Lower Livestock Prices = Lower U.S. Farm Income

• The popularity of the Atkins Diet appears to have peaked, as Americans are shifting back to more balanced diets. This is reducing domestic demand for meats.
• Broiler production is increasing faster than demand can keep up. In 2005, growth in export demand helped to offset the increased supplies. In 2006, however, export demand is suffering from the effects of the worldwide fear of Avian influenza. The discovery of the disease in Asia, Eastern Europe, and Africa has reduced demand for poultry meat in those regions. If the disease is found in the United States, some major importers would probably ban imports from the United States.
• The world market for poultry meat was rattled by the imposition of a ban on all imports of poultry meat to Russia in late-April 2006. The official reason for the ban was that Russia has found violations of its meat inspection standards in (apparently) all of its import suppliers. Russia has given this reason in the past for similar bans. It seems likely that Russia has cut off imports to protect its domestic poultry producers, who have been expanding production rapidly in recent years. Russian poultry demand has also been reduced by Avian influenza fears. The issue was resolved in a matter of days, but it was a reminder that the Russian market can be rather capricious, especially since Russia still is not a member of the World Trade Organization.
• U.S. beef production is increasing due to the resumption of live cattle imports from Canada. This increase in production should be offset somewhat by decreased beef imports from Canada, as the beef is simply crossing the border in a different form. The United States continues to prohibit imports of cattle over 30 months old, or beef from those cattle. It is possible that the trade restriction will be lifted by the end of 2006, which would further increase U.S. beef supplies.
• In the meantime, Japan and South Korea still are not importing beef from the United States and Canada. Shipments were began again on a very restrictive basis in late 2005, but some prohibited material was found in a shipment from the United States to Japan, which slammed the door again. The United States and Canada each has recently discovered another case of "mad cow" disease, which is further complicating matters.
• Three years after the first case of mad cow was discovered in Canada, it still appears that Japan, in particular, will not import significant amounts of beef from the United States or Canada unless 100% of the animals from which beef will be shipped to Japan are tested. If that is the case, it might prove cheaper for both countries, especially Canada, to go ahead and implement 100% testing of slaughter animals, rather than try to maintain a segregated marketing system.
• U.S. milk production increased by 5% in 2005, a pace that is much faster than demand can keep up with. Due to the capital-intensive nature of milk production, the U.S. dairy herd continues to expand in the face of declining prices.
• U.S. pork production continues to expand, although the U.S. hog breeding herd has hardly increased over the past couple of years. Productivity continues to increase, both in terms of pigs weaned per litter and more pork per animal slaughtered. Imports of live hogs from Canada continue to grow. Around two-thirds of these imports are feeder pigs, which are then fed out and slaughtered in the United States.
• One bright spot for the U.S. livestock sector is the rapid growth in pork exports over the past few years. Unfortunately, some of this growth has come as a result of export bans on U.S. beef, with pork substituting for beef in countries like Japan. Concerns over Avian flu have caused some substitution of pork exports for poultry, as well. Brazil's continued struggles with foot-and-mouth disease have triggered restrictions on their pork exports, reducing the impact of a large competitor in the world pork market.

The overall high level of livestock prices in the second half of 2003, and then in 2004 and 2005, was a major factor in the big jump in U.S. farm income that was seen in those years. From 1987 through 2002, net cash farm income always started with a "5", that is, it was between $50 billion and $60 billion. In 2003, that number jumped to $71.6 billion, and then to $85.5 billion in 2004. The current USDA estimate for 2005 is $82.8 billion, although it is expected to be revised downward. Global Insight's expectation for 2006 is for net cash farm income in the United States to return to $60-61 billion, thanks largely to lower livestock prices.

Index of Prices Received by Farmers for all Livestock. Source: USDA Agricultural Prices

Annual Net Cash Farm Income, Source: USDA. 2006 is Global Insight Forecast

Tom Jackson