Livestock, Dairy, and Poultry Outlook – October 2011

Cattle weights are down as producers have been forced to sell stock earlier due to the extended drought. Meanwhile, US dairy exports are likely to become more competitive next year, according to Rachel J. Johnson of the USDA ERS in the latest Livestock, Dairy, and Poultry Outlook.
calendar icon 22 October 2011
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USDA Economic Research Service



Drought-induced cow-herd liquidation has reduced average dressed weights and resulted in relatively more ground products but fewer middle cuts. Wheat pasture could be priced at a premium this winter. Cattle feeding margins remain negative despite higher fed cattle prices.

Beef/Cattle Trade

The United States is expected to maintain a widened net export margin into 2012 as growth in the US beef export market continues, due primarily to a relatively weak US dollar and increased global demand for US beef. Despite a shrinking US beef cattle herd, exports are expected to increase slightly above 2011 levels in 2012. Lower beef imports from Oceania continue to limit US beef import totals.


Despite relatively high feed prices, milk production is expected to rise both this year and next. The US cow herd will likely contract slightly next year but increasing yield per cow will boost overall production. Rising global production will likely make the international market more competitive for US exports in 2012. Prices are forecast lower across the board in 2012.


Cow-calf producers face difficult decisions for this winter

Crop progress for hard red winter wheat pasture in Texas and Oklahoma is well behind last year and the five-year average but, in Kansas, is only slightly behind last year and the five-year average. Limited availability of wheat pasture will likely drive pasture rental rates higher than in recent years. The higher rates will constrain those stocker operators trying to capitalise on the anticipated demand for heavier-weight feeder cattle next spring. Recent rains have helped but additional precipitation will be needed to maintain wheat pasture through the winter.

At the same time, beef cow-calf producers in the South must determine how many more cows and replacement heifers to sell and how to feed through the winter those they keep. Their northern counterparts have had a good year and appear to be gearing up for cow-herd expansion, partly to capitalise on anticipated demand for cattle in 2012 and beyond. Despite the large number of cows going to market, cow prices are declining only slightly, likely helped by the dollar’s weakness against other currencies and its dampening effect on imports of processing beef into the United States.

While monthly average five-area fed cattle prices have increased by $9.24 per cwt (8.6 per cent) from June to September, cattle feeders’ margins remain negative – by more than $100 per head in some cases. This is largely due to high feed costs, primarily corn and roughages, and feeder cattle prices that have remained high even as fed cattle prices have fluctuated due to a volatile futures market. Those cattle feeders familiar with hedges have had some opportunities over the last several months to lock in profitable price levels.

Beef demand appears to slow

In wholesale markets, the spread between average monthly Choice and Select cut-out values widened from a February 2011 low of $0.87 per cwt to a peak of $5.50 in June, then moved down to August’s $4.99. Since the beginning of September, the spread widened significantly on a weekly basis to just over $14 per cwt the first week in October (Weekly National Carlot Meat Report).

Several factors are contributing to the widening spread: Marketings from feedlots of 1,000 head or more have been such that fed cattle have not been allowed to put on any extra weight — partly due to high costs of gain, adversely affecting total beef production. However, feedlots have remained relatively current despite heavy placements of feeder cattle – especially the drought-induced light-weight placements – for much of the past year or longer. The shortened feeding periods and some pulling of cattle forward (by marketing them earlier in the feeding/finishing period) have also resulted in slightly fewer carcasses grading Choice and more Select grading carcasses, which has affected the Choice-Select spread since July 2011.

In addition, demand by restaurants may have slipped in recent months as is evident from the Restaurant Association’s Restaurant Performance Index and is lacklustre at best. As a result, demand for many higher priced cuts has likely been reduced. However, with more cows in the slaughter mix, higher priced cuts make up a smaller share of total beef supplies, which increases the relative value of the higher-end cuts and lowers the value of lower grading meat. As a result, prices for both Select beef and grinding beef have moved lower and the Choice-Select spread has widened.

Volatility in retail prices is also due to the impact that the drought-induced liquidation of cows is having on relative supplies of higher-end cuts. Estimated monthly average prices for Choice retail beef increased nine cents per lb, or two per cent, from July 2011 to August 2011. At the same time, monthly average five-area fed cattle prices increased 2.6 cents per lb, or 2.3 per cent, while average Choice wholesale cut-out values increased by 2.7 cents, or 1.5 per cent.

These general price increases followed volatility in all prices, with atypically rapid increases in retail prices from December 2010 to May 2011, followed by a two-month decline, before again increasing. At the same time, cattle and wholesale cut-out values followed atypically more modest fluctuations after peaking in April. Because of lags in production cycles for cattle and beef at various levels, retail prices typically adjust more slowly than cattle or wholesale beef prices. At the same time, cattle and beef prices at all levels tend to adjust more quickly when they are increasing (see special article). However, little about this year is typical.

Wholesale and Retail Price Changes in the Beef Sector

by Kenneth H. Mathews, Jr., Rachel J. Johnson and William F. Hahn

Variations between wholesale and retail prices

Retail and wholesale beef prices do not change at the same rate or in proportion to each other. They move in response to changes in supply and demand. Retail prices tend to adjust more slowly than cattle prices or wholesale beef prices. And prices at all levels (farm, wholesale and retail) tend to adjust more quickly when they are increasing. These asymmetries stem from lags and variations in demand and supply between the live cattle, wholesale beef and retail beef markets.

Demand at each level is affected by general economic conditions, seasonality, beef and cattle trade and other factors. Prices can also be affected by variations in demand for specific parts of the carcass or specific cuts of beef. Changes in cattle inventories affect quantities of beef available in both the long run and the short run through subsequent changes in relative supplies of Choice, Select and processing grade cattle and beef. Factors contributing to asymmetric price movements between farm, wholesale and retail prices levels are summarized as follows:

  • A long production cycle for beef that is difficult to adjust in light of the speed at which demand can shift
  • Changes in demand that affect cattle and beef prices at all levels—in general and seasonally, as well as by cuts, and
  • Seasonal and other variations in supplies of cattle imported from Canada and Mexico and beef imported from Canada

Variations in prices due to beef’s long production cycle

Wholesale and retail beef prices – both nominal and real – have been rising since 2000. In recent months, cattle prices and average wholesale and retail prices for beef have increased rapidly, setting record nominal (not inflation-adjusted) highs. The increase in prices can be attributed to a decline in cattle inventories since 1996, when drought set off long-term liquidation that is ongoing (except for 2005-07). Initially, beef production increased due to the extra cows and heifers that were being processed during the early years of the liquidation period. Since 2000, beef supplies have fluctuated downward, resulting in higher prices, with retail prices currently increasing faster than wholesale prices. As the US cattle herd is in a general liquidation phase and more cows and heifers are in the current slaughter mix, relatively fewer higher end cuts are available.

The long production cycle that characterises beef production makes it difficult to quickly adjust the supply base in response to variations in demand at the retail level. It takes about three years from the time a cow-calf operator decides to change the number of calves he or she produces until those calves are large enough to be placed into the feedlot. And once calves are born, future beef supplies are largely established for the next one to two years. The only flexibility beyond that point lies in the timing of when the cattle enter the feedlot. Once cattle are placed in the feedlot, they are typically fed and slaughtered within a narrowly specified time-frame.

In contrast, if retail demand declines, cattle in feedlots still must be processed for beef because it is usually not economically feasible to continue feeding cattle once they have reached a certain quality level. Thus, while beef can be placed in cold storage facilities for short periods, cattle and beef supplies take a longer time to adjust to changes in economic conditions.

Variations in prices among retail meat products

The economic downturn beginning in 2008 also changed the price relationship between traditionally cheaper cuts used for hamburger and more expensive higher quality cuts. While prices for both have increased – mainly because of reduced cattle inventories – the recession has contributed to larger gains for lower graded cuts used for hamburger. Factors that have combined to provide support for prices of ground products include cost-cutting strategies on the part of consumers (increasing overall demand) and supply-driven factors.

One consumer cost-cutting strategy has been the purchase of relatively inexpensive cuts of beef, pork and poultry. Ground beef is one of the least expensive beef products, and its versatility allows consumers to stretch food budgets by using it in stews, sauces, casseroles and other dishes. With the economy under-performing, consumers have increased their demand for lower priced cuts, especially ground products. In addition, declining US cattle inventories have resulted in less beef available for all uses, which has also contributed to higher prices for ground beef relative to various other beef cuts.

Ground beef products are made by blending processing beef (from culled cows and bulls and lower grading fed beef) with fatty trim (e.g. 50 per cent lean trim – half fat and half lean meat) from higher grading fed cattle. The share of total beef from higher grading beef – Prime and Choice – has risen during the last several years, reducing the relative share of lower graded beef and leaner cuts produced from Select and lower grading cattle. Because higher grading cattle are fatter, they provide more of the fatty trim than Select and lower grading cattle. With a larger share of carcasses grading Choice or better, more of the fatty trim is available to mix with less processing beef. Further, since the fatty trim is the smaller portion of the overall ground-product blend, the value of the leaner processing beef increases relative to the fatty trim.

Since the United States has large supplies of fatty trim, it is also necessary to import processing beef to blend with US beef to make ground products. However, tight beef supplies among major beef-trading countries and a weak dollar have led to year-over-year declines in monthly US imports of processing beef for at least the last year or so, which has also contributed to higher prices for US ground products.

US consumer demand for beef cuts and products also varies seasonally, directly impacting retail pricing and adding to some variations between wholesale and retail prices for individual cuts and for the wholesale-retail price spread in general. Demand for ground products and steaks often rises in April-June because of a seasonal increase in outdoor grilling during the spring and summer. Retail stores will use these cuts in advertising specials to draw consumers into stores. Since hamburger prices have remained relatively high, advertising beef prices has been an unattractive option for retailers this year. Roasts are also characterised by seasonal demand. Demand for roasts usually climbs in winter when consumers are willing to use their ovens because of the dual benefit of cooking and heating, which is less desirable during the summer months when cooling costs are highest.

Prices are affected by seasonal patterns in cattle and beef imports

Imports of cattle into the United States tend to increase supplies of US beef, putting downward pressure on wholesale beef prices. On average, the United States imports over two million head of cattle from Mexico and Canada annually. Imports of Mexican cattle are usually high in both spring and fall, but especially in the fall.

Supplies of fed cattle from the Southern Plains and the Southwest, which include feeder cattle imported from Mexico during the previous fall, increase in the spring. Fed cattle and cull cows that go directly to slaughter are also imported from Canada. On average, two-thirds of cattle imported from Canada are sent directly to slaughter, while most of the remaining one-third are sent directly to feedlots. These imports of both fed and feeder cattle from Canada increase the US supply of beef in the spring and fall, exerting downward pressure on both cattle and beef prices.

Seasonal shifts in the US beef supply are also evident in US beef imports. The United States imports about as much beef as it exports – roughly eight to 10 per cent of production. Imports of Canadian, Australian and New Zealand beef are highest in the spring and summer. Seasonal increases in beef supplies tend to put downward pressure on wholesale prices but not necessarily on retail prices. When prices decrease, wholesalers may decide to hold back stocks in cold storage to sell to retailers at a later date, when the price is potentially higher.

Beef/Cattle Trade

Strong Export growth continues to boost US beef exports, imports tightened

US beef exports through August are 27 per cent higher year-over-year. Strong growth continues to several major US beef export markets, particularly Asia. Through August, exports to South Korea and Japan were 50 and 38 per cent higher than a year earlier, respectively. US beef exports to Canada were 39 per cent higher and exports to Mexico were fractionally above a year earlier. Exports to Russia have continued to outpace year-earlier levels through August (+72 per cent), placing the United States behind Paraguay as the sixth largest exporting country of beef to Russia thus far in the year. US beef exports to Hong Kong (+62 per cent) and Egypt (+24 per cent) also continue to demonstrate strong growth.

Total US beef exports are forecast at over 2.73 billion pounds in 2011, up nearly 19 per cent over 2010. Strong export growth is expected to continue through the third quarter, with a 27 per cent increase in exports forecast. Exports in the final quarter of this year are expected to be fractionally above year-earlier levels. Beef exports in 2012 are forecast slightly higher, at 2.76 billion pounds.

US beef imports for 2011 are forecast at two billion pounds, making an almost 13 per cent year-over-year decline. Tightened exports to the United States from Oceania, in part a function of the exchange rate, continue to constrain US import totals. Beef imports for the third quarter are expected to be 17 per cent below a year earlier; modest growth of about five per cent is expected in the fourth quarter. In 2012, 2.1 billion pounds of beef are expected to be imported, four per cent more than totals forecast for this year.

Cattle imports revised lower – 2.1 million head in 2011

Cattle imports through August from Mexico were 29 per cent higher, year-over-year. Conversely, imports from Canada were 40 per cent below a year earlier. Although cattle imports from Canada are recovering somewhat – the price differential between US and Canadian slaughter cattle jumped well above levels of the previous three years in September and into October – Canadian cattle imports are still 20 per cent below year-earlier levels through September, according to AMS weekly reports. Although prices for cattle in Mexico remain well below the comparable US prices for feeder cattle (wholesale Mexico City steers versus imported Las Cruces Mexican cattle), the August downgrading of Chihuahua’s TB status – a major Mexican cattle-exporting state – may cause cattle imports from Mexico to drop significantly through the remainder of the year. US cattle imports are forecast to be 2.1 million head in 2011 and 2.025 million head in 2012.


US milk production continues to climb; prices expected to decline in 2012

Feed prices are expected to remain relatively high through the end of 2011 and into next year. Corn prices are forecast at $6.20 to $7.20 per bushel for the 2011/12 crop year. This forecast represents a small reduction from September’s forecast prices and is based on higher reported carry-in stocks and slightly lower projected corn exports. Similarly, the soybean meal price forecast was lowered from September to $335 to $365 per ton for the 2011/12 marketing year, based on a lower soybean export forecast in October. Preliminary estimates placed alfalfa prices at $196 per ton in September in the face of almost five per cent lower production in 2011. Significant relief from the current prices level is not likely until next spring.

Milk production for 2011 is projected at 195.9 billion pounds, a 200-million pound increase from September’s forecast. Both higher cow numbers and yield per cow contribute to rise. Despite high feed prices and continued heavy cow slaughter, the US dairy herd continues to expand more rapidly than anticipated. The herd is forecast to average 9.2 million head for the year. Yield per cow has also risen more rapidly than anticipated and is forecast at 21,300 pounds, an increase from September estimates. Output per cow may not have been as diminished by the hot summer temperatures as expected. In 2012, the US dairy herd is expected to contract to 9.19 million head. This forecast represents both a year-over-year decline and a decline from the September 2012 forecast. Although corn and soybean meal prices have been revised downward, they remain high by historic levels and continued expected high alfalfa prices along with lower milk prices will likely stimulate a herd reduction during 2012. These fundamentals will also limit the rise in output per cow next year, which is forecast at 21,600 pounds despite an extra milking day in 2012.

Milk-equivalent imports for 2011 are forecast at 3.2 billion pounds on a fats basis and 5.3 billion pounds on a skim-solids basis this year, both unchanged from September’s forecast. Next year, fat-basis imports are forecast unchanged at 3.2 billion pounds but skim-solids imports are expected to slide to 5.1 billion pounds, also unchanged from September’s forecast. Fat-basis exports are forecast at 9.1 billion pounds for 2011, a slight downward revision from September’s forecast due to lower expected butter and cheese exports. Favourable conditions in Oceania coupled with rising seasonal production are expected to pressure prices and increase competition particularly for US dairy exports in 2012. Skim-solids exports are forecast at 32.6 billion pounds this year, unchanged from September. In 2012, milk-equivalent exports on both a fats and skim-solids basis are forecast to be lower than in 2011. Fat-basis exports are forecast at 8.6 billion pounds, down fractionally from September’s forecast. Skim-solids basis exports are placed at 31.9 billion pounds, a decline from September’s projection.

This year, domestic commercial milk use is forecast to reach 188.6 billion pounds on a fats basis and 167.8 billion pounds on a skim-solids basis. In 2012, domestic commercial use is forecast to rise to 192 billion pounds on a fats basis and 170.8 billion pounds on a skim-solids basis. Both forecasts would represent a healthy rise in use, especially for the fats basis forecast after several years of slow growth. On a skim-solids basis, the 2012 forecast would represent the second year of growth after a decline in 2010.

Overall, prices for dairy products are expected to be lower in 2012 after rising sharply in 2011. Cheese and butter prices were lowered in October based on weaker international prices. The 2011 cheese price is forecast at $1.810 to $1.820 per pound and the butter price is forecast at $1.940 to $1.970 per pound, both lower than September forecasts. Nonfat dry milk (NDM) is forecast at $1.505 to $1.525 per pound, unchanged from September. Whey is forecast at 51.5 to 52.5 cents per pound, with the upper end of the range raised slightly from last month. The whey forecast is based on expected continued robust domestic use and relatively strong exports despite higher prices. Next year, the major product prices are all expected to be lower. The cheese price is expected to be $1.665 to $1.755 per pound; the butter price is forecast at $1.600 to $1.720 per pound. The NDM price is forecast at $1.355 to $1.425 per pound, and the whey price is forecast at 45.5 to 48.5 cents per pound. The lower prices reflect larger domestic production and stronger competition overseas, which will pressure exports.

The Class III price is forecast at $18.15 to $18.25 per cwt for 2011 and $16.30 to $17.20 per cwt in 2012. The Class IV price is forecast at $19.05 to $19.25 per cwt this year and $16.30 to $17.30 per cwt next year. The all-milk price is forecast to be $20.00 to $20.10 per cwt for 2011 and to slip to $17.75 to $18.65 per cwt next year.

Further Reading

- You can view the full report by clicking here.

October 2011

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