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Global market gets a coffee break

Global market gets a coffee break

John Barone discusses the latest commodities price trends, with a focus on coffee. This article ran in the Dec. 17, 2012, issue of NRN. Subscribe today. 

As the year winds down, coffee merits close watching as a potential long-term contracting opportunity.

Brazil got enough rain to avert most drought-related damage, ensuring a record-large crop in excess of 50 million bags. The International Coffee Organization pegged 2012-2013 world production at 147 million bags, up 9.3 percent from the prior year, and projected a supply surplus for the first time in five years. Coffee futures, which were $1.83 per pound Oct. 3, closed out November at $1.42. Forward contracts for 2013 are trading in the $1.50s.


This market is at or near bottom. Coffee prices tend to rise seasonally with increasing winter consumption in North America and Europe. Coffeecoverage is recommended at least until May or June — or for all of next year as 2013 prices are expected to be supported by increasing global demand and a cyclically smaller crop for 2013-2014.

Beef — November’s U.S. Department of Agriculture cattle report showed feedlot inventories at 11.25 million head, up 2.4 percent from last month but 5 percent below a year ago. New feedlot placements at 2.2 million head were 13 percent less than a year ago and the lowest October placement number on record. Off-feedlot cattle numbers have dropped to record lows, making feeder cattle scarce at any price. Total year-to-date beef output is 1.9 percent below 2011, and 2013 production could be down as much as 4 percent.

The USDA bumped its 2013 cattle price forecast to $128 per hundredweight, 4.8 percent above a year ago. Cattle futures closed November at $126.73 per hundredweight, and forward contracts for 2013 are averaging $132, 8.5 percent above 2012 levels and well above USDA projections. Beef prices hit record highs in June 2012. Those levels will be exceeded in spring 2013.

The only damper on beef prices is slumping consumer demand at the retail level. How the government responds to the fiscal cliff in terms of taxes also will have a big impact on beef demand in 2013.

Dairy — A pre-Thanksgiving cold-storage report slashed cheese inventories by 4.2 percent to just 954 million pounds. That’s the lowest level since March 2009 and would appear to indicate better-than-expected retail sales ahead of the holidays. Despite tighter supplies, the block-cheese market unraveled in November, dropping from $2.11 per pound to $1.76 for the month. The

USDA’s 2013 block-cheese forecast is $1.78. However, contracting cheese at that price is impossible, with first-half 2013 cheese futures averaging $1.85.

Butter in cold storage plummeted 26 percent in October but is still 11 percent above a year ago. While butter prices this time of year are driven strongly by commercial and consumer baking needs for the holidays, butter prices also tumbled in November, dropping from $1.89 to $1.60 per pound. 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 $1.67 per pound, while second-half futures are at $1.73.

Strong corn prices

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Grain — November’s USDA World Agricultural Supply and Demand Estimates report was mildly bearish for grain prices. Total corn production for this year is forecast to be 10.7 billion bushels, up slightly from the October report but still down 13 percent from 2011. High corn prices will prompt growers to plant another record-large crop next year. But before that crop comes in next fall, prices will remain strong to encourage further demand rationing.

Corn futures closed November at $7.48 per bushel. Forward contracts for January-August 2013 are averaging $7.53; September-December 2013 contracts are averaging $6.50. However, if the 2013 crop were to come in without significant damage, corn prices could easily drop below $6 per bushel by late summer. Only 33 percent of the U.S. winter wheat crop is in good or excellent condition. That compares to 52 percent a year ago.

Winter wheat is about to enter dormancy and still has plenty of time to recover, but without significant snow cover it will be vulnerable to a dry spring in 2013. Wheat futures remain strong at $8.44 per bushel, well supported by tight world supplies and concerns over the continuing U.S. drought.

Pork — Supplies remain elevated following two months of herd liquidation in August and September. Pork inventories Oct. 31 were 24 percent above a year ago. Ham inventories were 39.9 percent larger. However, October and November slaughter numbers indicate that the uptick in herd liquidation was temporary. Losses for hog producers have narrowed, and profits are projected for spring 2013.

Sow breeding stock likely will finish the year within 1 percent of 2011 levels. Hog producers are weathering the storm and looking forward to a large, cheaper corn crop by fall of 2013. Hog futures jumped from $77 to $84 per hundredweight in November and are averaging $94 for 2013, 10.6 percent above 2012. Pork prices for 2013 are expected to bounce back to or exceed 2011 levels.

Ham markets firmed up for Thanksgiving but were still 10 percent below a year ago. Look for ham prices to weaken in December and bottom out in January before turning higher again ahead of Easter. Pork bellies remain firm at $1.20 per pound and only look to be headed higher in January.

2013 broiler production projected down

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Poultry — The USDA said fourth-quarter 2012 broiler production will be up 2 percent from a year ago, following a 2-percent year-over-year decline in the third quarter. Broiler output for 2013 is projected to be down 1 percent from 2012. Chicken inventories in cold storage Oct. 31 were 6.8 percent below a year ago. Breast-meat supplies were down 21 percent, while wings were up 37.2 percent.

Year-to-date slaughter is down 3.1 percent, but heavier bird weights have held year-to-date production declines to 1.8 percent. The USDA’s “Georgia dock” price for 2.5-pound to 3.0-pound whole birds closed November at a record-high 97.25 cents per pound, 8.4 percent above year-ago levels. Higher whole-bird prices and tighter breast inventories are good news for producers and may help stave off further production cutbacks. U.S. farmers are likely to put a record corn crop in the ground, and their South American counterparts may do the same. If the weather cooperates, corn prices have the potential to be substantially lower — and poultry output higher — by summer 2013.

Vegetable oil — Soy-oil futures plunged from highs of 55 cents per pound in late September to 47 cents per pound in mid-November. U.S. soy oil currently is competitively priced in world markets. Seasonally limited South American supplies have been beneficial for U.S. exports. A market bottom in soy oil was reached in November, and prices are expected to be firm through winter. November lows could be tested again in spring 2013 when large South American supplies begin hitting the market.

But the recent rash of export sales was a reminder that China remains a big factor and that the Chinese will buy U.S. soy oil and corn on any significant breaks in the market. Soy-oil futures recovered to 49.41 cents per pound by November’s end. Futures contracts for 2013 are averaging roughly 51 cents. Coverage is recommended through at least spring — or all of 2013, for the risk averse.

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

TAGS: Supply Chain
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