, as foreign demand picks up with macroeconomic conditions that are expected to improve through 2010.

The United States is expected to import 2.72 billion pounds of beef in 2009, a seven per cent year-over-year increase. However, a weaker US dollar makes foreign beef relatively more expensive in the United States, dampening the recent demand for imported beef. In particular, imports of Australian beef, which increased dramatically in the spring when the US dollar was at its strongest, have tapered back in the third and fourth quarters of this year. In 2010, the United States is expected to import 2.795 billion pounds, a three per cent increase from 2009 forecasts.

Dairy

Rebounding Global Demand Combines with Lower Milk Production To Boost Prices in 2010

Dairy cow numbers are expected to continue to decline throughout 2010. The US dairy cow herd is expected to average about two per cent smaller in 2010 than 2009; this contraction comes on the heels of an expected three per cent herd reduction in 2009 compared with 2008. Year-over-year milk per cow is expected to move toward trend level increases as a result of a gradually improving milk-feed price ratio. Corn prices fell in 2008/09 to average $4.06 a bushel and are expected to moderate further to average $3.25-$3.85 a bushel in 2009/10. Soybean meal prices averaged $331 a ton in 2008/09, but are forecast to decline this year to average $250-$310 a ton. Alfalfa prices are expected to decline in 2009 from 2008 and will likely remain moderate next year. The decline in feed prices combined with higher milk prices will improve the milk-feed profitability ratio, but not to a level that signals expansion. The improving returns outlook show support for rising yields per cow over the course of 2010, raising production per cow to 20,950 next year after increasing to a projected 20,570 in 2009. On balance, however, there will be less milk next year as production is forecast at 187.7 billion pounds, an 0.8-per cent slide from the expected 189.1 billion pound production in 2009. Production in 2009 is forecast to decline from 2008 and will be the first decline since 2001.

Rebounding global demand is contributing to the improved price outlook. World demand, especially for butter and powder products, is improving the export outlook on both a fats and skims-solids basis. Total milk equivalent export on a fats basis is forecast to recover to 4.8 billion pounds in 2010 after contracting to 4 billion pounds in 2008; the climb is based mostly on improved butter and butter oil exports. On a skims-solids basis, exports are forecast to reach 25.5 billion pounds next year, a strong rebound from the 2009 projected 22.0 billion pound total. For comparison, skim-solids exports were 26.6 billion pounds in 2008, a year of high milk prices.

An improved outlook for economic recovery in the rest of the world, especially in Asia, combined with lower-than-forecast milk production from Oceania, form the basis for the robust export forecast. The European Union (EU) has ceased purchases of dairy products for intervention in light of increased demand both internally and externally, but the EU has not released product that is in intervention. In the United States, net removals will become negative as dairy products, especially nonfat dry milk (NDM), move out of Government warehouses. Domestic commercial use is forecast to increase only slightly in 2010 on a fats basis and to remain virtually unchanged next year on a skims-solids basis.

Stocks for cheese, butter, and Nonfat Dry Milk (NDM) remain above year-earlier levels, according to the latest Cold Storage report. In fact, stocks for cheese have been above both 2007 and 2008 levels all year. Despite high stocks, prices continue to strengthen, especially for butter and NDM. The improved demand outlook and the prospect of less milk next year will tighten stocks over the course of 2010, strengthening prices across the board. On a milk equivalent basis, ending stocks on both a fats and skims basis are projected to fall to their lowest since 2005 on a fats basis and 2004 on a skim-solids basis.

Stocks for cheese, butter, and NDM remain above year-earlier levels, according to the latest Cold Storage report. In fact, stocks for cheese have been above both 2007 and 2008 levels all year. Despite high stocks, prices continue to strengthen, especially for butter and NDM. The improved demand outlook and the prospect of less milk next year will tighten stocks over the course of 2010, strengthening prices across the board. On a milk equivalent basis, ending stocks on both a fats and skims basis are projected to fall to their lowest since 2005 on a fats basis and 2004 on a skim-solids basis.

Further Reading

- You can view the full report by clicking here.

November 2009

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