Tighter supplies to drive 2012 beef prices

Tighter supplies to drive 2012 beef prices

In its semi-annual report, the Department of Agriculture said total cattle numbers — on and off feedlot — for
July 1 were 100.0 million head, down 1.1 percent from a year ago. In a separate report, the USDA reported feedlot inventories at 10.45 million head, up 3.8 percent from a year ago. New feedlot placements in June were up 4 percent. 

Putting the numbers together shows that drought-induced early placement of feeders has caused feedlot numbers to swell. But those increases have come at the expense of off-feedlot numbers. Some 89 percent of grazing lands in Texas and Oklahoma were rated either poor or very poor in early August, and ranchers are literally out of water. The beef-cow herd is at 31.4 million head, down 1.1 percent from 2010, and replacement heifers are down 4.7 percent. 

The reports suggest adequate front-end supply through the third quarter, but lower placements and tighter supplies by the fourth quarter. The drought will have a multiyear effect on supplies. Long-term fundamentals point to even higher beef and cattle prices through 2012 and 2013, at the very least.

Coffee — Global coffee usage will exceed output again in 2010-11 and 2011-12, further drawing down stocks. However, Brazil is expected to have a record off-season crop of roughly 43 million bags in 2011-12 and a megacrop of 53 million bags in 2012-13, leading to the first stock building in six years. 

So far this year, coffee futures, which had soared to $3 per pound in April, averaged $2.52 in July and were around $2.40 in early August. Prices have eased a bit as the threat of frost in Brazil has subsided. Futures are averaging $2.62 year to date and look to remain relatively strong, near current levels, for the balance of the year. 

Higher prices this year have left farmers well capitalized and in no hurry to sell, as stocks in most producing countries remain at historically low levels. Conversely, investor reaction to forecasts for a weaker-than-expected global recovery could lead to some unwinding of speculative commodity positions.

Dairy — June milk output was up 1.1 percent from a year ago, but hot, humid weather took a toll on July production. Midyear cheese stocks were at 1.05 billion pounds, up 1.3 percent from last year. But cheese exports also were up 36.4 percent in the March-May period and continue at a brisk pace.

The new worry is that supplies will be tight for the fall holidays. Block cheese hit a two-year high of $2.16 per pound in early August. Supply fears likely will keep prices above $2 through summer. Midyear butter inventories were down just 4 percent from a year ago. Meanwhile, butter production in the second quarter was up 18.7 percent. But butter usage soared 13.1 percent higher in the March-May period, with exports up 65.7 percent and domestic use up 8.6 percent. Global markets remain supportive. Oceania is at $2.06 and Western Europe is $2.65. Butter at $2.10 in early August looks to remain in the $2 range for the second half of 2011.

Grain — July’s USDA World Supply and Demand Estimate pegged 2010-11 U.S. corn ending stocks at 880 million bushels, well below the billion-plus expected after the USDA’s midyear acreage report, and the lowest since 1996. Corn use for ethanol in 2010-11 will be 5.05 billion bushels, 37.9 percent of total use, and is expected to rise to 5.15 billion in 2011-12. Most private analysts’ projections for this year’s crop are below the USDA’s 13.47-billion-bushel July forecast. A sub-13-billion-bushel crop would keep
the stocks-to-use ratio in the 5-percent to 6-percent range, and prices well supported near $7 per bushel. 

How bad is the drought in the southern plains? So bad that farmers in Texas and Oklahoma may not bother to plant a fall wheat crop. That’s a big problem, because high-protein, milling-grade — winter and spring — wheat is in short supply globally. Wheat problems are apparent in the pricing discrepancies. In the first half of the year, Chicago wheat, which was $7.10 in early August, averaged $7.66, with a range of $5.84-$8.86. Kansas City, Mo., hard winter wheat averaged $8.81 — from $6.88 to $9.88 — and Minnesota hard spring wheat averaged $9.33. There are big premiums for the higher-protein wheat and incredible volatility in the trading ranges. 

Pork — Hog and pork prices soared in July as the brutally hot summer took a toll on hog finishing weights. Hog futures jumped from $95 per hundredweight in mid-July to a record-high $104.65 Aug. 3. Prices also are being supported by strong export sales and the potential for future sales. China’s State Council said it will boost pork supplies and stabilize prices as part of its efforts to check inflation. Chinese pork prices jumped 57 percent in June. South Korea also is battling inflation and will impose zero tariffs on all imports of chilled pork through Sept. 30. The USDA currently is projecting second-half pork exports to be 12 percent above a year ago, but China and South Korea could push that number higher. The USDA expects fourth-quarter hog prices to be 20 percent above a year earlier.

Poultry — First-half 2011 broiler output rose 4.8 percent, and large supplies continue to depress poultry markets. But producers are cutting back. Since May 1, egg sets have been 3.5 percent lower than last year, and chicks placed have been 3.4 percent lower. Over the past month, egg sets are down 5 percent to 6 percent. But with birds running 3 percent to 4 percent heavier than a year ago, larger slaughter weights are offsetting declining bird numbers. The broiler-feed price ratio was 2.9 in July, a record low. Parts prices are at such anemic levels that poultry producers are bleeding losses. Pilgrim’s Pride posted a $128 million second-quarter loss and announced plans to shut a Dallas chicken-processing plant. May exports were up 6 percent from last year, but year-to-date 2011 shipments are only 1 percent above 2010 levels. 

Soybean oil — The International Grains Council said world soybean output will fall 1 percent in 2011-12 due to a shift in acreage away from soybeans and toward corn in both the United States and China. China’s soybean imports could rise 6 percent to a record 57 million metric tons in 2011-12. June’s soybean crush was a less-than-expected 124.3 million bushels. Crush during the first 10 months of the 2010/11 marketing year is running about 1 percent behind year-ago levels. The biggest long-term issue with soy oil will be declining supplies. In three consecutive years, soy oil ending stocks will go from 3.4 billion pounds, to 2.8 billion this year and to 2.2 billion next year. Most of the increased usage is in methyl esters (biodiesel), which should keep prices in the mid-to-upper $0.50 range through 2012. Futures were in the $0.56-$0.57 range in early August, roughly a penny lower than last month.

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