Surging global demand is draining the world’s grain reserves, raising prices and creating huge challenges for producers, retailers and foodservice operators. Less than two years ago, grain prices were still relatively cheap. In January 2006, Chicago Board of Trade corn futures were $2.05 per bushel, wheat was $3.22, and soybeans were $5.62. Flash forward to 2007: Corn futures hit highs of $4.34 in February and have been volatile in the $3.40 to $3.90 range over the past month. Wheat and soybean futures hit record highs of $9.52 and $10.09, respectively, in early October.
Record-high grain prices have driven up input costs across a wide range of commodities. Most affected this year have been eggs, poultry and dairy prices. The U.S. Department of Agriculture market for N.Y. large eggs averaged 72 cents per dozen in 2006, hit highs of $1.31 in early October and look to average $1.04 per dozen in 2007. USDA boneless, skinless chicken breast averaged $1.31 in 2006, hit highs of $1.76 in August and will average near $1.50 in 2007. The block cheese market, which averaged $1.25 per pound in 2006, hit highs of $2.16 in September and looks to average $1.74 per pound for 2007.
In the past, big grain price increases have been caused by temporary supply disruptions brought on by events such as droughts or floods. This time around the changes are structural and the run-ups could last a decade. What’s changed? Booming, government-subsidized demand for corn-based ethanol coupled with the rapidly developing economies in Asia and Latin America, where the average consumer can now afford meat and dairy products. As a result, food-service operators and U.S. consumers are facing the fastest-rising food prices in almost two decades.
Beef—The September USDA cattle report showed feedlot placements in August down a much-larger-than-expected 17.2 percent from a year ago, on top of a 17-percent decline in July. Current supplies will be adequate for the next month or two, then cattle numbers will start to thin out. Supply numbers continue to be bullish for 2008 cattle prices. Choice middle-meat prices bottomed in September and bounced back a bit in October. Conversely, Select beef prices have backed off of last month’s highs and appear to be headed lower through year’s end. Prices for holiday items, such as rib eye and tenderloin, will peak seasonally in November and remain high in December.
Coffee—Futures prices, which hit lows of $1.07 in July and were still $1.13 in September, surged to the mid-$1.30s in early October. Hot, dry, Brazilian weather is at the crux of the coffee price outlook as the crop enters its flowering and pollination season. With tight world supply fundamentals overhanging the market, prices will continue higher in the absence of any meaningful precipitation. However, any forecasts for rain would trigger some speculative liquidation and any significant rainfall could lead to massive long liquidation.
Dairy—Cheese prices fluctuated wildly in September. The block market hit a high of $2.16 per pound Sept. 12, dropped back to $1.81 on Sept. 21 and then recovered back into the low $1.90s by October. Block supplies look to remain tight, with prices expected in the $1.80s for the next few months. Butter hit its high of $1.52 in July, but faded to the low $1.30s by early October. Seasonally, butter likely still has a few price bumps remaining ahead of Thanksgiving and Christmas. Milk production was up 3.6 percent in August on top of a 4-percent increase in July. That’s roughly twice the rate of increase in a typical summer. But extra supplies are being offset by continued strong demand. According to the USDA, strong global demand, combined with tight supplies, will keep dairy prices high for the balance of 2007 and well into 2008.
Oil—Soybean oil prices remain historically high despite large soybean oil inventories. In particular, strong export demand has been a key price driver. Soy oil prices, even at 23-year highs, are priced favorably compared to its main competitor, palm oil. In its monthly supply and demand report, the USDA slashed 2006-07 U.S. soy oil carryout to 2.58 billion pounds, down from 3.06 billion, and cut 2007-08 soy oil ending stocks to 1.73 billion pounds from 2.22 billion last month. Fewer soybean acres, larger exports sales and poorer prospects for oilseed crops in other countries all are helping to support prices.
Pork—The USDA Quarterly Hogs & Pigs Report showed summer farrowings at 3 percent above last year and litter sizes up 1 percent. Those factors combined to push this summer’s pig crop up 4 percent above last year’s, roughly double prereport expectations. As a result, the U.S. hog population has grown to 3 percent larger than a year ago, and hog and pork prices will likely feel the impact of larger supplies in the fourth quarter. Compounding already ample supplies will be record-large, live-hog imports from Canada, up 11 percent year-to-date and representing 9 percent of total U.S. slaughter this year. Pork supplies are expected to be up about 3 percent this fall and winter, and up 2 percent next spring and summer. Increased supplies continue to dampen pork prices despite the looming Thanksgiving holiday.
Poultry—Third-quarter broiler output looks to be up 1.9 percent over a year ago following a 2.7-percent decline in the first half of the year. Higher summer poultry prices have helped improve industry finances and helped producers crank up output. As a result, output will recover in the second half and approach last year’s record levels. The USDA projects 2008 output to be 2.3 percent higher than in 2007. Boneless skinless breast prices plummeted by 35 cents per pound in September and look to bottom seasonally in the upper $1.20s in December. USDA wing markets are likely to remain in the $1.25 to $1.30 range through year’s end. January, pre-Super Bowl highs could reach $1.40.
Turkey production looks to be up 3.2 percent through the first nine months of 2007. Even with the increase, a 6-percent jump in first-half exports has helped keep turkey stocks low. Last year, frozen toms averaged 89 cents in the fourth quarter. This year, toms are already in the mid-90-cent range and will approach last year’s record of $1.02 in November.
Egg production during the first nine months of 2007 is down 1 percent from 2006. Meanwhile, year-to-date exports are close to 40 percent above a year earlier. As a result, the USDA market for N.Y. large egg prices averaged just over $1.03 per dozen from January to September, up 55 percent year-to-date over 2006 levels. N.Y. large prices are projected to average $1.05 in 2007, up from almost 72 cents in 2006. Prices in 2008 are projected to be about 93 cents.
John T. Barone is president of Market Vision Inc. in Fairfield, N.J., and can be reached for comment at [email protected].
