Corn prices may limit meat production

Oct 22, 2010
by DTN

A sudden spike in corn prices may limit U.S. meat production in 2011, according to John Harrington, DTN chief livestock market analyst.

Corn prices rose sharply, up the limit Oct. 15, old crop up 35 cents per bushel and new crop prices up 12 cents last Monday and at midday last Tuesday, December futures up 15. With predictions of possible highs at or above $6, livestock producers are worried about feed bills.

Higher feed bills translate into a higher cost of gain for producers, which means feedlots and producers have to get more for their end products, Harrington said. In order to avoid losing money, producers will have to put fewer animals on feed.

“When futures become so unattractive that you cannot lock in any kind of profit, especially for cattle, feedlot placement will drop off,” Harrington said. “We’ve already seen that in the last couple days.”

Feed prices have already begun to fall, reflecting less demand, less buying interest from feedlots, and less interest in placing cattle on feed. That trend will probably continue if corn prices keep rising, he said.

“Eventually, corn prices will have to come back down, but it is a very scary situation for producers,” he said.

“Feedlots may either have to buy cattle lower or not at all.

Beef production is set to be down 2 to 3 percent in the first half of 2011, even with corn in the $4 to $5 range. If corn prices rise closer to $6, that could easily reduce total red meat production by another couple percent, he said.

But despite the spike in corn prices, the scene is already established for the fourth quarter, Harrington said. “What’s going to be is going to be,” he said. “All the new reactions to the corn market will not affect the end of 2010, but the end of 2011.

Livestock Outlook

Harrington and DTN Senior Analyst Darin Newsom held a Livestock Outlook webinar on Oct. 7, noting especially the great contrast between today’s cattle and hog market conditions and those of a year ago.

“Last year, we were losing billions and billions of dollars in both the cattle and hog industries due to international animal concerns, the recession, unemployment,” Harrington said. “We haven’t had profits every day of the year, but we’ve had a good many.”

The U.S. has killed about 2 percent more cattle so far this year, and Harrington estimated the slaughter for the year will total about 34 million head, up about 2 percent from last year. The fourth quarter will see a continuation of that slaughter trend as quite a few cattle have been placed against the fourth quarter, so the slaughter will have to remain fairly high.

Carcass weights have consistently come in lighter than a year ago due to a tough winter and cattle stressed throughout the January/February period. Harrington predicted carcass weights for the year will average about 768 pounds, about 11 pounds less than a year ago, and said he looks for fourthquarter carcass weights to level off.

As for foreign beef trade, beef imports declined sharply in the first half of the year due to big cutbacks from Australia and New Zealand where producers have been rebuilding beef herds. Next year, beef imports should rebound to about 2.5 billion pounds. In the fourth quarter of 2010, Harrington expects beef imports to be above last year’s level.

As for beef exports, the U.S. has had slower second and third quarters in 2010 but should export about 2.2 billion pounds of beef on a carcass basis for the year, an increase of 17 percent from 2009. That is the best shipment seen since 2003 before the BSE scare, he said. As for commercial beef production, Harrington predicted a decrease in annual per capita supplies and expected to see the same drop in the fourth quarter.

The good news is that consumers are spending a little more on beef and for the first eight months of the year, retail beef averaged $4.36 per pound, about a 2 percent increase over a year ago.

“Better than that, the farm share of the retail dollar—which was very low as retailers took a very defensive position in 2009—increased from 42 percent in 2009 to 46 percent this year,” he said.

Harrington said he expects an average steer price between $96 and $97 in the fourth quarter and expects the market will continue to reflect the improved demand curve seen throughout 2010. That is basically about a 15 percent increase over the fourth quarter of 2009, which averaged about $83.50.

Harrington said higher prices may be unlikely given the kind of tonnage he expects during the next three months and said the market may not be strong enough to generate a significant profit at the feedlot level.

The hog situation looks more favorable in terms of fourth-quarter profitability, he said. Hog slaughter has averaged between 3 and 3.5 percent lower than a year ago. After about four or five quarters of liquidation, the result has been fewer hogs and less tonnage.

Harrington estimated the 2010 hog slaughter will total about 109.5 million this year, about 7 million less than 2008. Fourth-quarter slaughter should total about 29 million hogs, about 2.2 percent lower.

Pork production should be about 22.2 billion pounds on an annual basis, off about 3.5 percent. Fourthquarter production should be about 5.88 billion pounds, 2 percent lower than last year.

The good news, Harrington said, is that pork imports are around 850 million pounds, up 2 percent from last year. But the big story for pork is on the export side, he said.

“We’ve had a nice recovery from last year when that swine flu scare knocked U.S. export business and domestic demand for a loop,” he said.

This year, U.S. pork exports are up 5 percent at 4.3 billion. There is still growth needed as the total in 2008 was 4.7 billion. The U.S. still needs to get Russia and China back on board, though Japan—the larger pork export market—is up 5 percent.

“The bottom line is that the pork trade has improved this year by about 10 to 11 percent,” he said. “We’re shipping more pork out than we are bringing in, thanks to cuts in commercial production and larger pork surplus supplies.”

Consumers are also spending more money on pork than in 2009 as the average cost of pork—$3.02 through August—is up 2.5 percent.

“Retailers are taking smaller margins from pork sales, allowing the farm share to grow to 32 percent versus only 25 percent in 2009,” he said. “That puts more money in the pockets of pork producers. — DTN