Current Situation and Analysis - 9/26/2017

Wednesday, September 27, 2017
DAIRY COW SLAUGHTER UP AS PRODUCT USAGE FLATTENS

            Dairy cow slaughter was up 9% from a year earlier during August, approaching the prior peaks of the year posted in January and March. Dairy cow slaughter has been up from a year earlier in every month this year, except for February due to the Leap Year influence last year. Through the first eight months of 2017, slaughter was up 4% year-over-year and is on track to reach three million head for the year, the largest since 2013.  At the beginning of the year, the milk cow herd was pegged at 9.349 million head, up less than 0.5% from a year earlier. In August, the number of cows being milked was up almost 1% from 2016’s. The last two months have seen the milk cow herd increase by one thousand head, which compares to an 8,000 cow increase during the same months a year ago.

            Producers are not getting strong market signals to expand or contract their herds, although dairy product usage has not been anything to get excited about. The All Milk price reported by USDA’s National Agriculture Statistics Service (NASS) was $17.30 per cwt. in the latest two months (June and July). In the same two months of 2016, that price was $15.45 but this year’s price pales in comparison to the June-July 2014 price of $23.25. The Class III milk price (largely milk going to cheese makers) was $16.57 per cwt. in August, up more than $1 from the previous month but was still below the prior August price of $16.91. Cheese prices so far in September have been under pressure, suggesting that the Class III milk price for this month will be moving lower.

            Milk production was 2% above a year ago in July and August, which is a big increase when compared to milk and dairy product usage in recent months. Fluid milk sales volume in the July (the latest reported month) was down 2% from the prior July and year-to-date fluid product volume also dropped 2% from 2016’s. This leaves more milk to go through butter, cheese, powder and other dairy product markets. Cheese production was up 1% in July from a year ago, but this matches up against American-type cheese usage that was down 4% non-American-type cheese (mostly Italian for pizza) that was down 3% from the prior July. Consequently, cheese inventories in cold storage were at record-breaking levels at the end of July. NASS cheese inventory data in cold storage at the end of August was released on September 22nd. That data showed some reduction in frozen stocks-on-hand, still the percentage comparisons to a year earlier were large.

            Butter markets are the bright spot for the dairy industry. Prices are record-high. Butter usage by U.S. consumers in July was up 8% from a year earlier. Over the May-July interval, butter usage was up 2% year-over-year. Growth in consumption has been pulling down cold storage inventories. The end of July inventory was down 8% from July 2016. End of August data just released showed liquidation accelerating with stocks down 12% from a year ago. Price relationships between butter and cheese in the wholesale markets should encourage more milk to go into butter production at the expense of cheese in coming months, moderating inventories and butter prices. Overall, relatively strong butter prices should keep milk prices steady or moving slightly higher through the end of this calendar year.  That price trend probably does not lead to a decline in dairy cow slaughter relative to a year ago.

STAGE SET FOR MORE CHICKEN PRODUCTION

      Based on wholesale product prices relative to feed costs, 2017 will be one of the better financial years this decade for the U.S. chicken industry. The value of chicken parts less feed costs this quarter will be the highest since the summer of 2014, slightly exceeding the returns of the second quarter of this year. Highlighting the current market situation are record-high wing prices and breast meat prices that are the highest since the second quarter of 2015.

      Broiler-type chicken production this quarter should be up 1% from last summer’s. Exports should be up slightly from a year ago, leaving chicken supplies available to the domestic market unchanged or up slightly from 2016’s. The higher prices in the midst of supplies that are unchanged or up slightly makes a positive statement about domestic consumer demand.

      Broiler-type layers in the hatchery flock as of September 1 were up 5% from 2016’s. Three months earlier, the broiler-type layer count was down 2% from a year earlier. Broiler-type hatching egg production in May was down 1% from a year earlier while August production was up 3%, in response to industry profitability. The flow of young hens (pullets) into the hatchery supply flock 7-15 months earlier usually is a good leading indicator of the hatchery hen population. In May, that reading showed a 3% increase year-over-year, compared to the 2% layer decline. In August, the 7-15 month lagged sum of pullet placements into the hatchery supply flock was up 2% while the layer flock was up 5%.  These divergences in trends are unusual, but given profitability levels are consistent with economic conditions.

      Domestic consumer demand for chicken usually pulls back seasonally from the summer to the fall quarter. Breast product values have been under pressure in recent weeks, consistent with seasonal trends. Profitability is forecast to make a larger-than-normal decline this fall, relative to the high levels during the summer. The decline in profitability should impact hatchery output, moderating the incentives to increase chicken production through the first half of 2018.

COLD STORAGE HIGHLIGHTS

      Data in the latest Cold Storage report from NASS (releases September 22nd) are as of August 31st, and give frozen items that are not for immediate sale. Frozen products have differing shelf-lives before then must be sold. For example, typical industry specification is that that a frozen whole turkey should be sold within about two years, while frozen ground meats require marketing much sooner (e.g. six month or so). At times U.S. cold storage stocks are increasing to support growing tonnage of frozen products being exported. At other times, stocks may build due to surging U.S. imports, like when Australia has a drought. Stocks can also build-up when product is difficult to sell.

       A feature of cold storage is that many items are seasonal, the best example are whole turkeys, which are unfrozen prior to Thanksgiving celebrations. U.S. turkey sales have struggled this year, which has added to the normal build-up of frozen stocks (up 14% year-over-year). In contrast to turkey, at the end of August, frozen chicken was only1% above 2016’s.

       In the red meats, even with very large tonnage being produced, most products has continued to flow through the marketing chains at a brisk pace and stocks have not increased year-over-year. As of August 30th, frozen beef tonnage was unchanged from 2016’s, pork dropped 5%, and lamb/mutton was down 11%. U.S. veal production has been increasing and sales struggling (stocks surged 83%).