22 August 2009

16 minute read

Beef

Cow-Herd Declines Imply Less Beef Beyond 2009

Crop conditions over much of the United States are quite favorable at this point.

The far-Western United States is turning dry again, as South Texas and the western half of the Gulf Coast slip into extremely dry conditions. Some other areas, mostly scattered through the Central Plains and Upper Midwest, are also abnormally dry.

Despite the generally good crop conditions, the cool summer and late start have resulted in crops being well behind normal. Hay production also appears to be sufficient to replenish stocks in preparation for winter supplemental feeding, and quality is good except for cuttings on which rain has fallen. Cattle in South Texas are being supplemented with hay.

The NASS semiannual Cattle inventory report released on 24 July 2009 showed the 1 July 2009 total US cattle and calf inventory 1.5 per cent lower than the 1 July 2008 inventory, the lowest 1 July inventory in the series that began in 1973. The total US cow inventory declined by 1.4 per cent from the 1 July, 2008 inventory, also resulting in the lowest 1 July inventory in the series that began in 1973.

Total US replacement heifer inventories declined by 1.2 per cent. Beef cow and beef replacement heifer inventories declined by 1.4 and 2.2 per cent. The more rapidly declining beef heifer inventories imply that the national beef cow herd will continue the current liquidation phase of a cattle cycle that began in 2005 (from an inventory that was low in 2004) and peaked in 2007.

Consistent with declining beef cow and heifer inventories, the ratio of heifers to total steers and heifers on feed in feedlots of 1,000 head or more is the highest July ratio since July 2004. This ratio and the year-over-year decline in other-heifer inventories make beef-heifer retention for cow-herd expansion unlikely in the near term. Further, the declining cow and replacement heifer inventories indicate the potential for reduced placements of feeder cattle in feedlots over the next two or more years because of the impact these inventories have on future calf crops.

1 July 2009 dairy cow inventories declined by 1.6 per cent, a reversal of recent milk cow inventory growth and the first decline since 1 July 2004. Milk replacement heifer inventories were unchanged from 1 July, 2008, which suggests some level of producer expectations of dairy herd expansion because the 1 July 2009 milk replacement heifer inventory is based on a smaller milk cow herd (9.2 million cows) than the corresponding 2008 inventory (9.35 million cows). That is, the ratio of replacement heifers to the base cow herd in the 1 July, 2009 inventories is 0.424 compared with the 2008 ratio of 0.417. However, continued poor returns will likely dampen most expansion plans.

Despite the 1.6 per cent decline in the dairy cow inventory, milk production will likely decline by a smaller per centage. This will occur because, in the national aggregate, higher producing cows likely were and will be retained (because their profit margins will likely be better), and those cows removed will probably be partially replaced in the aggregate herd by higher producing heifers. Both culling lower producing cows and retaining genetically superior milk-producing heifers are consistent with the positive growth trend in milk production.

The general declines in both cow and heifer inventories have implications for beef production over the next several years, possibly into 2012 or beyond. To understand why, it is important to recognize that heifer inventories are divided into two categories, depending on the intended end use of the heifers — as either breeding females or as fed cattle. An increase in one category is at the expense of the other—that is, the fewer heifers kept for breeding, the more are available in the short run to go into feedlots for beef. This decision as to final heifer disposition is alterable to some extent, as it can be made at several points between the birth of the heifer and slaughter as a fed heifer. Generally, the decision is made between weaning and 1 year of age—when most weaned calves, both steers and heifers, spend some time growing on pastures—and before the nonbreeding heifers are placed on feed (see Stocker Cattle Production on page 20 of the full report).

Again, this decision regarding heifers has implications for longer term feeder cattle supplies and subsequent beef production. As heifers are fed for slaughter rather than retained as breeding females, short-term beef production increases. Then, during a future expansionary phase of a cattle cycle, increasing retention of heifers for breeding results in fewer heifers going into feedlots for beef production.

This, combined with fewer steers available to be placed in feedlots due to reduced calf crops, results in declining beef production and often in high and volatile prices for fed cattle.

Beef production from steers is affected because about half of each national calf crop is male calves, of which all but about 3-5 per cent are destined for slaughter as fed cattle. During the contraction phase of a cattle cycle, more cows are generally sent to slaughter, and heifers are placed in feedlots rather than being retained for breeding. Subsequently, calf crops decline, and fewer steers are available to be placed on feed.

This downward spiral continues until enough heifers are retained for breeding to increase breeding female inventories. Then a year or two later, calf crops begin increasing and supplies of feeder cattle for placement in feedlots begin to increase, resulting in increasing beef production.

Feeder cattle supplies outside feedlots generally have lagged cycles in cow inventories by a year or two. This lag occurs because feeder cattle supplies consist of virtually every class of live cattle not kept for breeding and not in the feedlot.

These cattle represent a wide age range that allows considerable flexibility in the timing of placement in the feedlot or, for some heifers and bull calves, retention as breeding animals (see Stocker Cattle Production on page 20 of the full report).

Feedlot Inventories Continue To Shrink The Cattle inventory report showed the lowest cattle-on-feed inventories since the lower 1 July 1999 inventory, reflecting the ongoing national cow herd liquidation and the long series of mostly negative feeding margins seen by cattle feeders since May 2007.

NASS released the monthly Cattle on Feed report on July 24 2009 summarising activity in feedlots of 1,000 head or more. Net placements of cattle in feedlots of 1,000-plus head during June 2009 were the second lowest for June since the series began in December 1995.

This level of placements is consistent with the lowest estimated 1 July inventory of feeder cattle outside feedlots in the series that began in 1996. June placements were also weighted toward the heavier end, with 29.8 per cent of net placements in the 800-plus category, compared with 29.3 per cent in June 2008 and 28.4 per cent in June 2007.

While June 2009 marketings from 1,000-plus feedlots were up one per cent from June 2008, they were seven per cent below June 2007 and are the second lowest June marketings since the series began in December 1995. Combined with reduced fed cattle slaughter in recent weeks, the result has been an increase in show lists in some feedlots in excess of typical seasonal increases. The reduced kills are also resulting in increases in five day moving average dressing per centages and weights (AMS’ Daily National Carlot Meat Report, e.g. 1-17 August 2009), indicating that cattle are remaining in feedlots a little longer than is typical. If this situation persists, demand for imported processing beef could increase to utilize the extra trim that will likely result. Another result is that beef production will get slightly spread out in the third and fourth quarters, rather than being more bunched.

Beef Production Declines at a Slower Rate than Cattle Inventories

Beef production will likely decline by less than the decline in cow and total cattle and calf inventories would indicate, largely because the continuing upward trend in dressed weights offsets some of the inventory decline. A case in point: year-to-date Federally inspected beef production for the week ending 1 August 2009 was just over 4 per cent below cumulative production for the corresponding week of 2008, based on slaughter that was just over five per cent below cumulative 2008 slaughter.

The National Restaurant Association reports that June was the 13th month of declining same-store sales. This implied source of declining demand for high-end beef contributes to the narrow spread between cutout values for Choice and Select beef. While it has improved in May and June, the monthly spread was below $2 for February, March, and April 2009, and has been well below the five year average during the first half of 2009. The narrow spread between Choice and Select cutout values will likely persist as long as the per centage of beef grading Choice and better remains high by historical standards.

Drop credits have crept upward over the last few weeks after falling to a weekly low of $7.10 per cwt the week of 1 July 2009. Prices for most separate byproducts have increased slightly or have remained steady, resulting in an increase in the whole drop credit despite overall weakness in the general byproduct market.

And while it does not seem like much, a 10-per cent increase in the drop credit at current levels can amount to about $10 per head, enough to influence weekly kill rates and provide some support for fed cattle prices.

Average monthly retail prices for Choice beef continue to fluctuate around $4.31, averaging almost 3 per cent above year-earlier through June, despite wholesale beef prices that have declined by almost six per cent. The July price of $4.18 per pound for Choice beef marks the largest decline thus far in 2009.

While the average monthly all-fresh beef price averaged 1.4 per cent above year earlier through June, the July-over-July decline of almost 4 per cent was only the second month-over-month decline thus far in 2009—the only other decline being the less-than-1-per cent decline in June. Per capita beef disappearance is down by almost two per cent, which could partially explain some of the increase in retail prices. Poultry and abundant pork supplies at much lower relative prices and beef exports that are declining, despite a weaker dollar, continue to compete with consumer meat dollars.

Beef Trade

Limited Beef Supply Could Continue To Impact Beef Exports in 2010

Beef exports from the United States continue to be hurt by weak economies in foreign countries. The United States is expected to export about 1.7 billion pounds of beef in 2009, a nine per cent decline from last year.

Second-quarter US beef exports totalled 471 million pounds, a slight decline from last year’s second-quarter total of 472 million pounds. The lack of growth was due mostly to declining sales to North American partners. Even though the month of June exceeded last year’s monthly total, exports to Mexico, the largest importer of US beef, decreased 14 per cent in the second quarter year-over-year. According to FAS Export Sales Reports, however, exports will not continue as strong in July.

Also, exports to Canada decreased in the second quarter by seven per cent. Weekly figures for exports in July show relatively weak sales for Canada in July as well.

Japan was the best performing major import market, with nearly an eight per cent increase in the second quarter, year-over-year. US beef is still benefiting from a relatively weak US dollar compared with the Japanese yen, as well as from competing with relatively more expensive Japanese domestic product. However, beef exports to South Korea continue to wane from the levels first seen after US beef was allowed back into the market in July 2008. Weak restaurant demand, a weak South Korean won, and high stocks of frozen US beef make additional imports of US beef more difficult. Second-quarter exports to Korea totalled 20 million pounds, less than half the amount exported in the first quarter of this year.

The availability of beef supplies in 2010 could be a limiting factor for export growth in that year. As fat cattle production is expected to significantly decline next year due to smaller calf crops over the past few years and fewer feeder cattle, the supply of grain-fed beef for export will be lower. If domestic demand remains constant or improves next year, tighter supplies would result in higher prices. If prices increase, US beef could further lose its competitiveness with Australian beef, particularly in Japan and South Korea. Exports to South Korea are not expected to be as high as anticipated when the market reopened to US beef last year, as the economic difficulties appear to be lingering and many small restaurants are not carrying US beef products yet. US beef exports are expected to be over 1.8 billion pounds in 2010, which would still be a seven per cent increase from this year, as international demand for US beef continues to move toward levels that existed prior to BSE-related trade bans on US beef.

Beef Imports Increase Almost 14 per cent in the Second Quarter

The United States imported 751 million pounds of beef in the second quarter of 2009, nearly a 14-per cent year-over-year increase compared with 2008. Beef imports from Australia increased 54 per cent from last year in the second quarter.

US imports of Australian beef have begun to trend downward since the high volume in April, which was the highest monthly total since 2005. This is, in part, due to the weakening of the US dollar over the past few months. As of 31 July this year, the Australian dollar had appreciated about 11 per cent against the US dollar compared with August 2008. However, it has depreciated over 17 per cent since 1 April 2009.

While Australian beef is still relatively less expensive than last year, it has lost some of the price competitiveness that it saw earlier in the year, and more Australian exports are going to the large Asian markets of Japan and South Korea.

Additionally, a larger share of Australian exports is being sent to historically smaller Asian markets, including Indonesia, Malaysia, and Taiwan.

US imports of New Zealand beef increased 13 per cent in the second quarter compared with last year. New Zealand cow slaughter has increased 26 per cent through June, according to Statistics New Zealand, as a result of increased culling and reduced milk production in the New Zealand dairy industry. Cow slaughter peaks in April and May, as the Southern Hemisphere begins its winter. The increased production levels have led to increased New Zealand beef exports. The United States, which accounts for nearly half of New Zealand’s beef exports, has had increased levels of imports from New Zealand beginning in June and continuing through July, according to Customs reports and official trade statistics.

Imports from Canada, the largest foreign supplier of beef for the United States last year, decreased more than 13 per cent in the second quarter compared with last year.

Total beef production has decreased in Canada, but fed beef production is higher than a year ago. According to CanFax’s feedlot survey of Alberta and Saskatchewan, higher placements and inventories earlier this year resulted in increased marketings of fed cattle in June and July. In addition to increasing the supply of beef cuts, higher Canadian feedlot placements and marketings have also increased the amount of fed cattle trim.

Trimmings account for almost half of US beef imports from Canada so far this year, based on AgCanada figures. Trimmings are typically combined with processing beef from cows or imported grass-fed beef to make ground beef. With large supplies of processing beef available in the United States from high dairy cow slaughter and large amounts of Oceanic imports, supplies of trim could be limited as fed beef production declines in the United States and Canada in the months ahead.

Weekly AgCanada figures show that Canadian exports of trimmings have remained higher than last year. However, Canadian feedlot inventories were below last year’s levels as of 1 August which should limit fed cattle marketings and fed cattle trim available from Canada, putting upward pressure on ground beef prices.

The United States is expected to import over 2.8 billion pounds of beef in total in 2009, a 12-per cent increase from last year, as increased imports from Australia and New Zealand are expected to exceed the decline in imports from Canada. Imports are expected to continue increasing, but at a slower rate in 2010, to almost 3 billion pounds.

Dairy

Increases in Milk per Cow Slow Decline in Milk Production in 2009 Despite Herd Size Reductions

Milk production during the second quarter of 2009 was up one-tenth of 1 per cent from the second quarter of 2008, even though herd size was 53,000 head smaller than the corresponding quarter last year. June milk production was down twotenths of 1 per cent from a year earlier.

While the June reported herd size was 86,000 head less, production per cow was 13 pounds more than the corresponding month last year. USDA forecasts corn and soybean meal prices to be lower this crop year. The lower feed prices and cheaper alfalfa hay helped support additional feeding and milk production despite the overall contraction signals from the market. Coupled with relatively slow herd contraction, milk production is projected at 188.2 billion pounds for 2009, less than a 1-per cent reduction from 2008.

Prospects are for 2009/10 feed prices to decline slightly from 2008/09, helping boost the milk-feed ratio from this year’s lows. The lower expected feed prices could provide modest relief to producers as milk prices strengthen over the course of the year, but hardly presage a turnaround in overall dairy market prospects for producers. The lower feed prices and continued herd contraction will likely continue to boost output per cow in 2010. However, next year, the forecast herd contraction to 8.9 million cows will outweigh the forecast 1.9-per cent increase in output per cow and milk production will likely slip to 186.5 billion pounds.

Although exports were up in June, for the rest of the year exports will be reduced in light of higher domestic prices and increased dairy product availability in world markets, which reduces the competitiveness of U.S. products. Continued accumulation of dry milk powder in the European Union will likely pressure world prices, further reducing U.S. export prospects. Overall, exports on a fats basis will remain at 3.8 billion pounds, virtually unchanged in 2010 compared with 2009. On a skims/solids basis, 2010 exports will be slightly higher at 21.2 billion pounds compared with 20.0 billion pounds expected for this year. These forecasts remain well below 2008 totals.

The current USDA forecast assumes that Commodity Credit Corporation net removals will become negative in 2010 as product purchased under the higher support prices moves back into the market. Cheese and nonfat dry milk (NDM) prices should strengthen in 2009, reflecting the increase in support prices for those products. Economic recovery in 2010 and slightly lower milk production should help boost prices for all products in 2010.

The cheese price is projected to average $1.235 to $1.255 per pound this year and climb to $1.510 - $1.610 in 2010. Butter prices are expected to average $1.180 - $1.220 per pound in 2009 and strengthen to $1.435 - $1.565 in 2010. NDM prices are projected to average 85 to 87 cents per pound and rise to 94.5 cents - $1.015 per pound in 2010. Whey prices are projected at 24 to 26 cents per pound in 2009 and 28 to 31 cents per pound next year.

Milk prices should recover from 2009 lows next year but should remain well below the highs of 2007 and 2008. The Class III price is expected to average $10.70 - $10.90 per cwt in 2009 and rise to average $13.75 - $14.75 per cwt in 2010.

The Class IV price is projected to average $10.15 - $10.45 per cwt this year and reaches $12.10 - $13.20 per cwt next year. The all milk price average is expected to be $12.10 - $12.30 per cwt and rise to $14.65 - $15.65 per cwt in 2010.

Further Reading

-

You can view the full report by clicking here.