Gloomy economic news sinks commodity prices

Gloomy economic news sinks commodity prices

Commodities Corner

This article does not necessarily reflect the opinions of the editors and management of Nation’s Restaurant News.

Fears of global economic slowdown, along with disappointment over the lack of stimulus from the Federal Reserve and Congress, led to a broad-based sell-off in both equities and commodities in September. This is the third major sell-off this year. The last two were very short lived, but this one might have some legs. Since the beginning of September, corn futures have plunged from above $7.50 to below $6, soy oil from 58 cents to 49 cents and coffee from $2.90 to $2.23. But fundamentals remain relatively bullish for proteins, particularly livestock futures, which moved higher over the same period. One positive for consumers: The price average of regular gasoline has dropped to $3.41 per gallon, down 15 percent since peaking in May near $4 a gallon. 

Beef — The Department of Agriculture reported Sept. 1 cattle feedlot inventories at 10.7 million head, up 5 percent from a year ago. One of the largest drought-based herd liquidations ever has taken a toll; ranchers will slaughter a half-million beef cows normally kept for breeding, sharply reducing producers’ ability to expand in future years. Meanwhile, world markets remain red hot. U.S. beef exports for January-July are up 27 percent from a year ago. A pending new trade bill with South Korea could give beef exports an additional boost. Cattle futures hit a record-high $123.10 per hundredweight Oct. 3, and forward contracts for 2012 are trading in the $123-$126 range, reflecting expectations for even higher beef and cattle prices through next year.

Coffee — Futures prices plummeted from a high of $2.90 per pound Sept. 1 to $2.23 Oct. 3 as investors liquidated positions in the face of dismal global economic forecasts. Next year’s 2012-2013 Brazilian crop is projected to be between 57 million and 60 million bags — a record high. Elsewhere, Mexico and most Central American countries expect production recoveries this year. Heavy buying at lower price levels by North American and European roasters gearing up for the winter consumption season could put a floor under prices.

Dairy — It’s been a steady march lower for dairy prices over the past two months. Block Cheddar cheese markets began August at $2.14 per pound and finished September at $1.72. Butter dropped from $2.09 to $1.76 in the month of September. On the production side, August cheese output was 1.2 percent above a year ago; butter output was up 4.8 percent. The USDA is forecasting milk production to be 1.5 percent higher in both 2011 and 2012. The recent drop in corn prices, if it holds, adds profitability and the potential for additional output, above current USDA projections, for 2012. Going forward, retail promotions for the fall holidays will likely create some movement in prices, but the general trends will be lackluster demand and weaker prices. 

Grain — Over the past two months, the USDA twice cut its corn forecast and lowered corn yield from 157 bushels per acre to 148.1 bushels per acre. However, a late-September stocks report from the USDA’s statistics division reported corn inventories at a much-higher-than-expected 1.13 billion bushels, 23 percent above the USDA’s early-September estimate. Corn futures plummeted from $7.63 per bushel in late August to a low of $5.87 Oct. 4. But let’s not forget that China’s appetite for U.S. corn has put a floor under the market in two previous sell-offs this year. Despite efforts toward self-sufficiency, surging Chinese demand for meat and eggs is outpacing the ability to supply feed grains. The U.S. Grains Council estimated that China may need between 5 million and 10 million metric tons before the end of 2012 to replenish corn inventories.

The USDA also reported that wheat stocks were larger than expected at 2.15 billion bushels. With corn prices as high as they have been, analysts expected livestock producers to shift from feeding corn to feeding more wheat, but usage of wheat feed declined by 50 million bushels this summer. The drought in Texas and Oklahoma has abated a bit, but not nearly enough to save this year’s winter wheat crop. Chicago wheat futures have dropped from $7.62 per bushel in late August to a low of $6.04 Oct. 4. Kansas City, Mo., hard winter wheat futures dropped from $8.74 to $6.99 per bushel.

Pork — September’s USDA Quarterly Hogs and Pigs Report showed larger-than-expected numbers in almost every category. The June-August pig crop, at nearly 29.1 million head, is up 0.7 percent from a year ago, and a litter size of 10.03 pigs per litter was 2.2 percent larger than last year. While supplies will be a bit higher than expected, strong export sales have helped hog futures rebound from a bottom of $83.35 Sept. 6 to $93.67 Oct. 5. Traders are expecting increased exports to China and a pending trade agreement with South Korea to continue to support demand through 2012. Total exports through July are running 16.6 percent above a year ago. Exports to South Korea are up 129.4 percent. Exports to China are 248 percent above year-ago levels, but have fallen off substantially since April.

Poultry — Cold-storage chicken supplies fell 7 percent in August and are now slightly below year-ago levels, but still historically high. Chicken producers continue to struggle with high inventories, heavy bird weight, high feed costs and low chicken-parts prices. Egg sets were 8.2 percent below a year ago for the month of September, and chicks placed were 5.1 percent below a year ago, while weights averaged 2.7 percent above last year. Production in the third quarter was down 1 percent versus the third quarter of 2010, and the fourth quarter is forecast to be 3 percent lower than a year ago. Breast prices took another tumble and were near $1.20 per pound in early October, 30 cents below year-ago levels. USDA whole wings were also $1.20 and headed to the $1.30s in late January before the Super Bowl.

Soybean oil — Soy oil futures have dropped along with other commodities, and bearish global fundamentals could push prices even lower in the fourth quarter. Russia’s sunflower seed output will be record large this year. Palm oil output is currently at a seasonal peak, and it has been running at a significant discount to soy oil on world markets. While U.S. use of soy oil for biodiesel is increasing, a huge Canadian canola supply should offset any domestic soy oil headed to biodiesel. Soy oil futures, which were 58 cents as recently as Sept. 7, dropped to 49 cents by Oct. 5. Surging global consumption of fats and vegetable oils could still exceed output in 2011-2012, keeping stocks-to-usage ratios at multiyear lows and continuing to support prices in 2012.

John T. Barone is president of Market Vision Inc. in Fairfield, N.J., and can be reached for comment at [email protected] [3].