National Cow Herd Shrinking

Dairy Liquidation Leads Cow Slaughter

Above-normal levels of commercial cow slaughter thus far in 2009 are a continuation of above-normal beef cow slaughter that began in the first half of 2006, when dry conditions held sway over large portions of the Central, Mountain, and Southeastern United States. Beef cow slaughter has been influenced by intermittent drought in the West, Plains, and Southeastern United States since 1996. In addition, beef cattle prices have declined since 2005 and feed costs, while down significantly from their peaks, have been high since dry conditions and rapidly expanding ethanol production sparked grain price increases in late 2006. Declines in milk prices, compounded by dry conditions—especially in California and the Southern Plains—have also led to an increase in dairy cow slaughter since mid- 2008. More recently, rapidly declining milk prices, accompanied by the producerfunded Cooperatives Working Together (CWT) program, have been a key motivation for increases in dairy cow slaughter: The sixth round of CWT buyout since 2003 removed 50,630 dairy cows from production in the first part of 2009. Another round of CWT buyouts has been announced, with bids to close on May 1, 2009. While milk prices reached a peak monthly average price in November 2007, by March 2009 milk prices had declined by 48 percent from that peak, including a 41-percent decline since July 2008.



A number of other factors, either coincident to or a consequence of persistent dry conditions, have contributed to increases in both dairy and beef cow slaughter. Cow-calf operations have been caught between feeder calf prices that have trended generally downward since 2005 and 2006 and feed prices that trended upward from summer 2005 to a peak in summer 2008, but they have since declined somewhat.



Cattle feeders have likewise endured an extended period of negative profit margins since May 2007. These adverse periods have reflected declining demand for beef both domestically and internationally, due first to BSE, then to high prices for beef, and, most recently, to the world economic slump.



A period of record-high prices for U.S. cow-calf operations began in May 2003, when a cow in Canada was confirmed with BSE and U.S. imports of feeder cattle from Canada were banned, coinciding with cyclically low U.S. cattle inventories. After peaking in November 2003 and dropping briefly in the few months following the first U.S. BSE case, feeder cattle prices fluctuated at record levels. Record (thus far) monthly average feeder calf prices occurred in 2005 (a monthly average price of $137.42 per cwt in May 2005 for 500-550 pound, Medium Number 1 steers in Oklahoma City) and 2006 (a monthly average price of $117.58 per cwt in September 2006 for 750-800 pound, Medium Number 1 steers in Oklahoma City). Since August 2008, feeder cattle prices have declined to pre-BSE levels observed in 2000 and 2001.



Annual commercial cow slaughter has increased year-over-year since 2005, with each year’s slaughter since 2006 being based on successively smaller January 1 cow inventories. High-cull cow prices during much of 2007 and 2008 helped ease the pain of culling in the face of dry conditions and increasing feed prices that set records in summer 2008. Cumulative weekly dairy cow slaughter through the first quarter of 2009 was 24 percent higher than slaughter for the same period in 2008, helped in part by the CWT buyout.



Simultaneously, cumulative weekly beef cow slaughter was down by less than 3 percent year-over-year. Cow herd inventory dynamics of this magnitude could lead to further reductions in the national cow herd. With normal beef cow slaughter rates for the remainder of 2009, beef cow inventories on January 1, 2010 could be below 2009 inventories. January 1, 2010 dairy cow inventories are also expected to be lower if the CWT program increases dairy cow slaughter. Overall reductions in the total U.S. cow inventory could be significant through the year.



Reductions in total cow inventories could result in proportionally reduced calf crops, which would have implications for fed beef production and cattle and beef prices for at least 2010-12. This would occur because calf crops in 2009, 2010, and possibly 2011 would likely be smaller than 2008’s calf crop by several percentage points. These smaller calf crops would lead to reduced placements of feeder cattle in feedlots at least through 2012. Feeder cattle imports from Canada and Mexico could alter this result somewhat, but Canada’s cow herd is declining similarly to that of the United States. Pasture and weather, exchange rates, and economic conditions have modified Mexican exports somewhat, and year-over-year increases in feeder cattle exports to the United States through the end of March are likely the result of cattle held from last year and current dry conditions, pushing cattle off pastures and into the United States. Rules and practices related to the new Countryof- Origin labeling requirements have yet to be worked through, and these changes could also modify the cattle-import scenario that is shaping up for the remainder of 2009 and beyond.



If prices for fed cattle and beef rise late this year, as expected in response to expected lower fed cattle numbers and with typical price responses, incentives could motivate heifer retention above that necessary for national cow inventory maintenance. Added heifer retention would have two effects on inventories: First, the number of feeder cattle available for placement on feed in the shorter run would be reduced, which would further reduce the number of heifers contributing to beef supplies. Second, it would lead to an increase in the number of breeding age females added to the national cow inventory, which would eventually begin to increase calf crops and future beef production. The sooner added heifer retention occurs, the more condensed the scenario will become, but given current inventories, the earliest that heifers could be expected to produce a larger year-over-year calf crop would be in 2011. The bulk of these calves would not reach feedlot placement size until late 2011 or more likely 2012.



Placements of feeder cattle in feedlots of 1,000-head-or-larger capacity will likely be somewhat lower during the second half of 2009. Again, this will occur because of smaller calf crops and any increases in heifer retention from actions to increase national cow herd inventories. From January 1, 2006 through January 1, 2009, heifers have represented slightly increasing portions of total cattle on feed in lots of 1,000 head or more—another indication that heifers are not yet being retained at levels sufficient for herd building. USDA’s Cattle on Feed report to be released tomorrow (April 17) will provide further information on the number of heifers on feed.



Wholesale Choice beef cutout values have declined about 5-6 percent since the beginning of 2009. Since March 1, there have been several days when the Agricultural Marketing Service’s 5-day moving-average cutout value for Select beef was higher than the average Choice beef cutout value.



This Choice-Select inversion is not common and is indicative of declining demand in the food service (restaurant) sector, where consumers purchase much of the highend Choice-and-better beef, and increasing beef purchases at the retail grocery counter as consumers respond to adverse economic conditions.



Source: Livestock, Dairy & Poultry Outlook



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