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John Barone

Economic turmoil still looms large in 2013

John Barone assesses the state of commodities markets and how they may be affected by continuing economic uncertainty.

“Uncertainty” was the biggest complaint among business leaders in 2012, prompting many of them to delay hiring and investment spending until they could get a clearer, post-election picture of what was going on with the budget talks.

Now it appears that American consumers have caught that sentiment. The Conference Board’s Consumer Confidence Index fell 6 percent from November to December, to its lowest level since August. The numbers suggest that consumers were focusing on the potential tax increases and government spending cuts known as the “fiscal cliff.” The Jan. 1 deal reached by government leaders may have stopped the country from careening over the fiscal cliff, but the crisis has not been totally averted; notably, taxes will rise for many, a decision on the sequester has yet to be reached — only delayed for two months — and an upcoming vote on the debt ceiling still looms.

While doubts about economic growth have been bearish for commodity prices, any further cuts in consumer spending could present big problems for a U.S. restaurant industry that is already limping into 2013. The NRA’s Restaurant Performance Index dipped below the 100 level in both October and November, indicating industry contraction for the first time in 14 months. Needless to say, what Congress ultimately does with taxes, spending and the debt ceiling — and how that affects both confidence and disposable income — will have a big impact on foodservice in 2013.

Beef — December’s U.S. Department of Agriculture cattle report showed feedlot inventories at 11.33 million head, down 6 percent from a year ago. November feedlot placements were better than expected but still 5.6 percent below last year. Fewer cattle foreshadow record-high beef and cattle prices for 2013. In 2012 producers were able to offset lower herd numbers with higher cattle weights that averaged 2 percent above 2011. As a result beef output in 2012 was held to just a 1.3-percent decrease from 2011. By contrast, 2013 beef output is expected to fall by 5 percent. Cattle futures jumped from $125.88 to $129.90 per hundredweight over the last three weeks of December. At year end, forward cattle contracts for 2013 were averaging $133.18, 8.7 percent above 2012 levels.

Coffee — Due to better-than-expected output in Vietnam and Honduras, the USDA made upward revisions to the world coffee production estimates for both the current crop and last season. World production in 2011-2012 was 144.42 million bags, with a jump to a record-high 151.28 million bags expected for 2012-2013. The International Coffee Organization is projecting a supply surplus for the first time in five years. Arabica coffee futures, which were $1.83 per pound Oct. 3, dropped below $1.40 in early December and closed the year at nearly $1.44. Forward contracts for 2013 are trading in the $1.50s. Coffee prices for 2013 should be supported by increasing global demand and a cyclically smaller Brazilian crop for 2013-2014.

Milk output increases

Dairy — November’s milk production report was mildly bearish for prices. Total U.S. output was up 1 percent from a year ago and 1.5 percent above October, driven by modestly higher dairy-cow numbers and an increase in milk per cow. Still, milk supplies look to remain relatively tight through winter as producers struggle with sky-high input costs. The legislation passed to avoid the fiscal cliff included a renewal of the Milk Income Loss Contract subsidy to dairy producers, however, so milk prices should be kept from entirely skyrocketing in 2013.

The USDA raised its 2013 block-cheese forecast by a penny to $1.79 per pound in December’s World Agricultural Supply and Demand Estimates. With the current block market at $1.76, first-half 2013 cheese futures averaging $1.81 and second-half futures averaging $1.85, whether or not to contract cheese for next year remains a tricky decision. Butter closed 2012 just shy of $1.50 per pound, and that might be as good as it gets for a while. The USDA is projecting butter to average $1.67 for 2013, up 3.1 percent from this year. First-half 2013 butter futures are trading at $1.61, with second-half futures at $1.70.

Grain — High prices have helped cut demand, and corn futures have dropped below $7 per bushel for the first time post-drought. In December the USDA lowered its 2012-2013 corn price forecast from $7.60 to $7.40 per bushel. High corn prices will prompt U.S. growers to plant a record-large crop next year, and their South American counterparts may do the same. The December 2013 new-crop corn contract at $5.99 reflects the prospects for bigger corn supplies with the next harvest.

The USDA lowered its 2012-2013 wheat price projection from $8.10 to $8 per bushel on increasing world output. The USDA said extreme drought is affecting all six major wheat-growing states. Winter wheat still has plenty of time to recover, but without significant snow cover it will be vulnerable to a dry spring in 2013.

Pork — In the USDA’s end-of-year Hogs and Pigs report, hog inventories were down just fractionally, and the breeding herd was up 0.2 percent from a year ago. September-November farrowings were down 1 percent, but a 1.3-percent increase in pigs per litter pushed the fall pig crop to 0.3 percent above a year ago. After revising the March-May 2012 pig crop up substantially, the USDA is expected to revise its forecast for 2013 pork output from a 1.7-

percent decline to something closer to 2012 levels. Hog futures, which peaked at $87.55 per hundredweight in late December, dropped to $85.73 in response to the USDA report. But forward contracts for 2013 are still averaging $91.45, 7.6 percent above 2012 levels.

Poultry — 2012 broiler slaughter was down 2.5 percent, but heavier bird weights have held year-to-date production declines to 1.1 percent. Broiler output for 2013 is projected down 1 percent from 2012. The USDA’s “Georgia dock” price for 2.5- to 3-pound whole birds closed out 2012 at a record-high 98 cents per pound, 8.9 percent above a year ago. Higher whole bird prices and tighter breast inventories are good news for producers and may help stave off further production cutbacks. If the weather cooperates, corn prices have the potential to be substantially lower — and poultry output higher — by fall 2013.

Vegetable oil — For the next few months, the United States will be the dominant global player in the soy products trade. Shipments to China for October and November totaled 243 million pounds — more than China’s total for all of 2011-2012. But despite the surge in exports, domestic soy-oil supplies are rising. In its December Oil Crops Outlook report, the USDA raised its forecast for 2012-2013 soy-oil output upward by 2.6 percent because of higher crush and yield rates. In addition, ample global supplies of palm oil and moderate costs for crude oil are also bearish factors for soy-oil prices. As a result, the USDA lowered its 2012-2013 soy-oil forecast from 53 cents to 51 cents per pound.

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

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