Beef exports grow amid herd contraction
By Drovers news source | Wednesday, August 18, 2010
Cow slaughter continues at a high rate, keeping U.S. beef production from expanding, while 2010 beef exports are up 13 percent over last year, according to the USDA’s August Livestock, Dairy and Poultry Outlook report.
The July 1 Cattle report indicates that feeder cattle prices and the current series of profitable months of feeding cattle have not been enough to motivate beef cow herd expansion. As a result, cow slaughter continues at a high rate, setting the stage for further declines in cow inventories.
While cattle cycles can be defined as total inventories of cattle and calves from trough to trough — as used here—or from peak to peak, the cattle cycle behavior that persists is largely due to dynamics in the beef cattle sector, since dairy cows have not exhibited cyclical behavior since about 1947. Other ways to look at cattle cycles are by cow inventories or by beef cow inventories. Each cycle consists of an expansion phase, a consolidation phase, and a liquidation phase.
Historically, and prior to the current cycle, the shortest expansion phase, of 3 years, occurred from 1980 to 1982 when inventories increased by 4 percent from their low point. This expansion was followed by a liquidation that lasted 8 years from 1983 to 1990, during which, inventories declined by 17 percent. The next cattle cycle peaked in 1996, increasing 8 percent from its 1990 low — a 6-year expansion. This was followed by an 8-year, drought-extended liquidation that saw inventories decline by 8 percent and left a 2004 cattle inventory about a million head lower than the Jan. 1, 1990 trough. The shortest liquidation phase in historical terms occurred during the cattle cycle that began in 1959, peaked in 1965, and bottomed in 1967—a 2-year liquidation.
The expansion phase of the current cattle cycle began in 2005 and peaked in 2007, due in part to a short-lived upturn in dairy cow inventories. With the July 1 inventory report, U.S. inventories of cattle and calves are 4 years into liquidation. If one looks solely at January 1 beef cow inventories, the decline that began in 1996 has been continuous except during 2005 and 2006. Declines in both July 1 beef cow inventories (down 1 percent) and beef heifer inventories (down 2 percent) suggest that a further decline is likely in store for Jan. 1, 2011 beef cow inventories.
A number of factors drive inventory dynamics. Weather patterns, especially drought, can shift inventories into or extend liquidation of the cow herd. Profit margins can also affect retention or liquidation decisions. Current cow prices appear to be sending significant numbers of cows to slaughter, reducing the total cow inventory from its already low levels.
Increased demand for corn and other grains in international markets will also continue to play a role in feed grain price dynamics. Prices for energy and other inputs will likely increase, raising breakeven costs at all levels of the cattle and beef industries. These factors, combined with the much longer production cycle for beef cattle compared with other livestock species, enables producers of other species to more quickly respond to changes in demand for final meat and poultry products. With current Cattle report estimates of the calf crop in 2010 below 2009 by more than 400,000 head, or 1 percent, competition for feeder cattle in 2011 is expected to be severe. This competition could intensify if heifers are retained for replacements, further reducing feeder cattle supplies. Under such a scenario, feeder cattle prices would be well-positioned for significant support at higher levels.
July 1 dairy replacement heifer inventories were up by 3 percent. Given that the number of heifers for dairy replacement as a share of the cow herd was record high for July, we can anticipate continued dairy cow slaughter at relatively high levels.
Feeder Cattle Supplies Tight for Foreseeable Future
National Feeder and Stocker Cattle Summaries (SJ_LS850) indicate that feeder cattle sales have been well above year-earlier levels. At the same time, feeder cattle supplies outside feedlots, down by almost 3 percent, are the lowest since the series began in 1996. Further, the latest Cattle On Feed report released July 23 indicated that the ratio of over-700-lb June feeder cattle placements to total placements was lower than last June's and almost the same as in 2008. Should these placement levels continue, the stage is set for heavy fed cattle marketings at the end of the year and into the first and second quarters of 2011.
With almost a million fewer feeder cattle outside feedlots on July 1 compared with 2009, cattle appear to be "pulled forward" (placed on feed earlier than would be considered typical) to take advantage of the current profit potential and to utilize feedlot pen space. Continued increases in grain prices could counteract the pulling forward of feeder cattle placements, which could be supportive for feeder and later fed cattle prices.
Mexico has been rebuilding its cow herd after a series of extremely dry years. As a result, Mexico should be in a good position to export feeder cattle to the United States. This will offset anticipated reductions in exports of feeder cattle from Canada where large numbers of cows going to slaughter will reduce this and next year’s calf crops, and thus, future feeder calf supplies.
Feedlot Picture Could Dim
Second-quarter 2010 net placements were 14 percent above second-quarter 2009 placements and 6 percent above 2008 placements. May-June 2010 placements could come to market in the fourth quarter in sufficient numbers to exert some downward pressure on prices. July placements have the potential to add further to winter marketings. Marketings for 4 of 6 months thus far in 2010 are above year earlier.
Currently forecast corn and soybean prices — combined with feeder cattle prices near historical highs —will result in fed cattle breakeven prices above current levels. Fed cattle prices at or above these levels could be difficult to achieve in the face of competition from cheaper poultry and a slow-paced economic recovery through the remainder of 2010, although lower pork supplies would provide positive price support. Small or negative cattle-feeding margins would result in some negative pressure on feeder cattle prices, adding to existing reluctance among cow-calf producers to expand cow herds.
Good News-Bad News for U.S. Beef Exports
U.S. beef exports in 2010 are forecast at 2.19 billion lbs, growing 13 percent above 2009 export levels. Japan and South Korea are adding the most momentum to exports of U.S. beef. Growth in the third and fourth quarters of this year is anticipated at 17 percent for Japan and 6 percent for South Korea, year-over-year. The second quarter ended with 585 million lbs of beef exported, nearly 18 percent above the same quarter last year. In the third quarter of this year, 580 million lbs of beef are forecast to be exported. In general, strengthening economies and the gradual return to pre-BSE export levels has resulted in growth in the Japanese and South Korean markets. Also, the relatively weaker dollar against the Japanese yen has given a boost to U.S. beef exports to Japan. With moderate GDP growth and stable prices in Japan and South Korea, U.S. beef exports for the first half of 2010 have returned to 33 and 45 percent of pre-BSE levels (2003), respectively.
Although these figures may appear meager after 7 post-BSE years, exports to Japan through June demonstrated a solid 24 percent growth year-over-year (104 percent for South Korea), and weekly data suggests the percentage growth will be equally strong into the second half of the year.
U.S. beef exports to other major export markets in Asia also increased year-overyear through June: Vietnam (+2.5 percent), Taiwan (+48 percent), and Hong Kong (+84 percent). U.S. beef exports for 2011 are forecast to decline 6 percent from the 2010 total; this is due to lower beef production as the domestic cattle inventory declines.
Growth in U.S. Beef Imports Anticipated in the Second Half of 2010
Imports of beef to the United States for 2010 are forecast at 2.6 billion lbs, fractionally below 2009 levels. Data from the second quarter showed imports to be at 690 million pounds – 8 percent below the year-earlier second-quarter total. Coupled with lower supplies in Australia, the strong Australian dollar is a factor that has continued to plague the U.S. import market for Australian beef products, which, in turn, has put downward pressure on total U.S. beef imports thus far in the year.