USDA's 2017 Livestock Projections Have Varied Impacts

Posted on 03/09/2017 10:22 AM

In addition to publishing its first forecasts for the 2016-17 marketing year for the various grain and oilseed markets, USDA's May Supply & Demand (S&D) Report contained the department's first protein market projections for 2017. The report pointed to across-the-board increases in the U.S. livestock, poultry, dairy and egg industries. As one would expect, the projected increases vary by industry and product, as do their price impacts.

Cattle
After suffering through an economic and weather-driven herd liquidation phase from the mid-2000's to early 2013, U.S. cattlemen are aggressively rebuilding their herds. The droughts that apparently extended herd culling through 2011 and 2012 have clearly ended, thereby leading to much improved pasture and hay conditions, as well as to significant cuts in feed costs. Cattle prices were also climbing to record highs, and diminishing amounts of beef reached consumers.

Given the lags caused by the physiology of cattle, particularly the relatively long length of time until animals reach maturity, the cyclical low in beef production didn't occur until last year, with the 23.698 billion lbs. total falling about 550 million lbs. short of the 2014 result. In the May S&D, USDA analysts estimated the 2016 total at 24.81 million (up 4.7%) and projected 2017 domestic output at 25.79 million (up 4.0%). The following chart provides perspective on past growth in the beef and pork sectors (keep in mind the 2016-17 numbers are forecasts).

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The cattle industry is clearly set to expand rapidly during the coming years, especially with most indications suggesting the herd expansion will continue for at least another two to three years. This actually presents a sharp contrast to news from Australia, where cattlemen are reportedly cutting production quite aggressively. This juxtaposition is a big reason U.S. beef imports are expected to drop sharply from last year's 3.370 billion lbs. total to 2.893 billion lbs. this year and to 2.550 billion lbs. in 2017. Conversely, American exports are predicted to rise from the depressed 2015 total at 2.266 billion lbs. to 2.464 billion lbs. in 2016 and to 2.58 billion lbs. next year.

The increased exports combine with accelerated domestic usage to boost total offtake from 24.771 billion lbs. last year to 25.356 billion lbs. this year and to 25.854 billion lbs. in 2017. And while stock totals don't mean nearly as much to the livestock product sector as they do in the crop markets, year-end beef stocks are expected to decline from the December 31, 2015 total at 683 million lbs. to 600 million lbs. in late 2017.

Nevertheless, USDA is clearly pessimistic about the cattle price outlook, projecting a drop from last year's $148.12 average to a range for the 2016 mean between $124.00 and $129.00 (midpoint = $126.50) this year. The midpoint of the predicted 2017 range ($118 to $128) comes in at $123.00. USDA apparently expects the situation to stabilize somewhat next year despite the active herd expansion and production increase. Our analysts at Doane suspect USDA's 2016 price projections are overly pessimistic, but tend to agree with the 2017 forecast.

Hogs
The U.S. swine industry recovered very rapidly from the 2013-14 PEDv epidemic and its dramatic surge in piglet deaths and reduced hog and pork production. After diving to 22.83 billion lbs. in 2014, domestic pork production surged to 24.50 billion lbs. (up 7.3%) last year and is expected to climb to 24.99 billion lbs. (up 2% annually) in 2016 and reach 25.64 billion lbs. (up 2.6%) next year. Note on the chart this year's pork production total is expected to slightly exceed the beef total, then dip back below in 2017. Given the strong upward trends in industry litter sizes and hog weights, it's difficult to dispute projections for rising hog and pork production.

Despite the indicated increase in domestic supplies, USDA is actually predicting a modest annual increase in pork imports, from 1.111 billion lbs. to 1.158 billion lbs. this year. The projected 2017 total is essentially unchanged. The export forecast is more consistent with the anticipated supply growth, rising from 4.941 billion lbs. last year to 5.198 billion lbs. (up 5.2%) in 2016. The 2017 forecast rises to 5.30 billion lbs. (up just 0.7%) from this year. Doane is more optimistic on this point. USDA indicates that ending stocks will rise slowly later this year and again in late 2017.

As for the price outlook, USDA anticipates a general downward trend for hogs. USDA projects a slide from an average 2015 dressed price of $67.88 to $63.50 and $59.45 in 2016 and 2017, respectively (both being the midpoint of the forecast ranges). Doane doesn't particularly disagree with those figures, although they tend to think summer 2016 futures prices are somewhat low, whereas deferred futures are implying fourth quarter prices that seem overly optimistic.

Broilers
The U.S. broiler industry continues growing rapidly and is expected to continue doing so. As the following chart indicates, domestic chicken production (at 40.048 billion lbs.) topped 40 billion lbs. for the first time in 2015. This year's total is expected to reach 41.038 billion lbs. this year, although that's down from the April forecast at 41.100 billion lbs., and climb to 42.050 billion lbs. in 2017. Those in the broiler industry have to be thanking their lucky stars they escaped the 2015 avian influenza epidemics that devastated big portions of the Midwest turkey and laying hen flocks. We can also assume they're doing everything possible to avoid a future outbreak as well.

On the other hand, the export embargoes imposed upon U.S. poultry in the wake of last year's disease problems hurt sales and revenues. Broiler exports dipped from 7.301 billion lbs. in 2014 to 6.319 billion lbs. in 2015. USDA predicts a quick recovery, with this year's total projected at 6.723 billion lbs. and next year's result rising to 6.905 billion pounds. That's still about 400 million lbs. below the 2014 total, thereby indicating the industry still has a way to go before fully recovering from its bird flu problems.

Given the anticipated reductions in livestock and red meat prices, rising poultry prices seem quite unlikely. USDA agrees, projecting the 2016 average will fall into the 86 cent to 90 cent range (midpoint = 88 cents per pound) from 90.5 cents in 2015. But despite the big production surge expected again next year, the midpoint of the forecast 2017 range comes in at 87.50 cents. Our analysts at Doane believe cattle and beef prices tend to set the tone for the whole meat complex. Thus, the generally negative cattle price outlook could drag broiler values below those projected by the USDA.

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Turkey
Despite the fact the avian influenza outbreak forced the liquidation of millions of turkeys in the number one producing state Minnesota last spring, USDA projected 2015 U.S. turkey production at 5.627 billion lbs., which marked an annual decline of just 128 million pounds (2.2%). Output in other unaffected states was ramped up considerably, thereby avoiding a major shortage last Thanksgiving. And with Minnesota's industry now largely recovered from the outbreak, the national production total for 2016 is expected to reach 5.959 billion lbs., then rise to 6.125 billion lbs. next year. On the other hand, that forecast would still fall short of the 2008 record at 6.247 billion pounds. The Great Recession clearly took a major toll upon the industry.

The prospect of a Thanksgiving 2015 shortage prompted an import surge from 28 million lbs. in 2014 to 45 million last year. USDA sees those totals changing little in 2016-17. But the real trade impact of the bird flu outbreak was felt on the export side, with numerous countries halting imports from states that suffered disease outbreaks. Cumulative U.S. sales tumbled from 805 million lbs. in 2014 to 533 million (down 34%) last year. Most countries have now lifted their bans, so department analysts anticipate a resurgence to 605 million lbs. this year and to 670 million lbs. in 2017.

Domestic turkey prices averaged 116.20 cents per lbs. last year, with the avian influenza incident obviously serving as the driving force behind the rise from 107.60-cent average for 2014. The USDA views the turkey situation as generally improved, in the sense that they expect prices to prove relatively stable. That is, the projected respective midpoints of their 2016 and 2017 forecast price ranges at 116 cents (range = 114 cents to 118 cents) and 115.5 cents (range = 111 cents to 120 cents) are not substantially different from last year's mean. Doane tends to be somewhat less optimistic, due largely to the predicted surge in overall meat supplies, particularly the anticipated beef production surge.

Eggs
Iowa's huge laying hen flocks also suffered badly from the spring 2015 avian influenza outbreak. Moreover, given the pressure already being exerted upon producers by California's increased space regulations, the sharp supply reduction wasn't terribly surprising. After having climbed to 8.335 billion dozen in 2014, the 2015 total came in at 7.977 billion. Actually, that total seems rather remarkable, since it was the second highest on record, topping the 2013 production figure by 31 million dozen. USDA projects a strong 2016 recovery, with anticipated 2016 slightly exceeding the 2014 record at 8.336 billion, then surging to 8.475 billion next year.

Unlike the turkey industry, which relied heavily upon export cuts to rebalance the domestic situation, the egg industry was also forced to boost imports rather drastically. Total 2015 purchases jumped to 123.3 million dozen from 34.7 million in 2014. USDA forecasts 2016 imports to drop to 113.6 million, then plunge to just 60 million dozen in 2017. This suggests a relatively slow industry recovery from bird flu disruptions. U.S. egg exports dove from 393.8 million dozen in 2014 to 317.6 million last year. The sales total is not expected to recover in 2016, with the 315.8 million dozen forecast falling slightly below last year. It is predicted to rebound to 355 million dozen next year.

USDA expects the bumpy road for egg prices to continue during the coming months. Egg prices soared last week, with the 2015 average at 181.80 cents per dozen, topping its year-prior counterpart by 39.5 cents (28%). In contrast, the midpoint of the projected 2016 range for the annual price average came in at just 98 cents per dozen (range = 96 cents to 100 cents). A modest recovery is anticipated for 2017, with the midpoint of the forecast price range coming in at 113 cents (range = 108 cents to 118 cents). These seem low from a purely pragmatic standpoint, although stickiness of elevated retail prices certainly has the potential to substantially curtail consumer demand.

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Milk
The dairy continues expanding herds and boosting production despite increasingly depressed prices. The April Milk Production Report emphasized this point, stating the March U.S. milking herd at 9.325 million head. That's up 14,000 head from March 2015 and 16,000 from January, when the 2016 total registered an annual increase of just 1,000 cows. Given the rising cow population, as well as the long-term upward trend in milking efficiency, March milk production set a monthly record at 18.406 billion pounds, which was just 22 million under the all-time record posted in May 2015.

USDA clearly expects the rising production trend to persist. The May S&D forecast 2016 U.S. milk production at 212.4 billion lbs.; that marked a 600 million lbs. upward revision from April and represented a 1.8% annual increase. The first forecast for 2017 came in at 215.2 billion. Given the persistent milk price weakness suffered over the past 18 months, as well as the upward trend in milk production per cow, the latter forecast strongly suggests the USDA is anticipating a reversal of the herd expansion trend at some point this year.

Domestic demand for milk seems flat, but consumer interest in cheese and butter in particular appear to be growing rapidly. Unfortunately, extremely tough international competition from the EU and New Zealand is being exaggerated by the strong U.S. dollar. That shows up in the trade forecasts. For example, U.S. dairy product imports totaled just 4.3 billion lbs. and grew to 5.7 billion lbs. last year. They're expected to reach 7.7 billion lbs. this year, then slip to 7.0 billion in 2017. Conversely, after climbing to 12.4 billion pounds two years ago, exports fell to 8.8 billion in 2015. Foreign sales are seen stabilizing around 9.0 billion lbs. this year and next.

Again, USDA apparently expects tightening supplies during the coming months. Farm-gate milk prices plunged to $17.12 per cwt last year after setting a record at $23.97 per cwt in 2014. Having price moves significantly lower in the first four months of 2016 caused the USDA to lower its forecast range for 2016 "all milk" prices to the $14.60 to $15.10 per cwt area (mean = $14.85). The midpoint of the 2017 price projection came in at $15.75 (range = $15.25 to $16.25). Rising premiums built into CME Class III milk futures strongly second that comparative optimism. However, we at Doane would warn that those premiums could greatly slow the anticipated recovery, since they may encourage producers to delay and/or forego plans to cull herds and cut output.

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