29 January 2007

10 minute read

Cattle/Beef:

Seasonal holiday disruptions and snow storms in the western Central Plains temporarily reduced marketings of fed cattle over the last week of 2006 and first weeks of 2007. Hay stocks in some areas are declining rapidly from already-low levels, and cow slaughter has remained heavy in the context of January 1, 2006 cow inventories, primarily due to inadequate winter pastures. Feeder cattle placements for November 2006 were also lower than November 2005 levels, while marketings were up from year-earlier levels, both counts reflecting heavy placements over the past several months.

Dairy:

Continued demand growth, especially for dry products, will combine with a much slower rise in milk production in 2007 to boost prices in the dairy complex. Strong export demand for nonfat dry milk (NDM) is forecast to continue in 2007.

Hay Stocks Down Sharply

Total hay production in 2006 was estimated at 141.7 million tons, down 4 percent from the October forecast and down 6 percent from the 2005 total. Alfalfa hay production was 71.7 million tons, also down 4 percent from the October forecast and 6 percent below 2005. This was the lowest alfalfa hay production since 1951.

Other hay production in 2006 was estimated at 70 million tons, down 3 percent from the October 1 forecast and down 7 percent from 2005. Extremely dry conditions during the summer of 2006 prompted the release of Conservation Reserve Program (CRP) land for hay harvested in 30 States. Most of the CRP land released was in the Great Plains. Oklahoma and Missouri increased harvested acreage by 200,000 acres from last year. Drought conditions contributed to lower yields across much of the northern Rocky Mountains, Great Plains, and Southeast.

Yields across most of the northern Atlantic Coast States increased from last year due to favorable late-season weather. Consequently, hay stocks on December 1, 2006 were 8 percent below a year earlier, and down 16 percent from 2004 and the lowest since 1988. Supplemental hay use has been heavy in many areas since last summer and this winter is already necessitating heavy feeding in many areas. Hay stocks likely will be down sharply at the end of the season, creating additional need for increased hay production in 2007.

The farm price of hay was already up sharply from a year earlier in December, before the series of winter storms forced even heavier supplemental feeding. In December, alfalfa and other hay prices were nearly 16 and 21 percent, respectively, above a year earlier. Alfalfa hay prices averaged $112 a ton, up from $109 in November and $96.90 a year ago. Other hay prices are averaging $99.30 a ton in December, up from $98.10 in November and $82.10 a year ago. A series of winter storms in January, and the realization that hay stocks are even tighter than first believed, likely will result in a lot of hay being retained on farms as insurance against heavier feeding needs compared with the mild winter in 2005/06.

Cow Slaughter May Slow Expansion

Cow slaughter as a proportion of January 1, 2006 cow inventories has remained heavy, primarily due to inadequate winter pastures and rapidly depleting hay stocks that were already low. Commercial cow slaughter, at roughly 5.4 million head for 2006, is 11.7 percent above slaughter for 2005 and 5 percent above 2004. Average annual cow slaughter over the past 10 years has been about 14 percent of January 1 cow inventories, with higher slaughter rates during 10-year cyclical cattle inventory liquidations and lower slaughter rates during expansions.

Annual commercial cow slaughter for 2006 will likely be about 13 percent of January 1, 2006 cow inventories, compared with 11.6 and 12.3 percent of January 1, 2005 and 2004 inventories, respectively. These estimates indicate a reduced rate of inventory expansion during 2006, in contrast to the rate of expansion over the last 2 years.

The Cattle report to be released on February 2 may point to a national cow herd expansion that has slowed, as the January 1, 2007 beef cow inventory may not show a significant increase over January 1, 2006 inventories. The Cattle report, along with the January 2007 Cattle on Feed report, could give some indication of the extent to which heifer retention for cow inventory expansion has been affected by poor forage conditions.

Any significant cow herd expansion will likely come from the 2007 calf crop, implying that actual cow herd expansion could be at a reduced rate until 2009, which could provide support for beef prices for the foreseeable future. Grazing conditions will have to improve in 2007 and hay stocks will need to be rebuilt before producers will feel confident in holding back more heifers for herd expansion. These heifers would not be bred until 2008 and would not calve and begin to add to feeder cattle supplies until 2009.

Calves from these inventory-building efforts will not begin exiting feedlots as market-ready cattle until 2010 or later. Thus, any significant increases in beef production will have to come from heavier slaughter weights, feeder cattle imports from Canada and Mexico, or slaughter cattle imports from Canada, all of which will be dependent on normal pasture conditions during 2007. Recent snows in the Plains States should provide early spring moisture for pasture growth.

Pasture conditions, particularly cool season pastures, including winter wheat, deteriorated throughout the fall of 2006, and feeder cattle entered feedlots at lighter weights and greater numbers than under normal conditions. Significantly higher corn prices have adversely affected feeder steer prices. Fourth-quarter 2006 prices averaged 10 percent below fourth-quarter 2005 prices as higher feeding costs forced down feeder cattle prices.

Fourth-Quarter Year-to-Year Calf Slaughter Increases

Another indication of declining demand for feeder cattle is increased calf slaughter, which occurs when calves are worth less as stockers or feeders due to unfavorable pasture conditions or higher cost of grain. Calf slaughter, mostly of dairy steer calves, was at a record low in 2006, but began to rise above a year earlier last summer as forage conditions declined. Fourth-quarter slaughter rose 15 percent above a year earlier. This was the second year-to-year fourth-quarter increase since the sharp grain price increases in 1995-96 and again in 2002-02.

Estimated calf slaughter weights in early January 2007 are averaging about 20 pounds below January 2006 levels. The lower slaughter calf weights are being offset by higher slaughter levels. Monthly calf slaughter and monthly veal production were higher in October, November, and likely December 2006 than year-earlier levels. These factors suggest more veal calves are being slaughtered rather than being placed on pasture or in other backgrounding situations. Higher corn prices for the feeding sector are coinciding with higher hay prices due to low hay stocks at the start of the winter supplemental feeding season, compounded by the heavy snowstorms that have affected the Central Plains States.

Despite the negative factors in the cattle/beef sector, including deteriorated pasture conditions and higher prices for energy, the cow/calf /feeder sector continues to maintain favorable profits. Calf prices at Oklahoma City were below a year earlier during spotty trading in the first part of January, likely reflecting the poor fall and winter pasture situation, high costs of supplemental winter feeding, and sharply higher corn prices. However, sufficient precipitation this winter to give pastures a more normal start this spring will likely have a favorable impact on feeder cattle prices over the next several months, despite high corn prices due to ethanol demand.

Cattle feeders were in the red, with fed cattle prices currently in the upper $80 range. These prices are supported in part by weather markets and by gradually increasing exports to most traditional pre-BSE international markets, except Korea. Cattle feeders affected by late December 2006-January 2007 snowstorms were hit with higher feed and fuel costs and lower gains, and some feeders encountered high death losses.

The potentially devastating losses for individual cow-calf and feedlot producers will likely translate into relatively minor wholesale and retail market impacts, unless additional severe storms develop. The quarterly Cattle on Feed report to be issued January 26 will likely indicate proportionally more heifers on feed, further signaling a slowdown in the national cow herd expansion. This could lead to a decline in average slaughter weights for all cattle because heifers have lower dressed weights than steers, although continued large cow slaughter will also hold down weight increases.

Markets Continue To Chase Choice Beef

The unseasonably wide spread between Choice and Select cutout values indicates that the market continues to chase Choice cattle, although this spread has narrowed in the last several weeks. During the last few weeks in December 2006, the Choiceover- Select premium was about $17 per cwt, but this has moved below $15 in the last several weeks.

With the beef industry moving past the holiday season, retail markets are settling into more typical patterns. Fourth-quarter 2006 retail prices were 2 percent below 2005 prices. Wholesale-to-retail price spreads widened from a year earlier, with both the retail and packer spreads widening modestly. Some featuring of middle cuts over other lower priced cuts, and the relatively light supplies of Choice beef, could support retail prices.

Exports to South Korea have stalled over bone fragment disputes and purported traces of dioxin. Growth in exports to Japan has been limited by the agreement that U.S. beef exports to Japan be from cattle 20 months of age or younger. Only a limited number of U.S. age-verifiable cattle meet this restriction.

Dairy Product and Milk Prices To Stage Modest Recovery in 2007

Forecast milk production for 2007 is 183.0 billion pounds, up slightly from the 181.8 billion pound total estimated for 2006. Milk feed price ratios fell in 2006 compared to 2005 and will decline again this year, albeit at a slower pace. Higher feed prices will be partially offset by higher milk prices. The U.S. dairy herd is expected to decline modestly from 9,115 million in 2006 to 9,040 million in 2007.

Recent dairy cow slaughter has been above a year earlier. Some of this slaughter likely is herd liquidation, but most of it may be replacement as cow numbers continued to rise in November and December. Production per cow will continue its incremental upward trend, topping 20 thousand pounds per cow in 2007.

According to the December Dairy Products report, November production of cheese, butter, and nonfat dry milk are ahead of year-earlier levels. Low unemployment and robust job creation during the fourth quarter of 2006, combined with rising wages and smaller increases in milk production, should provide a foundation for higher dairy product prices in 2007. Cheese prices finished 2006 at $1.247 per pound, 24 cents lower than 2005.

The outlook is for the cheese price to strengthen in 2007 and the season-average price is forecast at $1.310 to $1.390 per pound. Butter supplies will be ample in light of strong dry product demand. Butter price should stage a recovery in 2007. The butter price averaged $1.219 per pound in 2006, 32 cents lower than 2005. The 2007 price is forecast to climb to $1.235 to $1.345 per pound.

Prices for both NDM and whey have followed a different pattern than cheese and butter. Prices for NDM dipped in 2006 to average 88.74 cents a pound for the year, 5.3 cents below 2005. Prices in 2007 are forecast to recover even more strongly than butter and cheese. The forecast 2007 price for NDM is 93.0 cents to 99.0 cents per pound.

Expected lower exportable supplies in Australia and the European Union and continued demand growth, both foreign and domestic, should continue to strengthen U.S. exports. Whey prices rose throughout most of 2006 and finished at 32.85 cents a pound, 5 cents above the 2005 price. Whey price rises are forecast to continue into 2007 with the yearly average price forecast at 35.5 cents to 38.5 cents a pound for the year. On December 29th, USDA issued an interim order amending the manufacturing (make) allowances in all Federal Marketing Orders for cheese, butter, NDM, and whey. Consequently, most of the reduction in this month’s Class III and Class IV price forecast reflect the change in the make allowance. The comment period will end January 22nd and new formulas will become effective February 1st.

The 2006 Class IV price averaged $11.06 per cwt. In 2007, the price is forecast to rise to $11.35 to $12.25 per cwt. Class III price averaged $11.89 per cwt in 2006 and is expected to climb to $12.50 to $13.30 per cwt in 2007. The resulting reported allmilk price is expected to be $13.60 to $14.40 per cwt. for 2007, after averaging $12.91 per cwt. in 2006.

Further Information