John Barone

New job growth helping drive economy

John Barone takes a look at the latest and future trends in the commodities markets.

The foodservice industry rises and falls with consumer spending. But spending cannot be sustained without a recovery in income, and a recovery in income can’t happen unless job growth returns.

Well, sing hallelujah and give thanks, because job growth finally is creeping back. On June 28 the Bureau of Labor Statistics reported a stronger-than-expected 195,000-job jump for June. So far in 2013, the United States is averaging 201,830 new jobs per month — much better than the 153,000-per-month pace of 2011 and 2012.

The National Restaurant Association’s Restaurant Performance Index seems to be mirroring job growth, with positive readings for the first five months of 2013 and a 14-month high in May. We may not be out of the woods yet, but streams of sunlight are beginning to reach the forest floor.

Beef — The Agriculture Department’s cattle report in June showed feedlot inventories at 10.74 million head, down 3.1 percent from a year ago. New feedlot placements in May were 2 percent above a year ago, suggesting that herd liquidation continues.

Pasture conditions remain poor, with drought still affecting roughly 85 percent of Texas. At some point producers will begin retaining heifers for breeding, sending fewer to slaughter and tightening beef supplies. Once that process starts, it will be another two to three years before we see a turnaround in beef supplies. Memorial Day brought with it some record-high prices for choice beef cuts, but middle meat prices dropped sharply in June and will continue to move lower through summer. It’s already time to start looking at year-end holiday items. Choice tenderloin prices are projected to have reached seasonal lows in July and are headed higher in August.

Coffee — Futures prices hit three-year lows of $1.17 per pound June 20 and have since traded mostly in the low $1.20s. The USDA is projecting 2013-2014 world coffee output to be 146.4 million bags, well above forecast consumption of 141.9 million bags. Brazil’s domestic supplies are projected to build to a nine-year high of 8.2 million bags. In the U.S. arabica beans certified for delivery against futures contracts are up 80 percent from a year ago. With seasonal demand waning with warmer weather in North America and Europe, there is not much — short of a Brazilian freeze — to support higher prices.

Dairy — With the profitability of dairy products almost a sure bet to improve as the year progresses, the USDA is projecting a 2.3-percent year-over-year gain in third-quarter milk output and 1.2-percent growth for the fourth quarter.

May’s cheese production was up 3.9 percent from a year ago, and cold-storage supplies were 8.2 percent higher than in May 2012. Ample cold-storage numbers and disappointing export sales helped block-cheese prices plummet from a high of about $1.92 per pound in early May to a low of $1.63 June 28. But cheese prices at $1.68 on July 8 already have begun to recover. Cheese futures in the second half of 2013 are averaging $1.77 per pound. Butter prices, which peaked at about $1.79 per pound in late April, fell to $1.43 June 28 before rebounding to $1.53. Butter prices typically increase through summer. Last year, butter prices rose from a low of $1.30 in May to a high of $1.95 per pound in early October. Butter futures for the second half are averaging $1.61 per pound.

Grain, pork, poultry and vegetable oil

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Grain — With corn, it’s been the tale of two crops — old and new. In its June 28 “Grain Stocks” report the USDA said corn supplies — old crop — totaled 2.76 billion bushels as of June 1. That was less than expected, 12 percent below a year ago and the lowest level in 16 years. Conversely, in the June 28 “Acreage Report” the USDA said this year’s new corn crop will total 97.4 million acres, the most since 1936 and up slightly from last year. Most analysts had expected that heavy spring rain and planting delays would have reduced planted acreage to well below year-ago levels. As a result, corn prices — old crop and new crop — went in opposite directions. The July old-crop futures contract jumped from $6.53 to $6.91 per bushel July 8, while the December new-crop contract has dropped to $5 — close to the USDA forecast of $4.90 per bushel for crop year 2013-2014.

U.S. wheat exports are projected to decline as world supplies build, especially from the Black Sea region. Wheat sowings in Canada, a major source of high-protein wheat, are at 12-year highs. Still, one large bullish factor is China, where poor weather has damaged the wheat harvest, raising the prospect of strong imports to meet milling needs. In June’s “Wheat Outlook” the USDA projected 2013-2014 ending stocks at 659 million bushels, which would be a five-year low. Wheat futures at $6.60 per bushel July 8 have remained relatively steady in a $6.50 to $7.10 trading range since April.

Pork — The USDA’s June 28 “Hogs and Pigs” report showed the market hog inventory at 60.76 million head, down 0.1 percent from a year ago. Supplies are lower partly due to a drop in Canadian imports, and they may get tighter if hog losses from the porcine epidemic diarrhea virus, or PEDV, continue. Through June there were 265 positive samples in 19 states. Smaller hog supplies point to lower-than-expected slaughter levels for the second half of 2013. Even so, pork output in the second half of 2013 could still be 2 percent above a year ago. And with breeding inventory up 0.3 percent from 2012, producers appear poised to capitalize on potentially lower feed prices.

Poultry — Poultry exports to Mexico have been particularly strong due to an avian flu outbreak. Mexico has culled 4.2 million chickens this year in an attempt to contain the outbreak. U.S. egg exports to Mexico for the first four months of the year reached 12.9 million dozen, almost 27 times greater than a year ago. In the United States, despite a 1.2-percent increase in eggs set, the number of chicks placed for grow-out is up only 0.1 percent from a year ago. The difference is thought to be due to increased shipments of fertilized eggs to Mexico.

Looking forward, sharply lower feed prices are expected to spur higher poultry production. So far this year, the hatchery flock is up 1.4 percent from a year ago. Broiler production is forecast to be up 5.2 percent from a year ago in the third quarter and up 3.6 percent in the fourth. The USDA projects broiler prices to jump 18 percent to $102 per hundredweight in 2013.

Vegetable oil — Falling exports, soybean availability from Canada and surging soybean-meal prices have provided soybean processors with ample crush margins, which has subsequently boosted soy-oil output. In world markets palm oil is plentiful and trading at a discount to soy oil. Also, a large South American soybean crop should lead to an increase in soy-oil exports.

But even with all of the bearish data, season-ending 2012-2013 U.S. soy oil stocks are forecast at 1.73 billion pounds, down sharply from 2011-2012 ended stocks that were nearly 3 billion. Soy oil futures have been trading near 47 cents per pound. Forward contracts for 2014 are averaging near 46 cents. Barring a major U.S. drought this summer, soy-oil prices are expected to trend lower, possibly reaching a major cyclical low in the fourth quarter. Biodiesel is a bullish factor on the horizon that will start to affect prices in 2014. 

John T. Barone is president of Market Vision Inc. in Fairfield, N.J., and can be reached for comment at [email protected] [4].