For the past six years, a perfect storm of macroeconomic factors — a weaker dollar, strong global demand and booming ethanol output — all combined to create one of the biggest commodity bull markets in history. Now, however, some of those factors are reversing, with the euro crisis threatening to sink global economic recovery.
Of the euro zone’s 17 members, eight are in recession. And, depending on the outcome of Greece’s June 17 elections, that country could exit the euro altogether. By doing so, Greece could pay off its debt with essentially worthless drachmas and default on as much as 75 percent of its euro loans. That possibility has sent cash flowing out of the euro and into the U.S. dollar. A stronger dollar means that commodities traded at U.S. exchanges and priced in U.S. dollars tend to go down in price.
China’s exports have been especially hurt by the euro recession, and that is beginning to translate into lowered Chinese demand for U.S. commodities. In early June the Reuters/Jefferies CRB Index, which measures a range of commodity prices, was off 16 percent from a February peak. Crude oil futures were at $82.70 per barrel June 11, down 24.7 percent from this year’s peak of $109.77 Feb. 24.
And as of June 5, traders were “net short” corn, wheat, soy oil, feeder cattle, hogs and coffee — meaning that the majority of trades were betting prices would be going even lower.
Beef — May’s U.S. Department of Agriculture cattle report showed feedlot inventories at 11.1 million head, down from 11.5 million last month and 1 percent below a year ago. New feedlot placements in April were 15 percent below last year. The gap in calf supplies, caused by last year’s herd-liquidating drought in Texas, will persist through 2012 and 2013. Year-to-date slaughter rates are running 4.8 percent below a year ago.
Herds should begin rebuilding this year. The problem is that retaining more heifers for breeding removes them from the slaughter lot, and gestation plus raising a cow to slaughter weight takes roughly 26 months. Therefore, results from the rebuilding process won’t be seen until the second half of 2014.
Choice beef prices resumed typical seasonal increases in May, as the lean, finely textured beef and mad cow scares faded from consumers’ memories. Prices are at or near seasonal peaks and are headed lower from mid-June through August before turning higher again in September.
Coffee — Futures prices at $1.55 per pound in early June are down another 20 cents from a month ago. While the International Coffee Organization warned that world consumption exceeded production for the fifth straight year in 2011, expectations for a potentially record-large 2012-2013 Brazilian crop as well as an imminent euro-zone recession have taken the steam out of prices. But historically tight current supplies should keep prices supported at or above current levels. Quality Colombian and Costa Rican arabica premiums remain stubbornly high at 37 cents above the coffee futures C contract, reflecting tight supplies from those countries.
Dairy — The USDA reported U.S. milk output up 3.2 percent in April vs. a year ago. But that’s still a decrease from 5.1 percent average growth for the first quarter of 2012. The USDA projects milk output growth will slow to 2.6 percent above a year ago in the second quarter and 1.7 percent in the second half of 2012. The April USDA Cold Storage report was slightly bullish for cheese and bearish for butter. Butter supplies in storage jumped to a three-year high. Even so, butter prices have edged up from a seasonal low of $1.30 per pound May 9 to $1.42 June 11, but may not go much higher. Cheese inventories fell 1.5 percent in April, indicating strong demand. Block-cheese prices have jumped from $1.50 per pound in late May to the low $1.60s in early June. Block prices already are at a level not expected until the third quarter and may be a bit overextended. But block-cheese prices in the $1.60s for the third quarter look like heaven compared with 2011’s third-quarter record-high $2.04 block average.
Grain — Food commodities are all about corn, and right now corn is all about weather. Hot, dry conditions across the corn belt are stressing the young crop and potentially cutting yield. On June 8, satellite imagery company Lanworth issued its crop forecast, and just like last year, Lanworth’s estimate for 2012 U.S. corn at 13.65 billion bushels is well below the USDA forecast of 14.79 billion. Historically warm weather this year let farmers plant earlier than usual. Hopes were to have a well-developed crop before the summer heat arrived and to avoid excessive heat during pollination. Dry weather early in the season can be helpful, forcing plants to develop deep root structure. But too little moisture will stunt growth and eventually wilt crops. It’s still too early for disaster, but it may be a good time to start worrying. Corn futures, which hit $6.66 in early May, had dropped to $5.51 June 1 before recovering back to $5.92 by June 11.
The International Grains Council said world wheat production will fall 3.5 percent in the 2012-2013 season, as another year of heat and drought threatens crops from the European Union, Ukraine and Russia. Chicago wheat futures have been on a roller coaster over the past month, dropping to a low of $6.01 May 11, rebounding to a high of $7.15 May 21 and then back down to $6.30 June 11.
Pork — Hog futures prices took a turn higher over the past month, jumping from a low of $79.35 per hundredweight May 15 to $93.32 June 11. But the price trend is not well supported by fundamentals. Year-to-date pork production is up 2 percent. The total inventory of pork on April 30 was near record-high levels, up 8.1 percent from the previous month and 20.1 percent higher than a year ago. Ham stocks are 46 percent above a year ago; bellies are 40.6 percent higher. The ham market in the mid-60-cents-per-pound area is down a nickel from a month ago, but looks to recover through summer. Pork trimmings continue to recover from the LFTB scare and look to trend high through summer. Pork bellies at $1.12 per pound June 11 are up 27 cents from a month ago and should continue to trade near $1.10.
Poultry — Producers continue to sustain output reductions. Through May, egg sets were down 4.9 percent compared to 2011, chicks placed off 4 percent, and broilers were down 4.4 percent. Cold-storage supplies grew by 5.6 percent during the month of April but remained 18.2 percent lower than a year ago. Stocks of breast meat are 18 percent lower than last year. Boneless, skinless breasts remained moderately priced at $1.40 per pound in early June, and the July high is now looking to be $1.50. Wings are still above $1.80 and defying expectations for a summer price decline. At this point, the best-case scenario probably is for lows of about $1.60 in August before prices move higher again in September. As long as bird slaughter numbers remain depressed, wings will continue to be in tight supply.
Soybean oil — Futures prices have dropped from 57 cents per pound in April to 49 cents in early June, despite the fact that almost all of the soybean news has been bullish. According to Oil World, U.S. soybean ending stocks will drop 17 percent from a year ago as importers switch to U.S. soybeans in the wake of drought-reduced output in South America. But strong global demand for soymeal has allowed the soy-oil share of the soy complex to drop from 47 percent to 37 percent. This bearish phase of the soy-oil price cycle should see near-term lows limited to the 48-cents to 49-cents range, with the possibility of even weaker prices in 2013.
John T. Barone is president of Market Vision Inc. in Fairfield, N.J., and can be reached for comment at [email protected] .
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