May 2, 2007

USDA: Production woes, high prices seen for US beef and dairy; pork output projections upbeat

While US cattle finally broke the slate of five straight monthly declines as year-on-year feedlot placements with its 4 percent increase in February, inventories and prices are seen to jack up this year, reports the US Department of Agriculture (USDA).

A 7-percent jump in marketings meant that total feedlot inventories have fallen to 3.53 percent compared to last year. This drop represents a huge reversal from five months ago, when feedlot inventories stood at 9 percent above a year ago. Aside from lower feedlot numbers, other factors such as a declining pasture, a harsh winter and high feed costs will likely contribute to lower-than-expected slaughter weights. Cattle will continue to have problems reaching Choice grades in 2007.

Retail advertising is expected to shift consumers' sights to beef. Prices for Choice middle meats - strips, top butts and short loins - will be sharply higher this spring. Price gains in Select grade beef cuts will be much more moderate than gains for Choice. A strong spring market is also expected for ground beef.

The soaring feed prices have also pushed costs for dairy producers. The milk-to-feed price ratio was 2.41 in March, the 14th straight month under the 3.0 benchmark, which represents profitability, with no relief in sight.

According to the USDA, higher feed prices will be partially compensated by higher milk prices and to compel milk production for a 0.66 percent increase this year. However, the USDA's forecast assumes continued usage of Monsanto's Posilac bovine growth hormone which has been barred by Starbucks and some retail supermarket chains to stop using production-enhancing hormone. The anti-hormone campaign could pull down USDA's high milk output projection.

On the other hand, USDA's 2007 pork output is forecast at 2.6 percent above last year. Larger herds and litter rates will more than offset for anticipated lower slaughter weights due to higher feed prices. First-quarter hog prices averaged a 9 percent increase from year ago to US$46.50. But hog prices will be lower in the second half, with estimates of US$46 in the third quarter and US$45 in the fourth quarter, as it accelerates seasonally. For the entire year, hog prices are expected to average US$46, down 2.7 percent from US$47.26 in 2006.

Booming March pork output helped hold down prices for pre-Easter hams, but the market will be heading seasonally higher again in May. The USDA said supplies of frozen pork bellies in storage are down 22 percent from a year ago. However, heavy pork slaughter numbers should hold prices for bellies in the 90-cent range for the next few months. Pork trimming prices will recover seasonally through spring.