19 December 2006

9 minute read

Corn Demand, Dry Conditions, and Balky Trade Adversely Affecting Cattle/Beef Sector

Cattle/Beef: Ethanol demand for corn and continued dry conditions are driving feed and forage prices significantly higher. These factors, combined with large feedlot inventories, continued heavy cow slaughter, and slowerthan- anticipated increases in beef exports, are keeping beef production higher than 2005 levels, with a corresponding decline in cattle and beef prices.

Dairy: Continued strong demand for dairy products, both international and domestic, will combine with marginally higher 2007 production to boost prices throughout the dairy complex. Cow numbers are expected to decline, but productivity increases will boost production slightly. Global supplies are likely remain tight into 2007, helping to support U.S. dairy prices.

Cattle/Beef

Both grain and forage prices are higher this year than they were at the same time a year ago. November alfalfa prices are up by 11 percent over November 2005 prices, other hay prices are up by 23 percent, and November corn prices are up by about 76 percent from a year ago. Higher hay and corn prices translate into higher feeding costs for the livestock and poultry sectors. The first significant snowstorm of the season and a widespread lack of standing forage have raised concern about current hay stocks. As a result, cows continue to be marketed in large numbers, which will likely slow the current cattle inventory expansion. Hay stocks for December 1, 2006, will be reported in the January Crop Production report.

The situation with respect to corn now is different than the situation that existed in 1995/96. Then, drought had temporarily driven grain prices higher, and, as harvest proceeded, prices came down. The present situation, with continued calls for expanding ethanol production, appears longer term, and prices have increased dramatically through the harvest of what is potentially the third-largest corn crop on record. As corn prices increase, the whole livestock feeding complex will have to make longer-term adjustments that in turn will affect other grains and feeds.

Fed cattle producers may be better able to adapt to higher corn prices than poultry or pork producers because cattle are better able to use distiller’s grains, a coproduct of the ethanol manufacturing process, both because of nutritional reasons and because they tend to be concentrated in large feedlots in relative proximity to ethanol plants. Increasing the percentage of distiller’s grains in cattle rations can offset some of the increased cost of energy in the rations. The amount of corn needed to finish cattle can also be reduced by placing feeder cattle on feed at heavier weights and feeding them for shorter periods. This means heavier feeder cattle might be fed to heavier market weights, although on feed for shorter periods.

Were this to happen, it could also mean more beef produced per head and, as the expansion in cattle inventories continues, more total beef might be produced. This would be tempered somewhat by fewer heifers going to feedlots as more are retained for cow-herd building. In addition, as feeder cattle spend more time on pasture and grow to heavier weights before entering feedlots, forage supplies could become tighter.

There is also a tendency for veal calf slaughter to increase as pasture conditions deteriorate. Monthly calf slaughter has been at or above 2005 levels since May 2006. Veal production surpassed year-earlier levels in March, August, and October, and veal production for October 2006 is 12 percent above October 2005 production.

Higher Corn Prices Have Implications for Feeder Cattle Prices

Higher corn prices have implications for relationships between prices for different weight classes of cattle. Normally, lighter-weight feeder calves sell at premiums to heavier-weight feeder calves (see figure, “U.S. cattle and corn prices.”). These premiums are usually wider when corn prices are lower because gains on cornbased rations are cheaper than pasture-based gains. As corn prices increase, putting weight on calves on pasture becomes cheaper than in the feedlot (note 1996 in the figure). They do not require as much time in the feedlot to reach market weight. The heavier-weight feeder cattle are worth more and consume less higher-priced feed than the lighter feeder cattle. As a result, cattle remain on pasture longer and enter feedlots at heavier weights. Although these cattle are on feed for shorter periods, they can reach higher final weights.

Large numbers of cows have been slaughtered this year, especially beef cows. Large numbers of heifers were expected to calve and enter the herd in 2006, helping to support total cow inventories on January 1, 2007, but at levels only modestly above those of January 1, 2006. However, dry conditions are appearing to reduce the number of heifers retained in 2006, and total cattle and calf inventories on January 1, 2008, could be lower than January 1, 2007, inventories. This could occur because January 1, 2008 cattle and calf inventories will reflect a relatively small calf crop born in 2007. Total cattle and calf inventories on January 1, 2007, will likely be above 2006 inventories because of the current high feedlot inventories and the number of calves outside feedlots.

Despite the recent increase in the percentage of fed cattle grading Choice or better into the 54-56 percent range on a weekly basis, the weekly spread between Choice and Select wholesale beef cutout values again exceeds both last year and the 5-year average spreads. Cumulative total red meat production is almost 4 percent greater than it was at this time last year, with beef leading the pack at almost 6 percent over year-earlier production. Consequently, November 2006 wholesale cutout values for Choice beef declined 3.5 percent below November 2005 levels, while Select prices declined by almost 5 percent.

Retail beef prices (November 2006), at $3.96 per pound, are just over 1 percent below $4.02 in November 2005. The November 2006 farm-to-wholesale and wholesale-to-retail spreads for Choice beef are slightly wider, by 5 and 1.5 percent, respectively, than November 2005 spreads. Despite this, packers continue to struggle with narrow margins.

Beef Trade

The beef export forecast for the fourth quarter was reduced slightly due, first, to some softness observed in exports to Mexico to date, based on weekly reports by the Foreign Agricultural Service, USDA, and, secondly, to the failure of the South Korean market to effectively open to U.S. beef. The South Korean government recently rejected small shipments of beef from three different U.S. packers after small pieces of bone or cartilage were found. The “zero tolerance” standard reflected in these actions appears to preclude meaningful levels of beef exports to South Korea until this issue is resolved. Forecast beef exports for 2007 were also reduced as projected exports to South Korea will lag behind earlier expectations.

Exports to Mexico, while expected to rise in 2007, may not increase as much as previously expected. On a positive note, Colombia and Peru have reopened their markets to U.S. beef products, and shipments to other smaller markets have been growing and should continue to grow through 2007.

The beef import forecast for the fourth quarter was reduced by 80 million pounds, as domestic cow slaughter and, consequently, domestic supplies of lean beef have remained high. Also, countries that routinely supply the U.S. lean beef market continue to favor other markets where they have found better prices for some of their products. Uruguay, for example, continues to ship to destinations such as Russia and Chile. Australia and New Zealand continue to dominate exports to Japan and South Korea. Both of these factors – large domestic supplies of lean beef and suppliers who are shipping elsewhere – also affect the 2007 forecast.

Poor wheat grazing prospects, high hay prices, and related poor feed conditions may extend the higher-than-normal cow culling into early 2007, and cold storage stocks are already at high levels. Australia and New Zealand exports to Asia will likely face less displacement from U.S. exports than was previously expected, because of continued slow recovery of U.S. beef shipments. Uruguay continues to supply markets formerly served by Brazil or Argentina. The 2007 U.S. beef import forecast was reduced to 3.3 billion pounds, which is still up 8 percent over the 2006 expected total.

Milk and Product Prices Forecast To Rise in 2007 as Milk Production Increases Slightly

Milk production in 2006 has continued to expand, although the rate of expansion has slowed as the year has progressed—from 5.1 percent above a year ago in the first quarter to only 1.3 percent in the third quarter. The November Milk Production report estimated October cow numbers at 9.1 million head, 47,000 more than in October 2005 and 2,000 more than in September. The increased cow population comes despite higher culling rates throughout most of 2006. The higher numbers, combined with increased production per cow, will push 2006 production above 2005 by 2.8 percent. The milk-feed price ratio slid to 2.34 in November according to the Agricultural Prices report, a decline of 19 points from October. Prospects for higher milk prices from now into 2007 are countered by stable-to-higher soybean meal prices and substantially higher corn prices, which will result in continued weak milk-feed price ratios.

Based on these data, projected 2006 milk production is 181.9 billion pounds, unchanged from November. Cow numbers are expected to decline slightly in 2007. However, gains in output per cow will offset lower cow numbers. Milk production is expected to post a slight increase resulting in a 0.6-percent rise in 2007 production to 183 billion pounds.

Cheese production and stocks were above year-earlier levels in October, but prices rose sharply on seasonal demand and limited supplies of nonfat dry milk and skim milk powders (NDM/SMP). Better returns on NDM and SMP as well as stronger fluid milk use this year compared with last have reduced the availability of milk for cheese production. Although cheese prices have declined from their peak, the fourth quarter price estimate has been raised from last month. The 2006 yearly average cheese price is expected to be $1.240 to $1.250 per pound, up slightly from November. For 2007, continued strong cheese demand will encounter slower rising milk production and push yearly average cheese price to $1.315 to $1.395 per pound.

Butter stocks are currently high but are being drawn down seasonally. Butter promotions continue at the retail level. Butter prices are expected to average $1.205 to $1.235 per pound in 2006. Butter prices could average higher in 2007 as production growth moderates but ample beginning stocks of butter will likely keep 2007 prices below 2005. For 2007, average butter price is forecast between $1.250 and $1.360 per pound.

Dry product inventories are tight and production rates steady. Thus, NDM prices have been firm to slightly higher in the fourth quarter of 2006. Global supplies of dairy products are also tight helping U.S. export prospects. The tight international situation is likely to continue through the first half of 2007. The average 2006 NDM price is expected to be 87.5 to 89.5 cents per pound. This average price reflects the strengthening seen in the current fourth quarter. The 2007 price should range higher, at 90.5 to 96.5 cents per pound. The whey market continues to show strength in light of robust demand both internationally and domestically. The whey price in 2006 is expected to be 32.5 to 33.5 cents per pound and to strengthen in 2007 to 34.5 to 37.5 cents per pound.

The expected modest increase in milk production in 2007 in the face of strong demand should boost milk prices in 2007. The Class IV price is expected to average $10.95 to $11.15 per hundredweight (cwt) in 2006 and rise to $11.40 to $12.30 in 2007. The Class III price is projected at $11.85 to $11.95 in 2006, climbing to $12.75 to $13.55 in 2007. The expected average all milk price is estimated to be $12.85 to $12.95 in 2006 and $13.70 to $14.50 in 2007.

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