US Beef and Dairy Outlook Report - February 2009

High commercial cow slaughter levels imply a reduced calf crops over the next couple of years, whilst falling milk production and exports are expected to lower prices, says the USDA's Economic Research Service in its February 2009: Livestock, Dairy and Poultry Outlook Report.
calendar icon 17 February 2009
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USDA Economic Research Service

Beef/Cattle: Continuing high levels of commercial cow slaughter, despite lower January 1 cattle inventories, imply reduced calf crops in 2009 and 2010. Negative cattle feeding margins since early 2007 will continue into 2009. These and other factors have implications for beef production into at least 2011.

Beef/Cattle Trade: Beef exports in 2008 were 32 percent above 2007 totals, primarily due to strong export markets in the middle of the year. Beef imports fell for the fourth straight year, 17 percent below 2007 imports. Global economic conditions.

Dairy: Milk production is forecast to decline slightly as yields increase but herd size contracts. A much lower export forecast increases domestic supplies and weakens prices. Domestic commercial use could rise fractionally as lower prices boost sales.


Cattle Inventories Continue To Decline

USDA’s National Agricultural Statistics Service (NASS) estimated year-over-year reductions in inventories of beef cows, beef replacement heifers, and calves under 500 pounds in its January 1, 2009, Cattle inventories report released January 30. It also reported downward adjustments in January 1, 2008, inventories for every category except cattle on feed. As a result, placements, steer and heifer slaughter, and cow slaughter during 2008 were all from a smaller base than previously thought. Total U.S. commercial cow slaughter for 2008, at 6.27 million cows, was 8.7 percent above 2007’s slaughter of 5.766 million cows.

Total U.S. commercial cow slaughter in 2008 was enhanced by imports of cows from Canada. From May 2003, when bovine spongiform encephalopathy (BSE) was confirmed in Canada, until November 2007, Canadian cows were not allowed into the United States. As a result, U.S. commercial cow slaughter contained only U.S. cows from May 2003. Based on weekly import data, beginning in November 2007, Canadian cows imported for slaughter accounted for almost 16,000 head of the U.S. total commercial cow slaughter during 2007. In 2008, another 157,000 head of Canadian cows were imported for slaughter in the United States. Adjusting for these Canadian cow imports still leaves an increase of 6 percent in the number of U.S. domestically raised cows slaughtered in 2008 over 2007.

The U.S.-sourced component of 2008 U.S. commercial cow slaughter accounts for almost 15 percent of the January 1, 2008, U.S. cow inventories. In 2007, U.S. commercial cow slaughter was 14 percent of the January 1, 2007, U.S. cowinventory base. These slaughter shares of cow inventories are similar to those of previous cattle cycle liquidation phases. For example, cattle inventory dynamics since 2004 have been similar to the dynamics that occurred during the cattle cycle that began in 1980, peaked in 1982, and reached a subsequent low in 1990. That cycle also exhibited a 3-year expansion phase and was followed by an 8-year liquidation phase, during which total cow slaughter rates (inclusive of imported Canadian cows) reached a peak of almost 18 percent of the January 1, 1986, cowherd base.

Several factors supported the high 2008 cow slaughter levels: (1) dry conditions in many parts of the United States since 2006 or, in the inter-mountain West, since even before 2001, (2) feed costs that have been at historically high levels during much of 2008, despite declines beginning in midsummer (3) attractive prices for culled cows throughout most of 2008, and (4) year-over-year declines in feeder cattle prices that began as early as summer 2007. The increased cow slaughter, plus the influx of Canadian cows and heavier dressed weights for steers and heifers, led to total U.S. beef production in 2008 that was higher—albeit by less than 1 percent—than in 2007, despite steer and heifer slaughter that was almost 2 percent below 2007. These higher slaughter levels led to reduced total 2008 U.S. cow inventories for 2009.

The NASS Cattle report indicated that heifer retention, except for dairy, has been insufficient to maintain cow inventories in the face of cow slaughter levels for the last 2 years. The upshot of the result is that liquidation has been more intense than many industry analysts originally thought. Given the heifer retention indicated in the report and expected cow slaughter during 2009, the January 1, 2010, cow inventory could also be down.

Commercial dairy cow slaughter as a result of the latest round of the industry’s Cooperatives Working Together (CWT) program will contribute to increased January 2009 dairy cow slaughter. If they were to occur, additional dairy herd buyouts during 2009 could result in higher than normal dairy cow slaughter.

Regardless of what happens to dairy cow slaughter levels in 2009, the implied potential for reduced total calf crops for 2009 and 2010 is virtually certain and will impact feeder cattle supplies and subsequent beef production through at least 2011. Heifer retention at herd-building levels, when it does begin, will contribute further to reduced feeder cattle supplies, and—assuming external factors, such as weather or animal disease-motivated trade disruptions, do not occur—fewer heifers will be available for placement in feedlots. Further reductions in both cattle-on-feed inventories and subsequent beef production will result.

Cattle Feeding Declines as Negative Margins Continue

While wheat pasture in the Southern Plains got off to a good start during fall 2008, it has since deteriorated significantly in some of the areas that are normally grazed during the winter. Estimated January 1, 2009, inventories of feeder cattle outside feedlots—slightly higher than January 1, 2008, inventories—included the smallest inventory of cattle on small grains pasture in 2001, when collection of the data series began.

Additional factors compound these inventory dynamics. NASS’s Cattle on Feed reports have indicated generally reduced year-over-year net placements in 1,000+ head feedlots since March 2008, except for July 2008, up almost 4 percent from July 2007. The absence of cattle on small grains pastures and reduced year-overyear feedlot placements may indicate that feeder cattle are alternatively being sustained on low- or no-growth forage-based feeding regimes. The recent yearover- year increases in weekly imports of Mexican feeder cattle also support the notion that cattle are being held out of feedlots as long as possible. These long-held domestic and Mexican feeder cattle supplies could be marketed and/or placed in feedlots at any time, probably in conjunction with feeder cattle price rallies. Weather-induced departures from normal pasture conditions could also be a factor as to when these feeder cattle are placed in feedlots.

Prices for feed grains, proteins, and hay peaked during mid-2008 and have trended generally downward since, resulting in declining feeding costs for both any feeder cattle being held out of feedlots and fed cattle marketed since October 2008 (when feeding margins were at their most negative). Another reason for reduced feeder cattle placements in feedlots is that, while prices for feeds have generally declined since midsummer, fed cattle prices have declined more sharply. As a result, cattle feeding margins continue to show heavy losses through January 2009.

Based on current expectations for feed prices and in the absence of any sustained rallies in fed cattle prices, negative margins for cattle feeding will likely continue for several more months. The feedlot placement of heavy feeder cattle during any feeder cattle price rallies or declining pasture conditions could contribute to some fed cattle price volatility when they are marketed as fed cattle in 2009.

These factors, combined with reduced kills expected for the remainder of this winter due to below-year-earlier feeder cattle placements in feedlots, could result in lower beef supplies for much of 2009 compared with those of 2008. However, heavier cattle placed on feed could result in heavier average dressed weights that could somewhat mitigate the negative effects of lower placements on beef production. Effects on beef production from heavier dressed weights could be even greater if cattle feeders retain finished cattle in hopes of higher prices.

Economic Conditions Impacting Beef Consumption

Wholesale cutout values have been below year-earlier levels 7 out of the last 10 weeks. This decline in values is due to a combination of factors. One factor is the inability of packers to sufficiently clear product from building inventories. Cold storage stocks have increased since midsummer 2008 as a result of reduced orders for U.S. beef in international beef markets. Seasonal consumption patterns of reduced demand for middle meats, popular for summer grilling, are also contributing to increasing cold storage stocks.

Increased job losses and other aspects of current domestic economic conditions have dampened consumers’ willingness to dine away from home except in fast-food and casual dining establishments. This decline in eating out has resulted in a shift away from higher quality beef to lower priced beef cuts and processing beef (e.g., ground products) and a narrowing of the spread between Choice and Select cutout values. Lower prices for meat products from pork and poultry are also contributing to downward pressures on beef prices. While packers have recently enjoyed positive margins, declining supplies of fed cattle and the potential for lower retail prices are expected to squeeze packer margins.

Beef/Cattle Trade

Beef Exports Increase 32 Percent in 2008

U.S. beef exports were 1.888 billion pounds in 2008, a 32-percent increase from 1.434 billion pounds exported in 2007. Mexico and Canada remained the two largest destinations for U.S. beef, respectively. Total annual U.S. exports to Mexico increased 11 percent from last year, whereas Canada increased 15 percent. Japan was the third largest export market at 231 million pounds, increasing 45 percent. The United States exported 152 million pounds to South Korea in 2008. In July 2008, the U.S. resumed exports to South Korea for the first time since October 2007. Exports of U.S. beef also went to countries that imported considerably more in 2008 than in 2007. Russia imported 48 million pounds of U.S. beef, mostly in the second and third quarters compared with 114,000 pounds in 2007. Vietnam imported 122 million pounds compared with 42 million pounds the previous year.

A weak U.S. dollar and rising global demand for meat products were the primary reasons behind export growth throughout most of 2008. Third-quarter exports were particularly high as trade with South Korea resumed and trade with Russia increased. Exports slowed dramatically in the fourth quarter, however, as the financial crisis and global economic slowdown began to unfold. The U.S. dollar strengthened against nearly every currency except the Japanese yen, and many trading partners’ economies were weakened, diminishing demand for grain-fed beef in those markets. U.S. exports are expected to be about 1.88 billion pounds in 2009, as the economic slowdown continues and the U.S. dollar is expected to continue to be relatively strong.

Imports Decrease for the Fourth Straight Year

In 2008, 2.538 billion pounds of beef were imported into the United States, a 17- percent decrease compared with the previous year’s total of 3.052 billion pounds. The decrease was mainly attributed to high supplies of processing beef from high U.S. cow slaughter and a weak U.S. dollar, which made foreign products more expensive.

Imports from Australia, the top supplier in 2007, declined 25 percent to 663 million pounds. A strong Australian dollar and strong global demand limited the amount of Australian beef sent to the United States. Imports from Uruguay also decreased significantly, from 355 million pounds in 2007 to 66 million pounds in 2008, as competing markets in the European Union and Russia provided better market opportunities for Uruguayan beef. Imports from Canada, the top U.S. supplier in 2008, increased 7 percent. U.S. imports from New Zealand also increased as high levels of dairy cow slaughter there have increased supplies of processing beef.

Worldwide economic conditions at the end of 2008 also impacted U.S. beef imports. Dramatic changes in the exchange rates and limited credit may have been the primary reason behind a sudden decrease in imports from Brazil in October, followed by a resumption of trade. Declining global demand may have also been responsible for more beef coming to the United States later in the year, particularly from Australia and Uruguay.

U.S. beef imports in 2009 are expected to increase 6 percent to 2.68 billion pounds. Although a stronger dollar and adequate domestic supplies are expected to continue into this year, decreased demand in new and emerging markets may leave many foreign suppliers with fewer exporting alternatives other than the United States.


Dairy Herd Set for Slight Contraction in 2009; Production Declines Slightly as Prices Plunge

Demand for dairy products weakened in fourth-quarter 2008 as production inched ahead. In 2008, cow numbers rose 1.2 percent while yield per cow rose by less than 1-percent. Last year was the first in many years that milk production rose primarily on increased herd size rather that yield per cow. In 2009, milk production is forecast to retreat to 189.1 billion pounds. Herd size is forecast to decline slightly to an average of 9.17 million cows with increased dairy cow slaughter later in the year. At present, the forecast assumes no additional herd buyouts through CWT (Cooperatives Working Together). Hence, the contraction is expected to be sharpest in the second half of the year as poor returns early in 2009 force a sharper response from producers. Output per cow is expected to continue to rise, but by less than 1-percent. The assumption is that liquidation would remove lower producing cows, raising the average yield of the remaining herd. Complicating this assumption is that the number of replacement heifers, while slightly lower than last year, remains relatively high. The milk-feed price ratio could decline further in 2009 as falling milk prices trump any declines in feed prices.

For products, the central problem is that domestic demand is not sufficient to absorb the available supplies. As a result, prices have declined sharply and are expected to remain well below 2008 levels throughout the year. U.S. commercial dairy exports softened in fourth-quarter 2008, and total milk equivalent exports on a fats equivalent basis are forecast to reach only 5.1 billion pounds in 2009. The same forecast on a skims solids basis is for 19.0 billion pounds of milk equivalent to be exported. Such totals are a sizable retrenchment from 2008’s exports of 8.7 billion pounds (fats basis) and 26.0 billion pounds (skims/solids basis). While global recession has reduced demand, slow sales may be compounded by the recent decision by the European Union to subsidize exports of nonfat dry milk (NDM), whole milk powder (WMP), cheese, and butterfat.

Total domestic commercial use in 2009, on a fats basis, is forecast at 185.6 billion pounds, less than a 1-percent increase from that of 2008. Dairy production expanded over 4 percent on a milk equivalent basis in December, and butter production was 10 percent higher, but total cheese production increased by only 1 percent. NDM production was substantially higher in December, year-over-year. Lactose and whey protein concentrate production partially compensated for the 6.5- percent decline in dry whey production for human consumption. Increased availability of milk and weak demand are leading to inventory building in some products, notably cheese and NDM. The increase in dairy products production will keep prices low but are also expected to prompt sales, even in a weak economy. Lower production in 2009 should ultimately ease the supply-demand imbalance, and prices could firm later in the year.

Cheese prices are forecast much lower in 2009 at $1.180-$1.250 per pound. Likewise, butter prices will be lower in 2009, averaging $1.080-$1.180 per pound. Prices for dry products will also decline this year but not as drastically because prices for those products slid considerably in 2008. NDM prices are forecast at 80- 86 cents per pound and whey at 16-19 cents per pound in 2009. Based on product price forecasts, milk prices will plunge in 2009 from those of 2008. The Class IV price is expected to be $9.35-$10.15 per cwt, and the Class III price is projected at $9.70-$10.40 per cwt. The all milk price is expected to be $10.95-$11.65 per cwt in 2009.

Butter is moving to the Commodity Credit Corporation. The Government has been purchasing NDM since last fall. Removals are expected to be heaviest in the first half of the year, dropping off as reduced production firms prices in the second half.

Further Reading

- You can view the full report by clicking here.

February 2009

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