090221 Greater Lean Beef Supply, Demand Make Recession Odd Couple

February 19, 2009

(Dow Jones)--When farmers start selling off dairy cows, the price of lean beef usually goes down because of the extra product flooding the market.

Not so in the current recession, where there is the unusual situation in the lean beef market of prices going up at the same time that supplies--from the dairy cows sent to slaughter--are also higher.

As U.S. consumers cut back on expenses, many have exchanged a steak on fine china for a hamburger on paper, creating extra demand for lean beef and trimmings from the slaughter process.

U.S. Department of Agriculture figures show wholesale prices for 90% lean beef are up about 14% from mid-December, yet dairy cow slaughter in the third week of January is up nearly 20% from a year earlier and the five-year average.

Lean beef imports also could be higher, said Daniel Bluntzer, livestock market analyst at Frontier Risk Management, but official numbers lag, and January imports aren't yet known. December imports rose to 266 million pounds, according to the USDA, the highest since July 2007 when they were 308 million pounds.

In late January, McDonald's Corp. (MCD) reported global comparable sales were up 7.2% in its fourth quarter and 14% for the year. In a press conference, Chief Executive James Skinner attributed the gains to company efforts to meet consumer needs and to trim costs.

But beef market analysts gave the nod to the recession, and they said consumers likely would continue trading down or cutting out purchases of many products. Many of the purchases being cut are, or include, dairy products, said David Anderson, extension livestock economist at Texas A&M University.

So, between that and reduced exports of milk products, wholesale U.S. milk prices "collapsed in the last two months," Anderson said. In better times, the U.S. was an active exporter of dried milk, cheese and other products. But as the worldwide economic crisis gained momentum, the value of the U.S. dollar bottomed and the European Union resumed export subsidies, U.S. exports fell away, he said.

U.S. dairy farmers are losing large sums of money, Anderson said. At the farm, milk is sold by weight and not volume, and it costs about $16 to produce 100 pounds of milk, he said.

Dairy producers are only getting about $11 per hundredweight, however, so they are losing $5 to $6 per hundredweight. Each cow produces roughly 75 pounds a day, Anderson said, which means a producer is losing $3.50 to $4 per cow per day, and many dairies may have thousands of cows.

Many are leaving the business entirely, and some are getting help from an association of dairy cooperatives. The government has no plans for a dairy herd buyout program, although one apparently was discussed.

Such a program was considered as part of the stimulus package signed by President Barack Obama on Tuesday, but it was scrapped before it ever made it to the bill, said Christopher Galen, spokesman for Cooperatives Working Together, the association that has been buying out dairy farmers since 2003.

The CWT Tuesday issued the results of its latest homegrown buyout program, which will send 50,630 dairy cows and 1,240 bred heifers to slaughter. It was considered to be the second buyout of 2008. The first 2008 buyout sent 24,585 cows to town.

U.S. Agriculture Secretary Tom Vilsack said on Feb. 12 that many producers are stressed and the department was in the process of determining what assistance can be provided. "We are certainly cognizant of the fact that they are under a great deal of stress and we hope to have something for them in the next week or so to send a message that we care and are concerned about what's happening," Vilsack said of the dairy producers.

Vilsack declined to give specifics, but said it concerned supply and that the USDA was working with the industry. "We've met with industry leaders and I think we have combined with what they're going to do to provide some additional credit so that we don't have a significant sale of dairy cows that would create some difficulties overall for beef producers," he said. "We're going to take a look at how we can reduce the supply of surplus commodities."

CWT press releases suggested increased government product purchases as a possibility for the USDA to consider.

Besides the dairy cows, Federally Inspected calf slaughter also was up in January, well above year-ago and average levels, according to USDA figures from the Livestock Marketing Information Center. Jim Robb, LMIC agricultural economist, said these calves would be mostly dairy calves that could have gone into the feedlots with a few more months of pasture time.

Instead, the calves were moved into the veal market, which could be showing a high level of frustration among dairy producers, Robb said.

Anderson said putting cattle on feed currently also is a losing proposition. He said the increased calf slaughter rate could be a market response because there's no place left to go with them.

Comparatively, the rate of beef cow slaughter in January was running at or below year- earlier levels, according to the LMIC.

Anderson said that likely was because the beef cow market has a lower percentage of its cows available to cull after extensive culling over the past few years.

But the dairy industry has more to do, Anderson said. High profits before the milk market tanked led many producers to boost herd size, and on Jan. 1, the USDA counted 9.3 million dairy cows in its inventory report, which was up from 9.257 million a year earlier.

There should be plenty of lean beef for McDonald's hamburgers.