July 16, 2012

US livestock markets facing drought impact

With worsening weather condition across the US corn belt, the latest USDA's World Demand and Supply Estimates (USDA's WASDE) has expected possible impacts of the fallout from the drought and rising corn prices upon the US livestock markets.

While higher feed prices are expected to slow the rate of expansion and temper growth in weights for the US hog and poultry industries, US beef production has been revised up slightly for 2012, totalling 4% below 2011 levels. The poor pasture conditions are anticipated to force US cow-calf producers to turn-off numbers earlier, with increased placements of lighter-weight animal expected in feedlots over the coming months. While the sharply higher US corn values will result in higher feed cost, increased feeder cattle placements into feedlots are expected to pressure feeder cattle value over the short term.

With over 25% of the cows in the US now estimated to have experienced some form of drought, combined with the continuation of poor dairy margins, US cow slaughter has noticeable increased in recent weeks. Additionally, US 90CL beef trimming prices have started their seasonal decline, with a wide spread between domestic and imported lean grinding prices. Although US lean beef prices are expected to be pressured by higher drought-induced cow slaughter, the already tight lean grinding beef supplies in the market are expected to continue to support imports from Australia.

Despite the anticipated increase in cow slaughter, the USDA has forecast beef production for the third and fourth quarters of 2012 to remain 4% and 8%, respectively, below the corresponding periods in 2011. The final three months of 2012 is expected to be the season with the tightest cattle supply, with demand expected to increase ­- led by choice middle cuts.

For 2013, the USDA revised beef production down slightly from June’s estimates, but still 2% below 2012 levels, as the anticipated steady placement of calves during the second half of 2012 results in a tighter supply of cattle early in 2013. While US average cattle carcase weight have increased during the first half of 2012, placements of lighter-weight cattle in feedlots and the higher forecast feed cost are expected to limit weights for the remainder of 2012 and into 2013.

Impacted by the high corn prices, US fed steer prices for the third and fourth quarters of 2012 are forecast to remain relatively high on-year, averaging 123US¢ per pound and 127US¢ per pound, respectively.

Despite the short term drought implications on trade, the USDA forecasts US beef imports in 2012 to increase 20% on the previous year, to 1.12 million tonnes, with 2013 imports to rise a further 6%, to 1.19 million tonnes - supported by firm demand for manufacturing beef. Meanwhile, US beef exports are estimated to decline 7% in 2012, totalling 1.17 million tonnes, before recovering 2% in 2013.