US Beef and Dairy Outlook Report - October 2008
By U.S.D.A, Economic Research Service - This article is an extract from the October 2008: Livestock, Dairy and Poultry Outlook Report.Beef Trade: U.S. beef imports in 2008 are 23 percent lower than 2007 year-to-date through August, but increases are seen for 2009 as the U.S. dollar strengthens and domestic cow slaughter decreases. Exports of U.S. beef will benefit as strong demand in Asia continues to grow despite global economic turmoil. U.S. exports are expected to increase 31 percent in 2008 and 10 percent in 2009.
Cattle: Total federally inspected cattle slaughter is declining seasonally, compared with recent months, as a result of the current economic situation, seasonally increasing steer and heifer dressed weights, and seasonally declining wholesale beef cutout values.
Dairy: Milk production in 2009 is forecast to rise slightly as yield increases counter declining cow numbers. Exports, which have boosted total demand both this year and last, will be lower next year, taking the edge off prices. Lower prices could help boost domestic demand slightly in 2009.
Beef Trade
Stronger Dollar Will Impact Trade Flows of Beef for the United States The global financial crisis has caused volatility in foreign economies and exchange rates. Since the summer, the U.S. dollar has strengthened against most major beef trading partners’ currencies. The weakening of the global economy has again made the U.S. dollar attractive, as it is perceived as a safe-haven currency. While the impacts of the current currency volatility won’t be clear until future trade numbers are released, currency fluctuations can be expected to affect the relative price of U.S. beef in international markets.
Imports of beef into the United States have been down significantly in 2008 from 2007 quantities, down 23 percent through August according to official Department of Commerce figures. Much of the decrease in imports has been due to the combination of high domestic supplies and expensive products from foreign sources. U.S. cow slaughter this year has been at its highest levels since 1997, resulting in a large supply of domestic processing meat, such as lean trim. The weak dollar relative to major exporters’ currencies—Australia, New Zealand, and Canada—has made foreign beef relatively more expensive. In particular, as emerging markets for beef grew, foreign suppliers were able to continue exporting beef to non-U.S. markets at relatively attractive prices.
Domestic cow slaughter is forecast to remain high through 2008 before declining in 2009. Availability of beef from Australia, the United States’ largest foreign supplier, is expected to be limited as Australian producers expand their herds after several years of drought-induced liquidation. However, if the dollar continues to strengthen as it has since the summer, it would impact the price spread between foreign and domestic beef. Total beef imports into the United States in 2008 are expected to be 2.493 billion pounds, an 18-percent decrease from last year. Beef imports for 2009 are expected to increase 7 percent from 2008 levels, to 2.675 billion pounds.
Exports Expected To Expand Due to Growth in Asian Markets
The weak dollar has coincided with strong U.S. exports of most commodities, including beef. A weak dollar makes U.S. products relatively cheaper on the world market. U.S. exports in August totaled 221 million pounds. Bolstered by the first full month of trade to Korea and a spike in exports to Russia, this was the largest monthly total since the first U.S. case of BSE in 2003. The United States has seen strong exports of beef to Japan, Canada, and Mexico, where the U.S. dollar has been relatively weak. Through August, exports to those three countries have been up 25 percent, and total exports have increased 33 percent.
While a stronger dollar will make U.S. beef less competitive in some markets, the dollar has not appreciated against the yen, making U.S. beef in Japan still relatively less expensive. The U.S. dollar has appreciated considerably against the South Korean won since the summer. However, with the reopening of the Korean market to U.S. beef, FAS’s Export Sales Reports show strong sales even as the won depreciated.
Worldwide consumption of beef may be affected by the global economic outlook. However, U.S. exports are expected to expand through the end of this year, on the strength of increased shipments to Asian markets, Canada and Mexico, and smaller, nontraditional markets for U.S. beef. Exports from the U.S. are forecast to be 1.876 billion pounds, a 31-percent increase from last year. Next year, exports are estimated to increase 10 percent from 2008 levels, to 2.06 billion pounds, as Asian markets continue to expand at a more modest pace in percentage terms.
Cattle Imports from Mexico Continue To Be Very Low
U.S. imports of live cattle from Mexico continue to be low in 2008, compared with 2007. Cattle imports from Mexico fell 82 percent year-over-year for the month of August. Year-to-date imports through August are at 400,356 head, a 38-percent decrease from 2007. Mexico received very good rainfall over the summer, possibly delaying cattle from crossing the border while pasture conditions were strong. Most Mexican cattle enter the United States from September through December for placement in U.S. feedlots as pasture conditions in Mexico deteriorate heading into winter. However, weekly AMS reports show no such increase so far this fall.
Imported cattle from Canada through August have increased 38 percent year-todate, compared with last year. High feed prices and a strong Canadian dollar discouraged beef exports from Canada and facilitated a large increase in feeder cattle imports into the United States towards the end of 2007. It is still unclear whether that pattern will continue this year as well. The Canadian dollar has weakened against the U.S. dollar, and feed prices have not increased at the same pace as they did last year. According to Canadian statistics, Canadian placements in September were 15-percent higher than last year, signaling that fewer feeders will be available to send to the United States. Slaughter cows and bulls continue to be imported from Canada at a steady rate. Cattle over 30 months of age were not allowed to be imported from Canada until November of last year and have since contributed to higher total cattle imports.
Total cattle imports into the United States are forecast to be 2.5 million head, nearly the same as 2007. Next year, total U.S. cattle imports are expected to drop 8 percent to 2.3 million head. U.S. imports of Mexican cattle are still expected to be lower than historical patterns would imply. U.S. imports of cattle from Canada are also expected to be lower than this year as the Canadian herd continues its declining trend.
Cattle
Cattle Prices Decline Due to Economic Conditions and Declining Slaughter
Several hay growing areas, notably in the Southwest, North Central, and Northern Appalachian areas of the United States, continue to endure dry conditions. The combination of dry conditions and, locally, either low hay stocks or high hay prices going into the winter, will likely put these areas at a disadvantage with respect to maintaining cattle inventories through the winter.
Current economic conditions have resulted in some uncertainty in the cattle sector. Although credit is reportedly available for agricultural loans, some banks are reportedly requiring 40-percent equity for feeding cattle, up from the 20 percent they required prior to the current financial situation. If credit tightens and banks require similar amounts of equity for stocker cattle this winter, wheat pasture grazing could also be adversely affected. Feeder cattle prices, already under some pressure, could be affected further this fall.
Federally inspected (FI) calf slaughter continues at a high rate in response to the low value of dairy calves and lighter feeder cattle, with the high grain and feed prices increasing the costs of gain. Despite being slaughtered at very light weights, the slaughter of relatively large numbers of these calves has resulted in year-to-date veal production that, while still behind that of a year earlier, is gaining on a weekto- week basis.
FI dairy cow slaughter got a slight boost in September 2008 from the CWT (Cooperatives Working Together) program, which reduced the national dairy herd by about 25,000 cows. A continued influx of Canadian cows, both dairy and beef, is also contributing to the relatively large total cow slaughter.
Cattle feeders are adapting to higher feeding costs by placing feeder cattle on feed at heavier weights than in the last few years. The percentage of 800-plus-pound feeder cattle placed in feedlots of 1,000-plus-head capacity during August 2008 was slightly greater, with 36 percent of net placements vs. 31 percent in August 2007. However, the percentage of under-600-pound feeder cattle placed in August 2008 declined to 18 percent from 24 percent in August 2007. ERS’ High Plains Cattle Feeding Simulator continues to show negative returns of almost $10/cwt through September 2008. Based on the simulator estimates, May 2007 was the last profitable marketing month.
Agricultural Marketing Service’s weekly Actual Slaughter reports (see report SJ_LS 711 at http://www.ams.usda.gov/mnreports/sj_ls711.txt ) show that steer and heifer slaughter weights have picked up in the last few weeks, in part due to a seasonal pattern that usually peaks in October. However, steers have still been 4 to 8 pounds heavier than during the same weeks in 2007. These heavier weights may mean most of the last fall and winter placements of light cattle have been marketed.
The timing of marketings of feeder cattle placed on feed at heavier weights can be more predictable because they are generally fed for short periods, in some cases only 110 to 120 days. Large numbers of such placements in feedlots could result in marketings of heavier cattle, with a tendency for marketings to be more bunched. Swings in marketings could result in some price volatility.
Total FI slaughter is declining compared with recent months as a result of declining wholesale cutout values. While consistent with a seasonal pattern of declining values from midsummer to the end of the year, wholesale cutout values are under additional price pressure because middle meats are not moving well due to decreased hotel, restaurant, and institutional (HRI) demand and competition from pork and poultry.
Dairy
Slightly Higher Production, Combined with Softening Exports, Turns Milk Prices Sharply Lower in 2009
The size of the U.S. dairy herd likely crested in the summer quarter and is expected to decline in 2009 to 9,245 thousand head after averaging 9,265 this year. An adjustment process been set in motion, and dairy cow population is expected to decline each quarter in 2009 from its 2009 year high. High feed prices and falling milk prices have reduced profitability, especially for small and medium-sized producers. Although grain prices have declined since last spring and are expected to slip further next year, feed costs remain high by historical measures, especially for alfalfa hay. Countering declining cow numbers, milk yields are forecast to rise by about 1 percent next year, which is below the 5-year average. The increased yield will advance milk production to 191.1 billion pounds in 2009 topping 2008’s projected 189.6-billion-pound total, about the same as the year-over-year increase in 2008.
Exports have buoyed dairy demand in 2007 and 2008, but a number of factors make next year’s export outlook weaker. The U.S. dollar has strengthened vis-à-vis the Euro and some other foreign currencies. European diary prices have declined and are more competitive with U.S. products. Oceania milk production is expected to recover from last year’s drought-induced cutback. Slower global economic growth acts to limit demand. While exports are forecast to decline for all product catagories, dry products are most likely to be affected. The decline for fats is expected to be more modest. Butter exports are expected to retreat less on a percentage basis than other products.
The CCC is forecast to purchase 50 million pounds of nonfat dry milk (NDM) in the fourth quarter of this year. No further purchases are expected in 2009.
Domestic use across all product catagories has been sluggish. High retail prices and a slowing domestic economy will slow growth in use. Domestic use is expected to rise by about 1 percent in 2008 compared with 2007. Next year, domestic use is forecast to climb by 1.7 percent over 2008, but more rapidly on a skims basis as the domestic market absorbs a greater portion of NDM production. Lower prices for all dairy products are expected to stimulate demand. However, this forecast could be upset if a deeper and longer economic downturn than is expected materializes. Prices across all product catagories are expected to be lower in 2009. The NASS cheese price, which is projected to average $1.900 to 1.910 per pound in 2008, is forecast to slip to $1.780 to $1.870 per pound in 2009. Butter prices are expected to average $1.450 to $1.480 per pound this year and decline to $1.390 to $1.510 per pound in 2009. NDM prices will likely fall from $1.265 to $1.285 per pound this year to average $1.070 to $1.140 per pound in 2009. Whey prices, expected to average 25 to 26 cents a pound this year, will fall to 20.5 to 23.5 cents a pound next year.
Lower expected prices for dairy products are already affecting 2008 milk prices and will continue to pressure prices in 2009. The Class III price is expected to average $17.50 to $17.60 per cwt in 2008 and slide to $15.85 to $16.75 per cwt in 2009. The Class IV price is expected to average $15.10 to $15.30 per cwt in 2008 and fall to $12.95 to $13.95 per cwt in 2009. Slightly higher production is forecast to tip the all milk price lower into next year. The all milk price is projected at $18.40 to $18.50 per cwt this year, declining to $16.50 to $17.40 per cwt next year.
Further Reading
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October 2008