October 1, 2003

 

 

USDA Livestock, Dairy and Poultry Outlook

 

Record Beef Prices Allocate Scarce Supplies of Quality Beef

 

The ban on imports of Canadian beef and cattle from the U.S. and world markets since May 20 when a single cow was discovered to have BSE (Bovine Spongiform Encephalopathy or Mad CowDisease) exacerbated an already short supply of market-ready cattle. With continued strong beef demand both domestically and internationally, tight beef supplies have resulted in prices moving to record levels to pull fed cattle marketings forward. Slaughter levels have remained relatively high, to maintain beef production levels, but the cost has been sharply reduced slaughter weights and a reduction in the number of higher grading cattle.

 

Renewed imports of Canadian beef from cattle under 30 months of age will help ease the record setting price situation presently allocating very tight supplies of Choice and Prime beef within the export, hotel-restaurant, and a retail market increasingly demanding more consistent, higher quality beef. Although prices are expected to decline from present levels as Canadian product reenters the market, prices are expected to remain strong as North American cattle inventories continue to decline due to continued drought I nmany areas.

 

Recent Rains Raise Hope of Replenishing Forage Supplies

 

Recent rains throughout most of the country raised hopes for improved grazing conditions and at least some small grain grazing. Substantial rains in the late August should help the Central and Southern Plains in preparation for winter wheat planting. Late summer growth should also help late hay harvests; the next update on this year's hay crop will be released in the October Crop Production report. Additional rains and mild fall temperatures for additional pasture growth will be essential for over-wintering even the reduced cattle inventory. Producers in many areas have already been forced to supplement their herds on drought-reduced grazing with hay made earlier in the year.

 

Retail Choice Beef Prices Continue Record-Setting Pace

 

Market supplies of higher quality beef are extremely tight, at a time when even the retail market has been shifting toward a higher proportion of Choice beef in the meat case. Although the top end of Select beef can be an excellent value, in general Select beef does not have the consistency of the higher grades of beef. In August 2002 about 60 percent of the steer and heifer slaughter graded Prime and Choice, this year the proportion dropped to 50.6 percent. Record Choice boxed-beef prices are allocating the reduced supplies among users. Retail beef prices have been on a record/near record-setting pace since February as poor weather conditions slowed weight gains and tightened beef supplies. Then just as rates of feedlot gains began to improve in May, BSE was discovered in Canada eliminating this source of higher quality beef from the market.

 

The price surge continued in August with the Choice retail beef price averaging a record $3.74 a pound up from $3.66 in June and $3.65 in July. In the second week of September, with further supply tightening in higher quality beef, prices for Choice boxed beef rose sharply averaging a record $156.11 per cwt. Normally, slaughter weights rise through early fall and peak in late October-early November. As fed cattle have been pulled foreword and slaughtered with fewer days on feed this summer, weights have been relatively flat and well below the record weights of a year earlier. Even though third quarter beef production remains near to slightly below year-earlier levels, as cattle slaughter increased well above year-earlier levels, slaughter weights and the proportion grading Prime and Choice has declined.

 

In July, federally inspected steer carcass weights averaged 25 pounds below last year, while heifer weights were down 19 pounds. The proportion of steer and heifer slaughter grading Prime and Choice was 61 percent last year, this past July the proportion was down to 54.5 percent. In August, steer carcass weights were about 30 pounds below a year earlier, while heifer weights were down about 25 pounds. The proportion of steer and heifer slaughter in August grading Prime-Choice was down to 52.6 percent, sharply below the 61 percent of a year earlier. The proportion grading Prime-Choice moved up to 64 percent last fall, but will remain far below that level this year unless the slaughter pace is slowed and cattle are kept on feed longer.

 

All Sectors of the Cattle Industry Profitable at Present

 

Typically, one sector of the cattle sector is profitable at the cost of another sector. At present, however, the ban on Canadian beef imports and the tight supply situation have resulted in industry scrambling to maintain the strong demand for higher quality beef and profits throughout the industry. At issue is how much higher prices can be pushed and still maintain profits in each sector. Clearly at present, some end users are not receiving the quality of beef their patrons have been receiving. Over the past several years satisfaction with higher quality beef has resulted in repeat business even at higher prices.

 

In 1999 and 2000, retail pork prices were about 84 percent of beef prices. As demand for higher quality beef strengthened, this ratio deteriorated to near 80 percent in 2001 and 2002. With the present intense competition for the sharply reduced supply of Prime-Choice beef, the Choice beef/pork retail price ratio has declined to 72 percent.

 

A similar situation has occurred with broilers. In the late 1990's the ERS retail young chicken composite price was about 55 percent of the Choice retail beef price. This ratio slipped to 46 to 50 percent in the early 2000's, and this spring the ratio was down to 44 percent. Although profits are extremely favourable throughout the cattle industry, a number of users are now paying extremely high prices for less than desirable quantities, and increasingly of lower quality of beef.

 

Select beef prices have also risen rapidly over the past several months reflecting increased demand for all types of beef. Both pork and broiler supplies are expected to be near to above year-earlier levels over the next year, while beef supplies will be declining cyclically, particularly if forage conditions improve and herd expansion begins. Pork and poultry will become increasingly more attractive competitors, particularly to the retail market, if the alternative is a return to the inconsistent "lean beef" of the 1990's.

 

Quality Beef Supplies Continue to Tighten

 

Over the past decade, the North American beef industry has become increasingly coordinated. The two largest beef packers in Canada are also two of the largest packers in the United States. In recent years the United States has imported beef and cattle from Canada, and has exported both to Canada although in smaller quantities. About 8 to 10 percent of U.S. beef supplies are directly (boxed beef) or indirectly (fed cattle for immediate slaughter or feeder cattle for later slaughter) imported from Canada.

 

With cattle herd liquidation occurring in the United States and Canada (as well as Mexico, an important source of feeder cattle) the present tight supply situation for high-quality beef is only going to get tighter until herd expansion results in increased beef supplies.

 

Female slaughter has been large again this year due to dry conditions in many areas, and herd expansion has been put off for at least another year. At present even if more heifers are retained and bred in 2004, beef production will not increase before 2006, and supplies will decline even more in 2004 and 2005. In fact the stronger the expansion signals and the more female stock are retained; the tighter supplies will get over the next couple of years.

 

Canadian Beef Likely To Be Absorbed Fairly Readily

 

The first loads of Canadian boneless beef from cattle under 30 months of age and veal began to enter the United States in early September. Although the industry is concerned with the reentry of Canadian beef, end users will likely absorb the additional beef fairly easily.

 

Certainly prices will decline from the feverish pace of the past several weeks, particularly for the higher quality beef, but the supply situation will remain very tight once the supplies begin to balance out. Initially larger quantities of higher quality beef are likely to enter from Canada because of their slaughter slowdown since May 20. This will allow fed cattle marketings in the U.S. to slow resulting in more days on feed for cattle in U.S. feedlots, a slowdown in slaughter and additional Prime-Choice beef to meet the growing demand for this product.

 

Once the initial surge of higher quality beef from Canada is exhausted, much of the Canadian beef produced is likely to be lower grade due to the backlog of cattle they need to process. Typically about 50 percent of Canadian beef enters the export market. The U.S. and Mexico have opened their borders for Canadian veal and boneless beef under 30 months of age.

 

Cattle Prices Continue Record Pace

 

Fed cattle prices averaged in the low $80's in August, and in the upper $80's in early September. Even as Canadian beef reenters the United States, prices are expected to remain near $80 to the low $80's over the next year as cattle inventories tighten. Prices may go even higher depending on female retention and continued demand strength.

 

Similarly, feeder cattle prices have risen rapidly as feedlot operators attempted to maintain feedlot inventories following the rapid marketing pace of recent months. Yearling feeder cattle prices in Oklahoma City were averaging near $100 per cwt in mid September. Prospects for improved fall grazing conditions, particularly small grain grazing, are also increasing the demand for a tightening supply of feeder cattle. Although prices are expected to decline as beef supplies smooth out, prices are likely to remain in the upper $80's to the low $90's over the next couple of years

 

Utility cow prices remain very strong, with prices averaging near to slightly above $50 per cwt in late summer. Even as calf weaning begins and additional cows are culled from the herd, prices are expected to remain strong, as many herds have already been culled due to reduced forage supplies. Prices for 90-percent lean beef remain strong, averaging near $120 per cwt this summer, up from $102.60 in the third quarter of 2002.

 

The tight supply of higher quality beef has similarly resulted in a sharp decline in supplies of fed beef trimmings, 50-percent lean, and a run at record prices. In summer 2002, 50-percent lean beef trimmings averaged $32.84 per cwt, but, as supplies of higher quality beef tightened, prices moved up beginning in April 2003, and with the reduction of trimmings from Canada, prices averaged $81.52 in August.

 

At present the entire market is short higher quality beef and the trimmings that are derived from this product. Prices for imported 90-percent lean beef, blended with 50-percent lean trimmings to add value, have languished in the $90 to low $100 range since spring. This has been an unusual year for the beef complex anyway one looks at it. The industry will be tested over the next couple of years as to whether it can continue to serve the strong customer base that it has developed with high quality consistent beef for the retail, hotel, restaurant and export markets in the future.

 

Prices relative to pork and poultry will be a key, particularly at the retail market. The retail market has shifted very successfully toward Choice beef and has been rewarded by consumers' willingness to pay higher prices for a consistent, quality product.

 

2003 Pork Production Pulls Almost Even with 2002

 

Responses to the BSE situation in Canada by the U.S. and Canadian markets have altered expectations for U.S. pork production and trade for the balance of 2003 and the first half of 2004. Larger U.S. imports of Canadian slaughter hogs is the key factor pushing expected 2003 hog slaughter to 99.3 million head, and pork production to 19.6 billion pounds.

 

Higher than average slaughter hog imports will likely persist through the first half of 2004, lifting estimated slaughter for next year to 98.4 million head, and estimated production to 19.5 billion pounds. These upward adjustments in estimated slaughter and production leave very little daylight between 2002 slaughter and production, and estimates for this year, and 2004.

 

Only 1 percent fewer hogs are expected to be slaughtered this year than in 2002. Production will likely be off by less than 0.5 percent if heavier year-over-year dressed weights continue for the rest of this year. Hog slaughter and pork production in 2004 are each expected to be less than 1 percent lower than 2003. Thus, breeding herd reductions of 2002 have largely been offset by larger hog and feeder pig imports from Canada, higher dressed weights, and small productivity increases.

 

Hog Prices Weaker, Retail Prices Steady

 

Record high prices in the beef sector finally spilled over into the pork sector last week. Although the Estimated Composite Pork Carcass Cutout averaged $64.21 from June through August, it had declined into the high $50 range in late August, and into early September. For the week ending September 13 the Cutout added more than $5 to the previous weeks close however, on the strength of higher wholesale demand for loins, butts, hams, and bellies.

 

Retail pork prices appear to be on the increase as well. USDA reported an August composite retail pork price of $2.71, in increase of almost 2 percent from July. Higher beef prices and declining supplies of market ready cattle will likely provide continued support for both wholesale and retail pork prices well into the Spring of 2004. Adequate supplies of export-ready Canadian pork products as well as slaughter animals could moderate pork price increases.

  

U.S. Imports of Canadian Slaughter Hogs Up Sharply

 

U.S. imports of Canadian slaughter hogs have increased sharply since June. Live hog imports reported by USDA/APHIS indicate that U.S. imports of barrows and gilts for the period June-August 2003 increased 48 percent over the same period of 2002. Larger imports of Canadian slaughter animals is consistent with Canadian slaughter data, which indicate that Federal Slaughter for June-August is more than 7 percent  lower than in the same period of 2002. The Canadian data further suggest that slaughter facilities in the western provinces have reduced slaughter numbers the most. For June-August 2003, Manitoba's slaughter is more than 19 percent lower than last year, and Saskatchewan's slaughter was 11 percent lower than last year.

 

Pork Consumption Lower in Canada in Response to BSE Situation

 

An important reason for lower Canadian slaughter-- and thus a greater supply of exportable hog--could be weak demand for pork by Canadian consumers, since the onset of the BSE situation in late May. It appears that Canadian consumers have increased their consumption of domestic beef as a sympathetic response to the plight of the Canadian beef industry. Lower Canadian pork prices contributed to lower packer margins and subsequent cutbacks in Canadian slaughter, diverting hogs to the United States for slaughter. Larger imports of Canadian slaughter hogs will likely persist, until supply and demand balance has been achieved in Canada, and more normal pork consumption rates resume.

 

Fallout From Canadian BSE Situation Extends to U.S. Pork Product Imports

 

Weak consumer demand for pork products in Canada appears to have created attractively priced products for U.S. importers. Despite the lower valued U.S. dollar, June and July imports of Canadian pork products increased 14 percent over the same 2 month period last year. For the first 7 months of 2003, imports of Canadian pork products increased 16 percent over 2002.

 

Pork Consumption Lower in Canada in Response to BSE Situation

 

An important reason for lower Canadian slaughter- - and thus a greater supply of exportable hog-- could be weak demand for pork by Canadian consumers, since the onset of the BSE situation in late May. It appears that Canadian consumers have increased their consumption of domestic beef as a sympathetic response to the plight of the Canadian beef industry. Lower Canadian pork prices contributed to lower packer margins and subsequent cutbacks in Canadian slaughter, diverting hogs to the United States for slaughter. Larger imports of Canadian slaughter hogs will likely persist, until supply and demand balance has been achieved in Canada, and more normal pork consumption rates resume.

 

Fallout From Canadian BSE Situation Extends to U.S. Pork Product Imports

 

Weak consumer demand for pork products in Canada appears to have created attractively priced products for U.S. importers. Despite the lower valued U.S. dollar, June and July imports of Canadian pork products increased 14 percent over the same 2 month period last year. For the first 7 months of 2003, imports of Canadian pork products increased 16 percent over 2002.

 

Broiler Production Forecast Increased

 

The U.S. broiler production forecast for third quarter 2003 has been increased to 8.43 billion pounds, up 150 million pounds from the previous estimate. This is a 2.1-percent increase in production compared to a year earlier and reflects an expected upward turn in the number of birds slaughtered as well as continued growth in their average weight.

 

Broiler meat production is expected to show a seasonal decline in the fourth quarter, with production estimated at 8.1 billion pounds. Throughout most of the third quarter, the number of chicks being placed for grow out has averaged only marginally higher than the previous year. This pattern is expected to change slightly going into the fourth quarter, with chick placements averaging slightly less than 1 percent higher than the previous year.

 

In the most recent broiler hatchery report, the number of egg sets and chicks placed over the last 5 weeks (August 2 to September 6) showed little growth over the previous year. This is a strong indication that the number of birds available to processors through the middle of November will at best be only a little higher than in the same period in 2002. However, average live weights have continued to increase and are expected to be a major reason behind higher broiler meat production. Over the first 7 months of 2003, the number of birds slaughtered was down by 1.4 percent, but that decline was has been offset by a 1.4-percent increase in their average weights.

 

Broiler Exports Edge Higher

 

Second quarter 2003 broiler exports totaled 1.17 billion pounds, up 2.6 percent from the same period in 2001. The chief reason for the increase is astabilization in the export situation with Russia.Exports to Russia were down 10.5 percent over the first 7 months of 2003, compared with same period in 2002. This amounts to a roughly 100-millionpound decrease in shipments. However, all the decrease was in the first quarter, with shipments in the remaining months slightly higher than the previous year.

 

Shipments to other top markets (Hong Kong, Mexico, and Korea) have also been markedly lower than the previous year. These have been almost totally offset by the growth in exports to a number of rapidly growing markets. In the Western Hemisphere, much of the growth has been in shipments to Cuba (up 62 percent) and Guatemala (up 30 percent). Other high-growth areas so far in 2003 have been direct shipments to China (up 104 percent), Angola (up 40 percent), and Taiwan (up 40 percent).

 

The forecast for broiler exports during the second half of 2003 calls for gradually increasing shipments. Total exports in the third and fourth quarters are expected to reach 2.6 billion pounds, up 5 percent from the previous year. Along with improvements in the Russian market, this forecast depends on improvements in exports to such markets as Hong Kong and Mexico.

 

Flat Production, But Lower Exports, Increases Turkey Stocks

 

Over the first 7 months of 2003, U.S. turkey production totaled 3.3 billion pounds, almost identical with the same period in 2002. Along with the minimal increase in production, the first 7 months of 2003 has seen a considerable decline in turkey exports (down 4 percent), chiefly due to lower exports to Hong Kong. These factors, combined with little increase in domestic consumption, have resulted in a continued buildup in stocks of frozen whole turkeys and turkey parts

 

Cold storage estimates at the beginning of August place turkey stocks at 742 million pounds, 5 percent higher than in 2002, but 39 percent higher han at the beginning of August 2001. Overall, most of the increase in turkey stocks has been in parts, which are 9 percent higher than at the same time the previous year. While stocks of whole birds are up only 1.4 percent, there is a large difference between the poundage of whole hen and whole toms in storage. Stocks of whole toms are up 14 percent from the previous year, but have been offset almost entirely by lower cold storage holding of whole hens (down 13.3 percent).

 

 

Source: USDA