A hot, dry June was a nightmare for crop conditions. The final verdict on this year’s U.S. corn crop is down to the wire, and prospects are not good. The crop entered its critical pollination stage in July. With soil moisture conditions already at drought levels in most growing areas, continued lack of rain in July will reduce corn yield sharply.
The U.S. Department of Agriculture’s quarterly grain stocks report came in as expected. Planted corn remains at a record high of 96.4 million acres, 5 percent above last season. But corn stocks June 1 were 3.15 billion bushels, down 14 percent from a year ago and the lowest since 1998. The dip in corn futures prices to $5.51 per bushel June 1 reflected expectations for a bumper crop this year. Now, crop conditions have plummeted and a virtual crop disaster is at hand. Just 40 percent of the U.S. corn crop was rated “good” or “excellent” July 7. That compares with 68 percent at this time a year ago.
Corn futures soared to near-record highs of $7.75 per bushel July 9. Forward futures contracts for September and December 2012, which had been trading in the $5.05 to $5.10 range in early June, are now in the low $7.30s per bushel, and first-half 2013 contracts are in the mid-$7.30s. Higher corn prices will have a ripple effect across the supply chain, particularly with poultry producers, who likely have abandoned any thoughts of expansion this year.
Beef — Drought is once again threatening the Southern Plains, and the gap in calf supplies that was precipitated by last year’s herd-liquidating drought in Texas and Oklahoma now could possibly extend through 2014 if conditions don’t improve. Year-to-date steer and heifer slaughter was 4.5 percent below year-ago levels in the first half of 2012. The drop in slaughter was mitigated partially by an increase in slaughter weights, which helped limit first-half production declines to 2.6 percent below a year ago. The USDA is projecting a 6.9- percent drop in year-over-year beef output for the second half, which would put total 2012 beef production at 5 percent below last year, with another 2-percent drop expected in 2013. It’s possible we may not see much relief in beef prices until 2015.
Coffee — Futures prices were over $2 per pound as recently as March, but an impending record-large Brazilian harvest helped push prices steadily lower to a $1.49 bottom in mid-June. But prices didn’t stay there for long. The market already had been oversold, and rain in Brazil impeded early harvest efforts. Futures prices had rebounded to $1.81 as of July 9. Historically tight current supplies should keep prices supported at or above current levels. And if Brazil’s crop comes in short of projections, prices could be even higher by August. Rebounding production has helped Colombian premiums drop from 37 cents to 33 cents above the “C” coffee futures contract. Costa Rican differentials are at 35 cents per pound.
Dairy — The “spring flush” of peak seasonal milk output came and went early this year, pulled forward by the warm weather. May milk production was up just 2 percent from last year, well short of 3.2-percent growth in April and 5.1-percent average growth for the first quarter of 2012. The USDA is forecasting 2012 milk output will rise 3.1 percent from a year ago. That might be a bit optimistic as rising feed costs and high prices for cull cows are encouraging producers to cut back. Dairy-cow slaughter is running 3.7 percent ahead of last year’s pace. Class III futures have been higher since early May, rising from $15.10 to $16.60 July 9.
May cold-storage cheese supplies, 1.9 percent below a year ago, were bullish for cheese prices. Block-cheese prices jumped from $1.50 per pound in late May to $1.64 per pound in early July. Cheese prices averaged $1.54 per pound in the first half of the year. The USDA is projecting $1.62 for the second half. Butter prices have edged up from a seasonal low of $1.30 per pound in early May to $1.54 in early July. Butter price fundamentals are bearish. Production levels were up 7.7 percent through May, exports sales are very sluggish, and cold-storage inventories are at record-high levels. Butter averaged $1.46 per pound for the first half of the year and looks to average $1.60 or better for the second half.
Soybean oil — In June’s USDA World Agricultural Supply and Demand Estimates, soybean stocks and acreage were reported to be a little more than expected. Now the focus will be on how much the drought will reduce yield. For soybeans, the “good” or “excellent” ratings fell to 40 percent of the crop in early July. That compares with 66 percent at this time a year ago. Rising soybean prices helped pull the whole soy complex higher, with soy-oil futures rising from a low of 48 cents per pound in mid-June to 54 cents per pound July 9. The USDA projects 2011-2012 soybean crush to be 0.7 percent larger than in 2010-2011, and private forecasters believe that estimate to be conservative. Strong domestic and foreign demand for soymeal could push crush higher and keep the soy-oil share of the soy complex low, helping limit price increases. But the drought has probably pushed expected prices from the high-40-cent range to the low-50-cent range.
Pork — The USDA’s quarterly Hogs & Pigs Report showed the June 1 breeding herd at 5.86 million head, slightly higher than expected and 1 percent above a year ago. Of course, that survey was conducted when there were still hopes for $5 corn by year’s end. Second-half slaughter was projected at just 0.6-percent higher than last year. Pork production for 2012 is now projected to be 2.7-percent higher than last year, partially offset by a projected 3.7-percent increase in exports. May cold-storage ham stocks were 26-percent higher than a year ago, which should help limit summer prices to the 80-cent to 85-cent-per-pound range. Pork bellies, at $1.35 per pound in early July, are up 30 cents from a month ago and up 50 cents over the past two months. Retail promotions should keep demand in place and prices strong through July before prices move — hopefully — lower in August.
Poultry — For the first half of 2012, egg sets were down 4.3 percent, chicks placed declined 3.5 percent, slaughter was 5.2- percent lower, and chicken production was down 4.3 percent — all compared with a year ago. Lower feed costs would have encouraged output increases, but the drought is quickly killing that possibility. USDA weighted average boneless, skinless breast prices have been flat — and historically cheap — in the $1.35- to $1.40-per-pound range. May cold-storage breast meat was down 28.5 percent from a year ago but still at levels high enough to cap seasonal price increases. Leg quarters look steady in the high-40-cent range for July and in the low-50-cent range for August and September. Wing prices in the $1.80s per pound are double year-ago levels. May cold-storage wings are 36.4-percent lower than last year. As long as bird slaughter numbers remain depressed, wings will continue to be in tight supply, and prices will remain elevated.
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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