Animal Science: Today and Tomorrow
Dr. Tom Troxel Dr. Michael L. Looper
Zilmax Loss – Market Impact
Following Tyson suspending purchases of cattle fed Zilmax, Merck Animal Health announced they will temporarily suspend sales of Zilmax in the U.S. and Canada. Specifically, the analysis indicated that the weekly average beef production forecast would be lowered by 6 to 7 million pounds per week from September to December. The potential price impact from a lowered beef production forecast is estimated to be worth $1 to $2.50/cwt increase in fed prices.
Prior to the announcement from Tyson, CattleFax was forecasting a fourth quarter average fed price of $128/cwt, which would be about $2/cwt above a year ago. This expectation for a higher fourth quarter average than last year was largely due to per capita net beef supplies forecast to be down 3% in the fourth quarter as a result of fewer slaughter cattle. This forecast was also based on fed cattle demand being down about 4% due to continued slow economic growth. Now with the supply forecast changing, as a result of the Zilmax announcement, the fed price forecast for the fourth quarter has changed. With demand still expected to be down 4 percent, and per capita net beef supplies now forecast to be down 4.5%, the fed market is expected to average closer to $130 in the fourth quarter; $2 higher than the previous forecast. Additionally, based on the historical averages, the range around a $130 fourth quarter average is expected to see cash highs at $133-$134, and the lows during the quarter near $122-$123. Just for comparison, if fed cattle demand is only down 2% in the fourth quarter and per capita net beef supplies are down 4.5%, fed prices would be expected to average closer to $133/cwt, with highs near $136-$137 with lows near $125-$126.
It is clear that with the suspension of Zilmax, the reduction in beef supplies will be supportive to a higher cash fed cattle market than previously forecast moving through the end of the year. However, a continued slow economy and expected larger competing meat supplies in the fourth quarter are reasons to be cautious for the beef demand outlook. Currently, CattleFax is still forecasting fed cattle demand to be down 4 percent. As the supply and demand situation continues to evolve we will keep you informed of any changes (Source: CattleFax).
Corn Supplies Update
On the grain front, USDA surprised the market by revising up its estimates for corn yields. Prior to the report, analysts had pegged yields to be a little less than 154 bushels per acre, about half a bushel lower than the USDA August estimate. In its latest report, USDA put corn yields at 155.3 bu/acre, almost 1 bushel higher than its previous forecast. The latest yield numbers incorporate objective data from field reports and thus are seen as more credible than previous modeled estimates. The revision added about 80 million bushels to the estimate for corn production this year. Total US corn production for 2013 is now pegged at 13.843 billion bushels, some 3 billion bushels larger than a year ago. To put this in context, consider that feed use last year was about 4.475 billion bushels. Some of the extra corn will go into livestock production. Ethanol output also is expected to increase given improving ethanol margins and the need to hit mandated use levels. In the coming months, demand concerns will likely continue to weigh on feed prices (Source CME Group).
Livestock Supplies Update
USDA also made a number of changes to its estimates for beef, pork and poultry supply/demand. USDA reduced net availability of beef for 2013 by 75 million pounds (-0.3%) and by 80 million for 2014. The main driver for the changes is the slower pace of beef imports. USDA still expects beef imports at 2.640 billion pounds in 2014, a forecast that requires a notable increase in US beef imports from Australia and Canada. There are serious concerns whether that will be possible given demand from other markets and the notable reduction in the beef cow herd in Canada.
USDA revised up its pork export number, which is consistent with the current trend in the market. Pork exports were also revised up for next year. As a result, domestic pork availability was lowered by 0.2% for both 2013 and 2014. It is important to recognize that pork supplies in the domestic market in 2014 are still forecasted to be up 3% vs.2013 levels and up 5.8% compared to 2012 (Source CME Group).