26 October 2010

11 minute read

Beef/Cattle: A slow start to wheat pasture season and higher corn prices have softened the demand for lighter weight feeder cattle. Meanwhile, cow slaughter has continued heavy throughout the third quarter and into the fourth quarter.

Beef/Cattle Trade: Asian markets continue to provide growth in the US beef export market. Beef exports through August were 17 per cent higher year-over-year and are forecast to total 2.28 billion pounds exported in 2010, 18 per cent higher year-over-year. High currencies among major US trading partners continue to curb buying momentum among US beef importers. Beef imports in 2010 are forecast at 2.48 billion pounds.

Dairy: production is expected to continue to rise in 2011. However, higher expected feed prices will likely limit producer profits. Domestic demand, especially for cheese, remains strong. Although world prices favor US exports, they are expected to decline in 2011, more steeply on a fats basis than on a skimssolids basis. Milk prices in 2011 are expected to remain near 2010 levels.

Beef/Cattle

Cattle Markets Slip From August Highs

Pasture conditions in the Southeastern and Midwestern United States have declined since the summer. As a result, year-over-year weekly (as of September 18, 2010) federally inspected cow slaughter in those regions has continued at relatively high levels. Dairy cow slaughter likely reflects feed costs that have risen faster than milk prices, narrowing profit margins. Continued increases in grain prices will exacerbate this situation and will continue to dampen any enthusiasm for cow herd expansion into 2011.

Dryness in the Southern Plains is hampering the establishment of winter wheat and, along with the sharply higher corn prices seen since the October 8 release of the World Agricultural Supply and Demand Estimates (WASDE), will likely affect demand for lightweight feeder cattle for wheat pasture programs. At present, most of the heavy yearlings have been marketed off summer growing programs and placed on feed, leaving mostly calves to be marketed for the remainder of the year. The bulk of the heavy end of the August placements will begin going to market after the beginning of 2011, with the bulk of the light end coming along during the second and third quarters. This could lead to some downward pressure on prices during those periods, despite expectations of generally short supplies of finished cattle moving through 2011. Nonetheless, quarterly prices in the WASDE were forecast to average above those in 2010.

After a brief respite of relatively high returns through the summer, cattle feeders were back at breakeven levels in September. Cattle feeding costs since July have increased sharply for cattle to be marketed at the end of 2010 and early in 2011. As a result, breakeven prices needed to cover these costs will be about $5 to $10 above current mid-$90s cash fed cattle prices. As of mid-October, five-area fed cattle prices (USDA, AMS, 5 Area Weekly Weighted Average Direct Slaughter Cattle, LM_CT150) have fallen 4 to 5 per cent from their August weekly highs of just below $99 per cwt.

While September 2010 Choice and Select beef cutout values were above August levels, they have declined steadily on a weekly basis from the short-lived rally in late August. They remain 12 to 13 per cent above year-earlier levels on a weekly and monthly basis. Retail Choice beef prices increased 1 per cent from August to September 2010 and were 7 per cent above September 2009. The farm-to-retail spread is virtually unchanged from the year-earlier spread, $2.36 per pound compared with $2.33 in September 2009. While only a penny a pound higher yearover- year, the September 2010 farm-to-wholesale spread was 20 per cent below its May high. However, steadily increasing drop values have mitigated the narrowing margins. Drop values are currently at levels not seen since the summer of 2008, largely due to hide prices—which can account for 75 per cent of total byproduct value—that are 43 per cent higher year-over-year (weekly basis, 4 October 2010 over 5 October 2009).

A recent American Express study summarized in a recent (30 September) Wall Street Journal web article found that the “ultra affluent” (those who charge more than $7,000 per month on their credit cards) are spending 25 per cent more on fast food than they did at the same time last year. That finding is consistent with the steady increase in ground beef prices observed through August 2010, before declining in September. Retail poultry prices have fluctuated somewhat from $1.75 to $1.79 per pound from May through September. Otherwise, a restaurant industry performance index remains unchanged since last month.

Beef/Cattle Trade

Less Beef in 2011: The Cause of a Smaller Year-Over-Year US Export Forecast

US beef exports for 2010 are forecast at 2.28 billion pounds, as 615 and 605 million pounds are forecast to be exported in the third and fourth quarters of this year. This export forecast for the second half of 2010 is the nearest to date to the export totals seen in the second half of 2002 and 2003, pre-bovine spongiform encephalopathy (BSE) disease outbreak years. In 2003, 680 and 578 million pounds of US beef were exported in the third and fourth quarters of the year. Beef exports through August were 17 per cent higher year-over-year, with exports to Japan and South Korea 21 and 132 per cent higher, respectively. Exports to Taiwan and Hong Kong through August were 47 and 53 per cent higher year-over-year.

US beef exports have grown year-over-year since 2004. However, in 2011, 2.21 billion pounds of US beef are forecast to be exported, which will mark the first year-over-year decline since 2004. The decline, however, does not stem from weakened international demand, but rather from the tightened supply of domestic beef. Year-over-year growth is anticipated for only the first quarter of 2011, with 515 million pounds of US beef forecast to be exported. Beef export levels for the remaining quarters of the year are forecast to be in the range of 2 to 9 per cent below this year’s quarterly export levels, beginning in the second quarter 2011. A continued weak US dollar into 2011 should also give firm support to next year’s export forecast.

With a tighter US beef supply in 2011, beef exports to import markets may become a function of which countries are the highest bidders. Regardless, exports to several Asian markets (South Korea, Taiwan, Vietnam, and Hong Kong) are expected to remain strong in 2011. Demand for beef in Egypt, a market where US export levels have been historically marginal, is also expected to remain relatively strong. In 2011, the strength of international demand for US beef should continue to support wholesale beef prices domestically, as has been the case for much of this year.

Higher Currencies Further Dampen Import Enthusiasm

As a relatively weak US dollar is supporting the beef export market, the strength of the currencies of major US trading partners is continuing to put a damper on beef imports into the United States. In 2010, 2.48 billion pounds of beef are forecast to be imported, about 6 per cent below 2009 levels. Import forecasts for the third and fourth quarters of this year are 645 and 575 million pounds, respectively.

Herd rebuilding in Australia began late in 2009, limiting exportable beef supplies; however, as 2010 has progressed and more Australian beef has become available for export, the strengthening Australian and New Zealand dollars, along with lackluster demand for beef domestically, have become the primary deterrents for US beef importers. This month, the Australian dollar reached highs against the US dollar not seen since July, 2008. US imports from Australia and New Zealand through August were 29 and 6 per cent below year-earlier levels. Imports from Brazil during January to August 2010 were also less than half of those during the same period in 2009.

Processed (prepared/preserved) beef shipments to the United States were suspended in late May, and no processing plants are currently eligible to export beef. In the third and fourth quarters of 2010, 4 and 5 per cent year-over-year growth is forecast for US beef imports; however, this growth is more indicative of import levels already trending downward in 2009.

In 2011, some overall growth in US beef imports is expected, with total imports forecast at 2.54 billion pounds. Quarterly growth from 2010 levels is also expected next year as first-quarter beef imports should be nearly 7 per cent higher year-overyear. Beef imports in the second quarter of 2011 should be fractionally below 2010 levels, and only modest growth is expected in the second half of the year.

The Price Is Right for Live Cattle Importers

Cattle imports for 2010 are forecast at 2.15 million head, 7 per cent above the yearearlier total. Through August, cattle imports from Mexico and Canada were 29 and 8 per cent higher, respectively, year-over-year. Nearly all Mexican cattle sold into the United States are feeder cattle, while a large share of Canadian cattle imports are steers and heifers for slaughter. Price incentives in the United States for Mexican feeder and Canadian fed cattle producers have largely augmented the typical flow of these respective cattle types across the northern and southern US borders. The exchange rate-adjusted price differential between US and Mexican prices (imported price of 500- to 600-pound feeders in Las Cruces, NM, versus the equivalent price of live, wholesale grass-fed steers in Mexico City) has averaged $12.98 /cwt higher in US dollar terms since January.

The price differential between US and Canadian slaughter cattle (Nebraska, 65-80 per cent Choice versus Alberta, mostly Select 1-2) has averaged $9.04 /cwt higher in US dollar terms since January. For most of this year, the US-Canadian price difference has remained well above the previous 2-year level, especially during the summer, when the difference was particularly high. Total cattle imports for 2011 are forecast at 2.1 million head, 2 per cent lower than those for this year due to decreased North American cattle inventories.

Dairy

Strengthening Demand and Rising Milk Production Should Keep Milk Prices Near 2010 Levels In 2011

Corn prices, which averaged $3.55 per bushel last year, are forecast sharply higher in the 2010/11 crop year; the US Department of Agriculture has recently lowered corn production and ending-stock forecasts. Prices are expected to average $4.60 to $5.40 per bushel in 2010/11. In contrast, soybean meal prices are not expected to differ much in 2010/11 from last year. The soybean meal price is forecast at $290 to $330 per ton this year compared with $311 the last crop year. The expected higher corn price will push the benchmark 16-per cent protein mixed-dairy ration over $8 per hundredweight (cwt) in 2011, up from about $7.30 per cwt in 2010. Although milk prices in 2011 are forecast to remain near this year’s level, higher feed prices are expected to squeeze producer margins, impacting the size of the dairy herd in 2011. The US dairy herd is expected to advance to 9,155 million cows next year, up about 0.4 per cent from the 2010 projected average. However, during the year, incentives to expand the herd will diminish. Milk per cow is also expected to advance, rising to 21,405 pounds, up 1.3 per cent from this year’s expected output per cow. Growth in milk per cow is expected to slow as higher feed prices take hold. The result for the year will be nearly a 1.7-per cent rise in milk production in 2011 to 196 billion pounds.

Domestic demand for dairy products, cheese especially, has been firm through 2010, and demand is expected to remain strong into 2011, at least in the first half of the year. Domestic commercial use on a milk-equivalent fats basis is projected to finish 2010 at 1.4 per cent above last year and forecast to rise another 1.6 per cent in 2011. On a skims-solids basis, domestic commercial use is expected to finish 2010 nearly 1 per cent below 2009. However, commercial use is forecast to snap back in 2011, rising nearly 2.5 per cent above 2010. The relative strength of commercial use on a fats basis is a result of strong cheese demand moving much of the added milk production to cheese production this year. Meanwhile, butter production has lagged last year’s levels every month until August when butter production edged ahead of year-earlier production. Butter production is likely to recover into next year due to additional milk production and favorable prices.

Milk-equivalent dairy imports are projected down in 2010 to 4.1 billion pounds, fats basis, and to 4.5 billion pounds, skims-solids basis. Next year, the trend continues, as imports are likely to fall to 4.0 billion pounds, fats basis, and 4.3 billion pounds, skims-solids basis. Higher export totals are expected in 2010: 6.6 billion pounds, fats basis, up from 4.1 billion last year, and 29.3 billion pounds, skims-solids basis, up from 22.4 billion pounds in 2009. However, exports are forecast down in 2011. Exports are projected to decline to 5.4 billion pounds on a fats basis and 28.3 billion pounds on a skims-solids basis. A gap between US and international prices still favors US exports and discourages imports in 2010. Next year, exports may be pressured by increased production in other exporting countries and several trade issues.

Relatively strong demand for dairy products in both 2010 and 2011 should be countered by continued rising milk production to keep milk prices near current levels into 2011. Cheese prices are expected to average $1.550 to $1.560 per pound this year. Continued firm cheese demand could strengthen prices somewhat further in 2011. Next year, cheese prices are expected to average $1.540 to $1.630 per pound. Butter prices are expected to moderate in 2011, as increased milk production should make more milk available for butter and powder production. The butter price is expected to average $1.720 to $1.750 per pound this year and $1.505 to $1.625 per pound in 2011. Nonfat dry milk (NDM) prices are forecast higher in 2011, as domestic demand improves and exports remain firm. NDM prices are expected to average $1.155 to $1.175 per pound in 2010, with a slightly higher average prices of $1.175 to $1.245 per pound next year. Whey prices are projected to average 36.5 to 37.5 cents per pound this year and to remain virtually unchanged next year at 35.5 to 38.5 cents per pound.

All milk prices are expected to average $16.45 to $16.55 per cwt in 2010 and remain about the same next year, averaging $16.00 to $16.90 per cwt in 2011. Class III milk prices are expected to average $14.65 to $14.75 per cwt in 2010 and climb slightly to $14.50 to $15.40 per cwt next year. Class IV prices could drop a bit, averaging $15.10 to $15.30 this year and $14.35 to $15.35 per cwt next year.

Further Reading

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