USDA revises corn yields to six-year low

Commodities Corner

In the U.S. Department of Agriculture’s August report, the agency confirmed what everyone suspected — that this year’s corn crop is an “official” disaster. The USDA dropped corn yields to just 123.4 bushels per acre, or BPA, down from a pre-drought 166-BPA forecast just two months earlier. Corn production for 2012-2013 was cut by 17 percent to 10.8 billion bushels, the lowest since 2006-2007. 

The USDA’s 2012-2013 corn price forecast was bumped by 39 percent, from $5.90 per bushel to $8.20 per bushel. Adding to the bad news, Pro Farmer’s Midwestern crop tour resulted in a projected corn yield of 120.25 BPA and total output of 10.48 billion bushels, both below the USDA estimates. 

The USDA raised both 2012-2013 U.S. wheat supplies and projected ending stocks, but tighter world wheat supplies and sharply higher corn prices caused the USDA to raise its 2012-2013 wheat price forecast by 22 percent, from $6.80 per bushel to $8.30 per bushel. But now that all of the bad news is public knowledge, grain prices appear to have stabilized. 

Corn futures per bushel have been in the $7.79 to $8.31 range since mid-July. Similarly, wheat futures have been in a relatively tight $8.46 to $9.13 range over the same period.

Beef — Supplies are tighter and prices higher than last year. Year-to-date through August, slaughter is down 4.2 percent, with a 2-percent increase in dressed weights holding the decline in beef production to a negative 2.1 percent. The USDA expects beef output to be down 
3 percent in the second half of 2012 and to decline another 3.9 percent in 2013. The gap in calf supplies, precipitated by two consecutive years of severe drought, will persist through 2014. Beef prices may not have a chance to be significantly lower again until 2015. Year-to-date cattle futures prices have averaged $120.88 per hundredweight. By comparison, forward contracts for 2013 are in the $132 to $137 range. 

Most middle-meat and ground-beef prices will trend seasonally lower through fall. Two exceptions will be rib eye and tenderloin, popular end-of-year holiday items. Prices for USDA 112A boneless, heavy, choice rib eye jumped from $5.98 to $6.85 per pound in August and are now 24 percent higher than a year ago. In 2011 rib-eye prices peaked at $7.62 in late November. Despite this year’s early price run-up, 2012 highs should not significantly eclipse 2011 levels. Similarly, USDA 189A choice tenderloin jumped from $8.82 to $9.83 in August and is 18 percent above a year ago. Last year’s early-December high was $10.80. It should be at least $11.50 this year.

Coffee — Futures prices, which opened the year at $2.29 per pound, dropped to an average of just $1.57 for the month of June. Then heavy July rain in Brazil knocked berries off trees, threatened quality and drove prices back to $1.89. But drier weather in August was ideal for harvest, and prices have fallen to the mid-$1.60s. How low can coffee go? The Brazilians are sitting on large supplies, and the euro crisis has weakened demand for higher-quality arabica beans. Tough economic times also have encouraged more usage of cheaper robusta beans. International Coffee Association data shows drops in both imports and consumption for Spain and Italy. Coffee futures could still test June lows in September, but questions about Brazilian crop quality and seasonal U.S. roaster buying ahead of higher winter consumption will soon put a floor under prices and eventually send them higher again.

Dairy — Poor profit margins are taking a toll on dairy producers, who have liquidated 5 percent more cows year-to-date than in 2011 and culled roughly 12 percent more than last year in July and August. Milk production in June and July was less than 1 percent above a year ago, down sharply from 5.1-
percent average growth for the first quarter of 2012. Class III futures are up 25 percent since early May, and long-term price prospects for milk and dairy products remain bullish. 

Cheese prices had quite a summer run, from a low of $1.64 per pound for block in mid-July to a high of $1.87 Aug. 29. Cheese demand should remain lackluster until Thanksgiving. Prices could take a break and consolidate in September before moving higher. Butter prices have been on a similar trajectory, jumping from $1.64 to $1.86 per pound in August. Butter prices typically rise post-summer as commercial bakeries and retailers book supplies ahead of the fall holidays. Hot summer weather, declining milk supplies and an earlier start to that seasonal drawdown in supplies are likely to support prices. 

Pork — Higher corn prices are bringing more hogs to market at a time of year when slaughter increases seasonally. As a result, hog and pork prices are dropping like rocks. Lean hog futures declined 20 percent in August from $93.20 per hundredweight to $74.18, USDA ham markets fell from 83 cents per pound to 67 cents per pound, and pork bellies declined from $1.55 per pound to $1.26 per pound. Ham prices have bottomed out and don’t look as though they will increase much for the fall holidays. Bellies are expected to continue falling. The typical seasonal declines for hog prices, from summer highs to winter lows, are generally in the 25-percent to 30-percent range. This year’s high was $97.30, so the market is already down 23.8 percent so far. But the huge spread developing between beef and pork prices could help put a floor under pork prices or, hopefully, drag beef a bit lower.

Poultry — According to the USDA, broiler output for the second half of 2012 will be slightly higher than a year ago. But the poultry industry is undergoing some structural changes. The broiler-type hatching flock dropped to 50.6 million hens in July, 5.6 percent below a year ago. It’s a good indicator of poultry-producer intentions in the face of higher feed prices.

Sanderson Farms chief executive Joe Sanderson Jr. said stronger market prices for chicken haven’t offset higher input costs. The company said it will run its plants at 6 percent below capacity until conditions improve. Koch Foods chief executive Joe Grendys said, “costs have gone up so much due to the drought that the industry will be forced to get price increases of 10 to 15 percent across all product lines” for 2013. 

USDA weighted-average boneless, skinless breast prices finally got to a summer high in the $1.50-per-pound range in late August. But breast prices are likely to be back in the $1.30s by October. Wing prices closed August at $1.88 per pound versus $1.01 a year ago. There are some signs of demand destruction on wings, and prices could actually moderate a bit to the $1.70s over the next month or two.

Vegetable oil — The USDA lowered both yield and output for the 2012-2013 soybean crop. As a result, the 2012-2013 soymeal price forecast was increased from $380 to $475 per short ton, and 2012-2013 soy oil was increased from 54.5 cents per pound to 55 cents per pound. Soybean prices, which failed to benefit from late-season rain, have been on the hot seat. After averaging $13.48 per bushel for the first half of the year, futures prices hit record highs of $17.75 just before Labor Day. Soybean crops in the United States, Brazil and Argentina all faced drought problems this year. Soybean oil futures jumped 9 percent in August from 51.7 cents per pound to 56.4 cents per pound. 

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

PREVIOUSLY: Global economy poised for increased costs [4]