Nothing riles a beef producer more than the words “dairy buyout.” Thus, reaction was immediate when rumors circulated in January that the dairy industry was seeking federal money for a new buyout.
The beef industry still has bitter memories of the havoc caused in 1986 when a federal dairy buyout put 1.4 million additional cull dairy cows on the market. This caused a 25% decline in the price paid to beef producers and sent cattle prices to their lowest level in 30 years. The beef industry reckons the 1986 buyout cost the industry $1 billion.
It was little wonder then that beef cattle groups went into full attack mode against another such buyout. The dairy industry beat a hasty retreat, insisting it never intended to ask for federal money.
But concerns about a buyout remain because the dairy industry will still proceed with a buyout under its own Cooperatives Working Together (CWT) program that dairy producers fund. CWT has conducted five such programs since 2003. Two in 2008, with the second ending in February this year, removed 76,000 cows.
The programs to date have scarcely impacted the beef market. But the proposed 2009 program might involve far more cows. The dairy industry believes it needs to cull 325,000 cows by the end of September to bring wholesale milk prices back to breakeven for producers.
Low milk prices late last year saw an increase in dairy-cow slaughter, and the culling rate accelerated in January. Dairy-cow slaughter in the first quarter this year was about 125,000 head larger than that in the first quarter of 2008.
A new CWT program will likely start by the end of May and presumably take into account the number of cows culled by producers up to that point. Not surprisingly, dairy producers slowed their culling rate in March when confirmation of a new program emerged.
The beef industry's main concern is that a new CWT program might be both large and of short duration rather than spread over the rest of 2009. Officials say its effect on beef and cattle prices would be minimized if spread into next year.
Beef and dairy industry officials met mid-March to discuss the new program. The message after the meeting was that the dairy industry is aware of the fact it is in the beef industry as well as the milk business. But that doesn't alter the fact that a new buyout will affect the beef and cattle markets.
The big increase in dairy-cow slaughter in the first quarter and a sharp increase in imported Australian beef caused the price of fresh 90CL beef to decline 10% by early March before recovering by the end of month. An average dairy cow produces about 350 lbs. of 90CL lean equivalent beef. So the first quarter saw an additional 44 million lbs. of lean beef come on to the market.
Should the dairy industry cull its avowed target of 325,000 cows, this would mean another 70 million lbs. of additional beef on the market. At the same time, Australia looks set to export about 325,000 metric tons of beef to the U.S. this year, a 38% increase on 2008's reduced numbers.
The prospect of more beef on the market might be partially balanced by strong demand for lean manufacturing beef to make ground beef, hamburgers and other such beef items. Americans keep buying more of these items as they provide a beef-eating experience at an affordable price.
But analysts say more cow beef will reduce the price of cull cows, which will increase the cost of raising a beef calf. It will also affect the price of chucks and rounds from a fed-cattle carcass. Beef producers need to keep a close eye on dairy-cow slaughter levels as they develop marketing plans for their non-productive cows.