March 2009 Articles

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Less Obvious Market Impacts of the Zilmax® Situation

Less Obvious Market Impacts of the Zilmax® Situation
Source: Ross Pruitt, Department of Agricultural Economics and Agribusiness
What can be said about the decision to temporarily suspend sales of the feed additive Zilmax® that has not already been said? There are plenty of other news stories that document the suspension of this product and the additional decline in U.S. beef production due to carcasses being slightly smaller than expected prior to the suspension of sales. Beta agonists such as Zilmax® certainly contributed to dressed steer weights that were, on average, 18 pounds heavier in 2012 compared to 2011. This partly explains why U.S. beef production in 2012 was only 1.1% lower than 2011 compared to initial forecasts for a 4% or greater decline. Year-to-date beef production in 2013 is 0.2% higher compared to a year ago as of this writing as heavier dressed weights and increased cow slaughter have offset lower total cattle slaughter numbers.
The decision to suspend sales of Zilmax® likely will have minimal impact on increasing exports. Some foreign markets are closed to U.S. beef that has been fed beta agonists including Zilmax®. Of those feedlots that were using Zilmax®, there is a good chance they will simply switch to ractopamine (the other commonly used beta agonist in beef production) as opposed to entirely stopping use of beta agonists. This will keep markets such as Russia and China closed due to the majority of U.S. beef production being exposed to beta agonists during the feeding period. With that said, U.S. beef exports are 0.5% higher through the end of June compared to a year ago.
Research studies have shown that there are some differences in the yield of each carcass fed beta agonists which may result in increased fat trim. Since mid-July, the price for 50% lean beef trim has surpassed the highs of 2012 prior to consumer rejection of lean finely textured beef. If decreased yields occur, this may weaken that market with additional supplies that may translate into slightly lower fed cattle values. Part of the strength in the price of 50% lean trim reflects the fact that less is sold on the open market as the food sector continues to actively market ground beef.
Although feedlot costs of gains are expected to be lower this fall, the outlook on whether they will go from being in the red to the black is not certain. The Livestock Marketing Information Center’s estimated feedlot returns forecast negative returns for the remainder of the year. While their series does not account for beta agonist use, feedlots that do use beta agonists will likely be at or slightly above breakeven. With grain prices expected to lower in the fall on a very large grain harvest, calf and feeder cattle prices have risen reflecting increased demand that has probably undercut feedlots ability to be strongly in the black in the first part of next year. If there are no late surprises with the grain harvest, it will be interesting to see how aggressive feedlots are in placing lighter weight calves and if that translates into slightly stronger calf prices. Winter wheat pasture potential is looking better than the past couple of years which, when combined with the potential for feedlot demand for lighter weight calves, may result in slightly stronger than expected calf prices in the final quarter of the year.

USDA NASS August Cattle on Feed Report summary: Pre-Report Expectations
1,000 head % of Prior Year Avg. Range
Placed in July 1,722 89.6 97.5 92.9 – 111.6
Marketed in July 2,000 104.5 104.4 102.5 – 106.1
On Feed August 1 10,026 94.1 95.8 94.4 – 98.2

This month’s Cattle on Feed report certainly has a bullish tone to it. The number of cattle on feed came in below what analysts providing pre-report expectations thought would be in U.S. feedlots of at least 1,000 head. Placements were also well below the range provided and is the 5th smallest total placement number for August since the current series began in 1996. Much of the decline in placements is likely due to the decrease in Mexican imports during August compared to one year earlier. Total placements were no more than 10% lower than last year in Iowa, Nebraska and Texas, but other major feedlot states were drastically lower than last year: Colorado and Kansas were 19% lower each and Oklahoma was down 34%. Estimated placements weights were higher than a year ago but only ten pounds heavier compared to the twenty pound increase year-on-year for the past two reports. This is reflective of above year ago placements of 700-799 pound animals in Texas and over 800 pound animals in Nebraska and Texas. There was one additional marketing day this year compared to last year, but marketings per day were only slightly lower than a year ago.