Encouraged by the return of (some, at least) winter precipitation, America's drought-beaten beef producers now show at least intentions of expanding the supply of cattle. Denver-based market-analytics firm CattleFax predicts the U.S. market for live cattle ready for slaughter hit its top cyclical price in 2014 and in all likelihood is now on its way down the back side of the traditional high/low price cycle.
However, that road back to wholesale price relief for grocers is a long and bumpy one, and will not come soon.
Rain makes grass, and grass makes beef, the old saying goes, meaning cattle ranchers devastated by years of drought are now making plans to start adding more breeding animals. Those obvious intentions, combined with a milder winter that should help farmers achieve those plans, coupled with a strengthening dollar and labor slowdown at West Coast shipping ports that could both tamper beef exports are all working together to push down the cost of live cattle on expectations of rising future supply.
But how quickly that translates to lower wholesale and retail prices is not black-and-white. The undertone in the wholesale beef market currently remains "soft," in USDA's words. But don't confuse that softness with poor demand, the agency's analyst cautions. Historically, total meat consumption tends to languish during the winter quarter, followed by burst of increased consumption as grilling season arrives. So for the first quarter of 2015, at least, buyers at the wholesale level remain reluctant to significantly increase beef purchases.
Retail beef prices rose to record highs in January, with January 2015 Choice retail beef at $6.33 per pound—up almost a dollar from this time last year—and all-fresh retail beef at $6 per pound, up over a dollar from January 2014. Still, at least for the near-term, packers continue to operate in the red. While wholesale beef cutout values did rally noticeably in late February as a result of reduced steer and heifer slaughter, those prices have not risen enough for packers to maintain steady profits, USDA says, although certain components like 90 percent lean beef remain at historical record levels.
USDA predicts beef prices will increase 4.5 percent to 5.5 percent this year--less than half last year's 11 percent to 12 percent increase. Overall retail meat, poultry and fish prices are expected to increase 3 percent to 4 percent.
On the way back to replacing the approximately 3 million breeding cows U.S. ranchers sold off between 2004 and 2010, supply will test the market's patience. All indications say we will have a larger crop of new calves born in the spring months, but that doesn't correlate to a bigger supply of market-ready cattle until 2016.
USDA reported that during the final two months of 2014, egg prices in most markets experienced a brief but sharp peak in prices. Wholesale prices for Grade A large eggs in the New York market averaging $1.28 per dozen the final week of October spiked more than 70 percent by the first week of December, rising to $2.19 per dozen.
Despite retail meat category prices in record territory, shoppers appear willing to continue to pay those higher prices, according to the latest update of a willingness-to-pay index from Oklahoma State University.
Turkey. U.S. turkey farmers produced just 0.2 percent less meat in August than they did in the same period last year, at 484 million pounds. Because that estimate actually came in higher than USDA expected, the agency revised its estimate for production in the third quarter 2014 to 2.1 percent higher than last year's. This anticipated increase comes after turkey meat production has been lower on a year-over-year basis for the last five consecutive quarters. Looking into next year, USDA expects that year-over-year production to increase to 3.4 percent higher than for this year. Lower feed costs and generally strong prices for whole birds and parts appears to be spurring turkey producers to increase production.
Still, even with that increased production, supplies remain limited. Cold storage holdings of turkey products at the end of August were down 15 percent lower compared to 2013, pattern that held true for the first eight months of this year. The lower stocks over the last several months were due primarily to smaller holdings of whole birds, specifically of whole toms--holdings of whole birds were 10 percent lower than a year earlier, but the decline came entirely from smaller stocks of whole toms. Stocks of whole hens at the end of August, in contrast, were 14 percent higher than a year earlier. Those lower stocks have pressured prices upward not only for whole birds but also for most parts, USDA reports. The average national price for frozen 8- to 16-pound whole hens was $1.10 per pound in third-quarter 2014, over 10 cents more per pound than a year earlier. The wholesale price in fourth-quarter 2014 is forecast at $1.12 to $1.16 per pound, about 9 cents per pound higher than the previous year. With falling cold storage holdings, prices for most turkey parts have been higher than those in the previous year. In August, prices for boneless/skinless turkey breasts were over 100 percent higher than a year earlier and averaged over $4.00 per pound. Prices of frozen tom drumsticks were also much higher, averaging just under $1 per pound, 34 percent above a year earlier. Prices will continue to get upward price pressure until rising stock levels, which are expected in 2015 from higher production, start to reverse this trend.
Lamb. Lamb and mutton production for the third quarter of this year is expected to by down 12 percent from the mid-year and down 4 percent compared to last year. Although production typically fall during the summer months because farmers have fewer market lambs to sell, USDA also believes the decline reflects recognition by farmers that weaker-than-expected consumer demand for lamb does not bode well for their bottom line ahead, and they are therefore reducing production. The amount of lamb and mutton being held in cold storage is the highest its been since the middle of WW II, USDA says. Cold storage right now represents nearly 2.5 times the entire production of domestic lamb and mutton for the month of July. Those excess stocks suggest consumers are slowing down in their lamb consumption. But despite the relative weakness in lamb and mutton demand, imports continue to show strength: Second quarter 2014 lamb and mutton imports were up 11 percent from the same period last year. Third-quarter imports are forecast at 37 million pounds, slightly above third-quarter levels in 2013.
Hams. USDA's September report regarding the pig inventory on U.S. farms showed the supply chain is feeling the effects of an epidemic disease that has moved through the major hog-producing regions which kills young pigs. The Sept. 1 inventory of market hogs was 2.7 percent lower than a year ago, reflecting losses to Porcine Epidemic Diarrhea that occurred in the spring and summer months. At the same time, the report indicated nascent signs of recovery and expansion. Fourth-quarter production is expected to be year-over-year lower, deriving as it does from lower pig crops. But as has been the story for most of 2014, higher average weights of the hogs farmers are bringing to market will help to offset lower fourth-quarter slaughter numbers. Pork production is expected to be about 6 billion pounds, almost 4 percent below a year earlier.
Meanwhile, pig farmers appear, like turkey producers, to be reacting to expected lower feed prices and higher hog prices by planning to expand supply. The Sept. 1 inventory of breeding animals was almost 2 percent higher than a year ago, the sharpest increase in the herd since December 2007. Hog prices that, although down compared to early 2014 are still 3 percent higher than the average for 2013 are incentivizing farmers to expand the number they breed by 4 percent for the fall and winter quarters. Meanwhile, USDA predicts pork demand will remain strong and continue to absorb those prices, as shoppers increase pork consumption to replace exceptionally high-priced beef products.
The retail price of whole milk rose in May to an average nationwide price of $3.74 a gallon, according to the Bureau of Labor Statistics, marking a 5.5-year high. Although by July the price had dropped back to $3.65, milk prices on the futures market jumped into record territory early this month, portending even higher retail prices ahead. All this increase has come at a time when dairy farmers are increasing, not decreasing, the supply.
What’s going on with milk prices?
Dairy exports higher than a year ago have been a big factor, driving demand and price even in the face of supply increases, reports University of Wisconsin milk market authority Bob Cropp. World dairy product prices have been higher than U.S. prices, which has served to draw even more milk out of this country. China has been very active in importing dairy products, now surpassing Canada as the United States' second largest customer. Cropp expects this export volume will likely hold at levels that will end the year above the record level of 2013.
But China has accumulated stocks to the point where its import activity has slowed, resulting in a significant fall in world prices to a point now below U.S. prices. While cheese exports were still higher than a year ago for June, reports are that new orders by international buyers have softened. June butter exports have already fallen below a year ago, as have nonfat dry milk exports--now off by 25 percent, Cropp says. So dairy product prices and milk prices can be expected to decline. The question is how soon and by how much?
The level of milk prices and much lower feed costs has meant very favorable margins for dairy producers, and favorable margins typically spur increased production to take advantage. Corn prices are 44 percent lower than a year ago, alfalfa hay prices are just 3.3 percent higher and soybean oil meal prices are starting to fall and are 5 percent lower than a year ago. However, California, the nation's largest producer, with a severe drought is experiencing alfalfa hay prices 35 percent higher than a year ago. So, with some tempering, milk production is picking up, as dairy producers feed for higher production per cow and by adding milk cows. USDA’s milk production report revised June’s milk production to 2.2 percent higher than a year ago and estimated July’s production to be 3.9 percent higher. July milk cows numbered 0.4 percent higher than a year ago, and milk per cow was 3.5 percent higher. Of the 23 dairy-reporting states, 11 had more cows than a year ago, 21 had more milk per cow and 20 had more total milk production.
All told, Cropp says, expect milk production to continue to run 4 percent or more above levels a year ago for the remainder of the year But, it will take time to build stocks. That means prices will only gradually decline rather than take a sharp fall. Dairy futures are reflecting that price optimism.