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USDA Livestock, Dairy and Poultry Outlook


19 January 2012

USDA LDP: US Beef Prices Higher in 2012, Dairy Prices Under PressureUSDA LDP: US Beef Prices Higher in 2012, Dairy Prices Under Pressure

Despite the drought-induced sell-off of cattle in the South and record-high feed prices, prices for all cattle have held up well in 2011.
Livestock, Dairy and Poultry Outlook

Summary

Beef/Cattle: Recent rains have provided some relief in the drought-affected Southern United States, but La Niña is expected to continue her influence into 2012. Despite the drought-induced sell-off of cattle in the South and record-high feed prices, prices for all cattle have held up well in 2011. However, profit margins for cattle feeders and packers have been largely negative.

Beef/Cattle Trade: US cattle imports for 2012 are forecast at 2.025 million head, or 2 per cent lower than the forecast total for 2011. Beef exports for 2011 are expected to be 21 per cent higher, year-over-year at 2.78 billion pounds. The strength in the US beef export market should continue this year, as exports are expected to be near 2011 levels.

Special Article: “Mexico’s Emerging Role as an Exporter of Beef to the United States”

Dairy: Despite a forecast of a small reduction in herd size from 2011, higher milk per cow will raise milk production in 2012. Exports on both a fats and skims-solids basis are lowered for 2012. The result is lower prices in 2012 than in 2011 for the major dairy products and consequently for the all milk price.

Beef/Cattle

Record Prices but Negative Margins

Pasture and range prospects continue to improve in those areas of the South that have received precipitation over the last several weeks, some getting as much as 200 per cent of normal December precipitation. In the short run, the precipitation will help wheat pasture when it begins to grow in February. With some followup precipitation, precipitation this fall and winter will set the stage for year-over-year improvement in conditions over those observed from October 2010 through March 2011 and will help native pastures begin to grow or recover this spring. The La Niña effect is expected to continue at least into spring of 2012, however, and could affect precipitation patterns in 2012 as it did in 2011.

Cumulative weekly federally inspected “other” cow slaughter--mostly beef cows-- through the week of 31 December 2011 was almost 5 per cent above the same period a year earlier, and was over 14 per cent above same period in 2009. Total annual commercial cow slaughter has been observed at current levels only one time since 1987—in 1996, also a drought year. Commercial cow slaughter in 2011 is on track to equal around 17 per cent of the 1 January 2011 cow inventory compared with 14.9 per cent of the 1 January 1987 cow inventory and 16.3 per cent of 1 January 1996.

USDA’s National Agricultural Statistics Service (NASS) semi-annual Cattle inventory report to be released on 27 January 2012, will provide analysts a better idea of the effect the drought has had on the national cow herd and replacement heifer inventories. However, ahead of the report, the atypically large cow slaughter relative to the 1 January 2011, cow inventory has fueled expectations for an overall year-over-year decline in beef cow inventories, especially in Southern States, and a likely decline in heifer inventories as well. Despite these expectations, it is important to keep in mind that the drought affected an area accounting for roughly 40 per cent of the national beef cow inventory. For the most part, the other 60 per cent of beef cows in the United States enjoyed average or better pasture conditions, and adjustments to their cow inventories could offset to some extent what happened in the South.

Despite the most severe drought in recorded Texas history, record-high corn prices throughout 2011 and recent rains have supported feeder cattle prices, producing several records and pushing some lighter weight feeder cattle prices to $200 or more per cwt. Increasing prices for feeder heifers throughout 2011 reflect both increased interest in placements in feedlots and in cow herd rebuilding. Interest in heifers has increased considerably in the last few weeks as drought-affected producers begin thinking about restocking and others begin to expand their cow herds. Calves from any heifers retained for breeding in 2012 will not be ready for slaughter until sometime in 2014 or later. Producers’ resolve to retain heifers to increase cow herds could likely be tested as heifer prices rise in the face of increasing demand for feeder cattle over the next few years. Net placements of feeder cattle in feedlots of 1,000 head or more through November 2011 averaged 2 per cent higher than the 2010 average.

Net placements in 2010 averaged over 5 per cent higher than 2009 placements. While the placements in 2011 were largely drought-induced, placements in both 2010 and 2011 were from successively smaller calf crops. This generally means calves were “pulled forward” for placement in feedlots; that is, they were placed at lower weights and/or at younger ages than would ideally have been the case. The fact that average annual estimated placement weights have declined since 2008 is consistent with the notion of placing cattle earlier and/or at lighter weights.

Increasing net placements and reducing placement weights are in opposition with respect to total beef production because lighter weight placements generally are marketed at lighter finished weights. The result is more beef from more cattle, but less beef from each animal. Other factors also affect total beef production, including the proportion of heifers in the slaughter mix (more of which decreases average dressed weights); cow slaughter (more of which tends to lower average dressed weights of all cattle while increasing total beef production); bull slaughter (which tends to increase dressed weights and total beef production); and feeding activity in feedlots of less than 1,000-head capacity (more of which increases fed beef and total beef production).

November marketings of fed cattle from 1,000-plus-head feedlots were less than 1 per cent below year-earlier marketings. However, marketings for all of 2011 are likely to exceed 2010’s marketings. Further, based on the large placements of lightweight calves in 2011, marketings for much of the first half of 2012 are expected to exceed those of first-half 2011. Heavy marketings during the first half of 2012 could also result in some downward pressure on fed cattle prices, although anticipation of smaller marketings later in 2012 will likely keep declines from being sharp. The outlook for steer and heifer prices is slightly more bullish for the second half of 2012 and beyond, as second-half 2012 slaughter is expected to be lower than second-half 2011 slaughter. Activities in feedlots of less than 1,000 head could alter this scenario. Some insight into this situation will also be reflected in the total cattle on feed number in this January’s NASS Cattle inventory report.

Wholesale beef cutout values have been on a roller coaster for much of the year. While cutout values in 2011 have been at levels well above both 2010 levels and the 3-year average, except for a period in March and again during late May through September, packers have been unable to maintain sufficient pressure on cattle feeders to lower fed cattle prices enough to widen wholesale margins. Despite record retail prices, packers have also been unable to pass enough of the higher prices through to retailers to keep average packer margins in the black. Retail prices in 2012 are expected to surpass 2011 prices, but by how much will depend on the economic recovery, beef imports, and prices for pork and poultry.

Beef/Cattle Trade

Cattle Imports from Mexico Finish 2011 Strong

US beef cattle imports for 2011 are estimated to have been at 2.075 million head. This is 9 per cent below a year earlier, but still indicative of strong import levels in the face of tightened North American Cattle inventory levels. The seasonal fall peak in US cattle imports from Mexico was again pronounced as imports surged in November to over 189 thousand head. Through December, AMS weekly reports indicated total 2011 cattle imports from Mexico to be 15 per cent above year-earlier levels. Drought extending from Southern Plains down to Northern Mexico, in addition to strong feeder cattle prices, served as the impetus for increased imports from Mexico in 2011. Beginning in July, US imported feeder cattle prices (Las Cruces 500-600 lbs) averaged $34.77 per hundredweight higher than equivalent Mexico City wholesale grass-fed steer prices.

Weekly cattle imports from Canada through December were 19 per cent below a year ago according to AMS reports. Imports of steers and heifers for immediate slaughter averaged 51 per cent higher year-over-year on a weekly basis, although this was not enough to offset lower total Canadian imports stemming from lower imports of Canadian feeder cattle and cows for slaughter. Marketings of Canadian cattle have been above year-earlier levels since June, and placements have been such that marketing numbers and the supply of cattle available for export as steers and heifers for slaughter should remain relatively high into the first half of this year. Imports of Canadian slaughter cows and feeder cattle, however, should continue to remain tight as herd rebuilding efforts are underway in Canada. Total cattle imports will be lower in 2012, forecast at 2.025 million head. Lower imports are expected from both Canada and Mexico.





US Beef Exports Forecast 21 Per Cent Higher in 2011

US beef exports for 2011 are estimated to have been at 2.78 billion pounds, or 21 per cent higher than 2010. Through November US beef exports are 23 per cent higher than a year ago. Much of this growth occurred in exports to Canada (+30 per cent), Japan (+30 per cent), South Korea (+38 per cent), and Hong Kong (+34 per cent). The growth trend in US beef exports to Egypt (+19 per cent) and Russia (+83 per cent) has also continued this year. Exports to Mexico are only fractionally below year-ago levels. In 2012, US beef exports are forecast to be just fractionally below 2011 levels, although total domestic beef production will be about 5 per cent smaller.

Special Article

Rachel J. Johnson and Amy D. Hagerman

US beef imports from Mexico have at least doubled in each of the last 2 years, continuing an upward trend that began in 2003 (fig. 1). The impetus for the increased imports is beef from Mexican Tipo Inspección Federal (TIF) plants and increased production of grain-fed beef, the quality and type of beef US consumers prefer. The increase in coarse grain domestic feed use in Mexico, in addition to increased exports of US feed and distillers’ grains, is evidence of the shift toward fed beef in Mexico.

Beef imports from Mexico in 2010 totaled 107 million pounds, making Mexico the fifth largest exporter of beef to the United States. Through November 2011, imports of beef from Mexico increased by 46 per cent over the same period in 2010. The majority of beef imported by the United States from all sources is processing beef, which is mixed with trim for grinding in the United States. Over the last 10 years, on average over 86 per cent of beef imports to the United States have been boneless, fresh, or frozen meat cuts, much of which is used in processing. This category of imports has increased from Mexico—by nearly 88 per cent in 2010—but is paralleled by increasing imports of bone-in beef cuts as well. Of the bone-in beef cuts imported to the United States in 2010, which excluded processed fresh beef, nearly 42 per cent were supplied by Mexico. However, it is notable that beef imports from Mexico still serve a very small portion of overall US beef consumption1.

There are two reasons for the increasing exports of Mexican beef to the United States: (1) an increase in the number of TIF plants in Mexico (federally inspected slaughter plants meeting standards similar to those in the United States), and (2) an increase in production of grain-fed beef in Mexico, the quality of beef that most often meets the tastes and preferences of US consumers. For meat to be moved across State borders in Mexico or to be exported to the United States, it must be inspected at the Federal level. When the Mexican inspection program began 60 years ago, 15 TIF establishments were operational; that number has grown to 365 TIF plants in 27 States in Mexico, rising almost exponentially in the past few years. In 2010, 75 TIF slaughter establishments were certified, including some preexisting facilities that were converted to adhere to TIF standards. These efforts are being driven by initiatives in Mexico to produce higher quality meat products, become more competitive in the global marketplace, and capture gains from exports. The Secretariat of Agriculture, Livestock, Rural Development, Fisheries and Food (SAGARPA) announced this year that another 100 active slaughter establishments will become certified TIF plants (http://www.sagarpa.gob.mx/saladeprensa/boletines2/Paginas/2011B600.aspx). Through October 2011, Mexico exported beef products valued at $452 million, with 60 per cent of that earned from beef sent to the United States.

The increase in TIF plants has resulted in an increase in boxed beef and higherquality, exportable beef cuts. Since TIF plant production of boxed beef is increasing as it replaces traditional hot-carcass (with viscera) marketing on a value basis, not only is there a greater supply of the primal and sub-primal cuts that are in greater demand by US consumers compared with Mexican consumers— such as tenderloin (filete), loin (lomo), sirloin (aguayón), ribs (costillas), and short ribs (agujas cortas), for example—but there is more trim available for processing. Trim is also in greater demand in the United States relative to the Mexican market, where beef from culled animals is not ground but is consumed as muscle cuts. Mexican consumers tend to prefer the leaner cuts of beef, such as the chuck and round, with little or no marbling, since the traditional grass-fed beef production system in Mexico produces leaner beef.

Although Mexican consumers still prefer traditional cuts and processing methods, changing preferences in certain areas have resulted in growing demand in Mexico for the flavor and other attributes of grain-fed beef. As a result, increasing numbers of cattle are being fed through semi-intensive and intensive feedlot operations (table 1). One limitation to Mexico’s beef production is forage availability, but with greater numbers of cattle finished in the feedlot rather than on pastures, more forage resources are being released for cow-calf production This, in turn, will allow for greater total beef production in Mexico. Grain-fed beef is still produced in a somewhat less intensive system compared with US feedlot production—feeding periods are shorter and carcasses are considerably leaner, with little or no marbling—but this is still a significant shift from the traditionally grass-fed beef production systems where animals have yellow fat and are often 3-4 years old at slaughter.

In addition, feed consumption of coarse grains in Mexico has trended up over the last couple of decades, supporting the expanding Mexican beef production and feedlot industry (fig. 2). The increase in dried distillers’ grains (DDGs) exported to Mexico in recent years (fig. 3) has also supported the increase in Mexican cattle feeding.

An increase in TIF processing capacity, changes in beef demand in Mexico and the increase in Mexican grain-fed cattle for slaughter are resulting in a greater supply of beef available and of interest to the US import market. The Mexican beef industry continues to improve infrastructure and marketing channels but still faces challenges in competing for inputs, feed sources, and forage and land availability from domestic crop production. Mexico has the potential to keep growing as a supplier of beef to the United States as the changes in demand, cattle feeding, and slaughter in recent years are sustained.





Dairy

Modest Increases in Milk Production and Lowered Export Prospects This Year Will Push Down Prices Compared With 2011

The forecast 2011/12 season-average corn price was lowered 20 cents on each end of the range to $5.70 to $6.70 per bushel. Prices received by producers remain below cash bids, limiting upward potential in the season-average farm price. Forecast soybean meal prices were raised this month by $10 a ton on each end of the range to $290 to $320 per ton. The preliminary December milk-feed price ratio was calculated at 1.88 in the December Agricultural Prices report. Based on price forecasts for feed ingredients, 2012 ration values could be somewhat lower than in 2011, but are likely to remain high by historical standards. Milk prices are expected to be lower in 2012 than in 2011, suggesting the milk-feed price ratio is unlikely to improve this year.

Producers may still be adjusting to the rise in feed prices that began last year and the prospect of lower milk prices in 2012. The fourth-quarter 2011 estimate for cow numbers was lowered slightly; but when rounded, resulted in no change from December’s 9,200 thousand head. No change was made in 2011 output per cow, which is projected to be 21,315 pounds. Herd size forecasts for 2012 were unchanged from December, and herd size will likely decline slightly from 2011 to 9,190 thousand head. The total milk production forecasts for both 2011 and 2012 remain unchanged from December at 196.0 and 198.5 billion pounds, respectively. The 27 January Cattle report will provide an indication of producer intentions for heifer retention.

Fat basis milk equivalent imports for 2011 were raised this month from 3.3 to 3.4 billion pounds, due mainly to an unexpectedly large rise in cheese imports in October. Butterfat also logged an increase in October, but not as large as the rise in cheese imports. For 2012, cheese and butterfat imports are expected to remain stable and in line with 2011 levels; consequently, the import forecast is increased slightly to 3.3 billion pounds. The 2011 milk equivalent imports on a skim-solids basis were raised from last month to 5.4 billion pounds. As with the fat basis forecast, higher cheese imports last fall are largely responsible for the rise. The higher skim-solids basis imports for cheese were offset by slower casein imports. The 2012 skim-solids import forecast was adjusted down to 5.1 billion pounds due to lower expected imports of milk protein concentrates.

Fat basis exports for 2011 were unchanged from last month at 9.3 billion pounds. However, there was some shifting among products. Butterfat exports were off sharply for October, but the lower butterfat export was offset by higher cheese and food product exports. The fat basis export forecast for 2012 remains at 8.6 billion pounds, unchanged from December. Butterfat exports are expected to remain weak this year. On a skim-solids basis, 2011 export projections were raised 200 million pounds from December to 33.8 billion pounds due to higher movement in lactose, food products, and infant preparations. Skim-solids basis exports are forecast at 31.9 billion pounds in 2012, unchanged from December.

Year-ending stocks on both a fat and skims-solids basis were adjusted downward slightly for both 2011 and 2012. The lower 2012 ending stock forecast is based largely on lower carryin stocks. Butter stocks at the end of November were above 2010 levels but still below those of 4 out of the most recent 5 years. Stocks of all natural cheeses are above those of the most recent 5 years except for 2010. Similarly, nonfat dry milk (NDM) stocks are above those of the last 5 years except for 2008.

Higher milk production, and lower export prospects in 2012 will pressure prices in 2012 compared with 2011 for all products except whey. The 2012 prices forecasts were changed only slightly this month compared with December. The 2012 cheese price is forecast at $1.655 to $1.735 a pound, down slightly from December. The forecast butter price is unchanged from December at $1.605 to $1.715 a pound. These forecasts are based on the current price weakness for these products. Only NDM and whey prices were raised, based on current price strength and the expectation that export demand will remain firm. The 2012 NDM price is forecast at $1.370 to $1.430 a pound, up slightly from December. Likewise, the whey price forecast was boosted from December to 60.5 to 63.5 cents a pound. The Class III milk price was raised from December to $17.10 to $17.90 per cwt based mostly on expected strong whey prices. The Class IV price was also raised from December to $16.45 to $17.35 per cwt based on higher expected NDM prices. The all milk price is forecast at $18.30 to $19.10 per cwt, also a rise from December.


January 2012

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