Drought Shakes the Markets

USDA Economic Research Service offers July 17 "Livestock, Dairy & Poultry Outlook."

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% 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. Midweight 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 hundredweight (cwt.) fed-cattle prices (High Plains Cattle Feeding Simulator: http://www.ers.usda.gov/data-products/livestock-meat-domestic-data.aspx).

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% from their June high, Select cutout values have seen a steady decline of 6% 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.