Commodity prices have surged recently. In the six weeks from April 20 to June 5, corn futures jumped 20.3 percent, from $3.69 to $4.44 per bushel; wheat is up 23.6 percent, from $5.04 to $6.23; coffee futures grew 20.7 percent from $1.11 to $1.34 per pound; and crude oil is up a whopping 49.2 percent from $45.88 to $68.44 per barrel. Crude-oil prices are now more than double the low of $33.98 set in February. How is this possible at the bottom of the worst recession since the 1930s?
Several forces are overwhelming normal supply/demand fundamentals. For starters, China—once again—is the 800-pound gorilla in the room.
China holds a lot of U.S. dollar-based assets, which are declining in value. To hedge that position, China and others are stockpiling hard commodity assets. China’s imports of crude oil increased 14 percent in April, and China is more than partly responsible for this year’s rise in copper and soybean prices.
Other commodity influences: 1) A flood of stimulus spending across the globe has raised the global money supply to historic levels. Similar liquidity cycles supported the tech-stock and housing bubbles. 2) A weaker dollar makes U.S. exports cheap to foreign buyers and attracts speculative fund money to commodities. 3) Economic recovery will eventually improve demand for commodities. There will be market setbacks, but one of the side effects of economy-saving monetary and fiscal policies will be premiums on commodity prices, especially deferred futures contracts.
Beef—May’s U.S. Department of Agriculture cattle report showed 10.82 million head of cattle on feed, down 2.8 percent from a year ago, which was more than expected. April new placements were up 4 percent and marketings were down 7 percent. Seasonally increasing supplies and heavier placement weights will combine with recession-reduced demand to take the steam out of beef prices this summer. Middle meat prices were down sharply in May and will continue lower. Post-Memorial Day ground beef demand has softened. Prices look to be just moderately higher through summer.
Coffee—Futures are rallying due to: 1) tight supplies of high-quality Arabica beans; 2) a weaker dollar that has boosted all U.S.-based commodity contracts; and 3) the seasonal “freeze premium” ahead of the Brazilian winter. However, there is an abundance of lower-quality Robusta beans that, in normal years, wouldn’t make up for tight Arabica supplies. But with consumers trading down to more “at-home” brew, Robusta will help fill the gap this year. Summer consumption will be down in the United States and Europe, and if we get a freeze-free winter in Brazil, prices could lead to a correction and/or contracting opportunity in mid-to-late summer.
Dairy—Weak domestic demand and a sharp drop in exports have led to a milk supply glut and sharply lower prices. The milk-feed price ratio hit a record low of 1.47 in May. Generally, ratios below 2.5 mean losses for dairy producers, which lead to herd reduction. Consequently, the U.S. dairy herd is forecast to contract by 1.5 percent this year and another 2.5 percent in 2010.
Dairy markets have collapsed under the weight of large supplies. Block cheese prices, which had hit highs of $2.28 per pound in May 2008, are nearly half that much at $1.15 this year. Butter, now at $1.25, was $1.51 a year ago.
Look for declining second-half supplies to take cheese prices up to $1.60 and butter into the $1.40s this fall. In its first look at 2010, the USDA says block cheese prices are expected to average $1.63 per pound, up from a projected $1.26 in 2009. For butter, prices are forecast to average $1.22 for 2009 and $1.51 in 2010.
Grain—A wet planting season may put a dent in the 2009 U.S. corn acreage. That’s helped corn futures jump from lows of $3.43 per bushel in March to $4.44 in early June. The USDA pegged 2009-10 world-ending stocks at 125 million tons, down from 140 million tons in 2008/09. 2009-10 corn is projected at $4.30 per bushel, up from this year’s $4.20. The USDA is expecting world wheat production in 2009-10 to be the second largest on record and push global-ending stocks 9 percent higher. As a result, the 2009-10 crop-year projection for wheat is $5.40 per bushell, down from $6.85 for 2008-09.
A year after panic over supply shortages, rice appears to be plentiful. A stalled global economy and large Asian crops have kept prices under pressure for months. Rice futures, which began 2009 at $15.63 per hundredweight, were $12.61 in early June. The 2009-10 crop-year projection for rice at $16 is still expensive, but down from $21.15 in 2008-09.
Pork—Hog and pork markets are thus far unable to shake the effects of swine flu, and prices remain in the doldrums at a time of year when they are typically headed higher. The USDA lowered its second-quarter price forecast of lean hogs by 10 percent. USDA ham markets in June were down a nickel from last month and are 30 cents per pound below year-ago levels. Foreign and domestic consumer confidence with respect to pork products is expected to rebound as flu incidents recede.
The USDA estimated that pork production will be down 3 percent in 2009 and down 0.5 percent in 2010.
Poultry—Broiler output has declined sharply and won’t recover until next year. First-quarter production declined 6.3 percent from a year ago, and production in the second quarter is projected down 6 percent. Smaller year-over-year decreases are expected in the second half of 2009. Overall output is forecast to be down 4 percent in 2009, with just a 1.6 percent recovery in 2010. USDA boneless skinless breast hit $1.50 per pound in early June and should get to $1.60 by month’s end. But summer highs will likely remain below $1.70. USDA whole-wing markets at $1.40 are sky-high for this time of year. Reduced bird numbers mean fewer wings. Look for wings to bottom in the mid-to-upper $1.20s in August before heading higher again into fall.
Soy oil—April and May saw a surge in U.S. soy oil exports, particularly to India and China. Higher palm oil prices, tight South American soy oil supplies and a weaker U.S. dollar all contributed. In May, the USDA raised its 2008-09 export forecast for soybean oil by 25 percent, to 2 billion pounds. Continued strength in the export market for soybean oil is expected through 2009-10. Soy oil futures have jumped from lows of just below 30 cents per pound in mid-March to 38 cents in early June.