USDA Outlook: Corn, feeder cattle prices should see effects of drought through rest of 2012, into much of 2013, as lack of rainfall hurting crop, pasture conditions
July 19, 2012
– The following article is excerpted from the July Livestock, Dairy and Poultry Outlook published by the Economic Research Service of the USDA.
Drought Shakes the Markets
This year’s lack of adequate rainfall over more than half of the United States has resulted in rapidly deteriorating crop and pasture conditions in the key areas of the Midwest, Southeast, Plains, Southwest, and West. This year’s drought is more detrimental overall because areas affected by last year’s drought have not been able to recover. As a result, corn prices have moved sharply higher and cattle prices have begun to drift lower. The drought will have the largest impacts on prices for corn and feeder cattle through the rest of 2012 and into much of 2013.
While weekly federally inspected beef cow slaughter has been generally below last year’s high levels, it has picked up recently due to drought-induced concerns over standing and harvested forage supplies for the remainder of this summer through the coming winter. At the same time, dairy cow slaughter has been above year-earlier levels for most of 2012. Despite the high levels of cow slaughter, weekly dressed cow beef prices have slipped only 3 percent since their peak the week-of-May 26. With heifer retention likely on hold due to drought-constrained pasture conditions, these increases in cow slaughter almost surely set the stage for further decline in cow inventories. The July 1 Cattle report that NASS will release on July 20, 2012, will give indications of changes in cattle numbers.
Feeder cattle prices have responded predictably to rising corn prices, moving lower as corn prices escalate and cattle feeders react to extremely negative margins. Mid- weight feeder cattle appear to be bearing most of the brunt, with lightweight feeder calves following due to deteriorating pasture conditions. Heavier feeder cattle appear to be declining the least, likely due to their propensity toward shorter feeding periods in the face of expensive corn.
Cattle feeders who had been hoping for positive margins later this year and in 2013 have also begun to adjust their expectations by paying less for feeder cattle to offset anticipated higher feed prices. Projected margins for fed cattle marketed in July are in excess of -$200 per head based on $117 per cwt fed cattle prices.
Weekly wholesale cutout values have begun to decline again after briefly moving higher in May and June. While weekly Choice cutout values through July 7 have declined about 2 percent from their June high, Select cutout values have seen a steady decline of 6 percent since their June high. These declines may reflect declining Choice retail beef prices that have generally moved lower since reaching an all-time high of $5.09 per pound in January 2012. At the same time, monthly retail prices for all-fresh beef, which includes ground product, continue to set successive record highs. These record retail all-fresh prices are likely due to the continuing strength in ground products, which likely reflects reduced supplies of processing beef as a result of the pull-back from using lean finely textured beef in ground beef products. With both pork and poultry prices so much lower, however, a near-term peak in retail prices is probably not far away.
Stronger U.S. Dollar Pulls Beef to the United States, Hampers Exports
A stronger U.S. dollar thus far in 2012 has improved conditions for stronger U.S. beef imports. Supply also has been higher from major trading partners. The largest increase in imports has been from Australia as imports are 85 percent higher through May. Imports from Canada are 3 percent higher, year-over-year, and shipments from Mexico and Uruguay have increased by 43 and 50 percent, respectively. Through May, U.S. imports are 22 percent higher, near the 21 percent yearly increase forecast for 2012. The beef import forecast for 2013 is expected to be 6 percent higher, year-over-year, at 2.62 billion pounds.
Through May, U.S. beef exports were lower to most major trade partners, hampered by a stronger U.S. dollar. Exports to Mexico and Canada were 12 and 10 percent lower, respectively, through May. Exports to Japan and South Korea were 4 and 27 percent lower; however, exports to Vietnam and Egypt increased by 29 and 8 percent, respectively. Second-quarter U.S. exports are expected to be about 1 percent lower than year-earlier levels at 695 million pounds, but third- and fourth- quarter exports are expected to be 10 and 6 percent lower, year-over-year. Beef exports in 2012 are forecast at 2.6 billion pounds, or about 7 percent lower, year-over-year.
Feeder Cattle Pulled from Both Canada and Mexico
U.S. cattle imports through May were up 21 percent, year-over-year, with imports from Mexico and Canada up 29 and 7 percent, respectively. Drought conditions extending into Mexico have continued pulling imports of feeder cattle northward. The price differential between Mexico City feeders and imported 500-600 pound feeder cattle has also continued widening thus far through much of the year to date. USDA’s Agricultural Marketing Service (AMS) weekly reports show Mexican cattle imports increasing at higher rates through June as imports are 31 percent higher, year-over-year.
Canadian cattle imports through June are 9 percent higher, year-over-year. The increase in imports from Canada has been primarily in feeder cattle (+92 percent, year-over-year). Canadian feeder cattle prices have deteriorated in recent weeks due to due grain cost uncertainty and limited demand for feeders in Canadian feedlots. Total U.S. cattle imports for 2012 are forecast at 2.175 million head as conditions for stronger year-over-year imports from both Canada and Mexico are expected to continue. U.S. cattle imports for 2013 are forecast at 2 million head.