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CME: Cow Slaughter Still Running Below Year Ago Levels

21 July 2014

US - Cow slaughter continues to run significantly below year ago levels on improving moisture conditions in key production areas and above average pasture conditions, write Steve Meyer and Len Steiner.

We estimate that for the week ending 19 July, total cow/bull slaughter will be around 109,000 head, down 17 per cent from a year ago. Cow and bull slaughter has been running 15-20 per cent below year ago levels since April, underscoring the shortage of cull cow availability.

As we have noted before, the shortage of cows has had a direct impact on beef prices, particularly the price of lean beef, with the benchmark 90CL boneless beef prices hittng a weighted average of $295/cwt earlier this week, a 45 per cent increase compared to a year ago.

It appears that some end users may have been caught short in this market, hoping for a break in prices that never materialized. Further exacerbating the shortage has been the significant drawdown in inventories that happened after the first spike in prices in April.

The sharp rise in lean and extra lean grinding beef values has caused a scramble for imported lean beef among those whose spec allows the use of imported grinding products (mostly foodservice).

This has caused the price of 90CL imported boneless beef, which for much of the year traded well below domestic product, to rise sharply in late June and so far in July. Prices for imported lean beef have gained a dime almost every week for the past four weeks and pipeline supplies of lean beef remain very limited.

Australian packers, who effectively are the only game in town at this point, are ramping up shipments to the US and we estimate that Australian beef exports to the US in June will be up about 90 per cent from a year ago. So far, Australian cattle slaughter remains heavy but that will not last for long.

According to the latest Meat and Livestock Australia estimates, Australian cattle inventories as of 30 June 2014 were 26.7 million head, down 8.8 per cent from the previous year. The rate of inventory depletion in Australia has been dramatic due to the impact of drought but it is clearly not sustainable. We expect less beef will be available from Australia in 2015, which will further impact overall lean beef availability in the US.

But back to the US market. The latest USDA Crop Progress report showed that about 55 percent of pastures across the US were rated in good/excellent condition. This is a higher rating than the same period a year ago when 46 per cent of pastures and ranges were rated good/excellent and dramatically better than in 2012 when just 18 per cent were rated G/E .

Current pasture conditions also remain well above the 10 year average for this time period. While summer weather eventually will take its toll on pastures, the strong start to the season has greatly benefited cow producers so far.

Carryover hay stocks recovered significantly this year, with 1 May hay stocks in a number of states showing a dramatic improvement compared to the previous year. The strong start of the season so far this year will further add to hay inventories (except for alfalfa) and expectations are for overall hay supplies to dramatically improve this year, likely matching hay production levels we saw back in 2004. This will not be the case for alfalfa, as drought in California has taken its toll.

According to USDA, total hay acreage that will be harvested this year is expected to be 57.646 million acres, about 1 per cent lower than a year ago. However, better conditions should offset the impact of the smaller acres. The drastically improved situation in the hay market can be seen in the latest price data.

Prices for alfalfa, which remains in short supply, are currently still hovering near all time record levels. According to a monthly USDA report, June alfalfa prices averaged about $222/ton, slightly lower than May levels and surpassing the record levels from a year ago. On the other hand, prices for other hay types in June were $139/ton, 7 per cent lower than the previous month and 5.4 per cent lower than a year ago.

Bottom line: The conditions are in place for cow-calf producers to limit the number of cows they send to market in the next 12 months, which will limit overall lean beef supplies and further contribute to beef price inflation we have seen so far this year.

Daily Livestock Report - Copyright © 2008 CME. All rights reserved.

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