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Lower feed prices offer some relief for protein producers

Lower feed prices offer some relief for protein producers

Corn at $3—the notion was unimaginable a year ago when corn was at $5.49, or even two months ago, when it was at $4.48.

Taken together with a drop in soymeal prices, which fell from around $400 to the $340s, it represents huge cost savings for poultry producers and signals that poultry output will likely stop contracting. Input costs are at the point where cheaper breast prices will be OK, given leg quarters in the 40-cent range and wings in the $1.40 range. Egg and turkey producers could also be inspired to ease off the brakes. Dairy and hog producers may even start breathing again by 2010.

So what will happen with prices? That depends. With unemployment jumping to 9.7 percent, consumer demand won’t be bouncing back anytime soon. However, Asian economies are already perking up, and a weak U.S. dollar combined with cheap U.S. commodity prices could mean an imminent rebound in export sales. Keep an eye on crude oil prices as a trendsetter. Altogether, there’s the potential that we’ll see another commodity bubble in 2010.

Beef—The U.S. Department of Agricuture’s August cattle report showed 9.644 million head of cattle on feed, down 2.3 percent from a year ago and a record low for this time of year. July placements were up a larger-than-expected 13 percent from a year ago, as lower corn prices are drawing more young cattle off pasture and onto feedlots. July feedlot marketings were down 5 percent from a year ago, reflecting sluggish beef demand.

The seasonal peak in fed cattle supplies occurred in July and the bottom will come in November. However, middle-meat prices look to be relatively flat, with chucks and rounds seasonally higher. This year’s holiday celebrations—especially New Year’s Eve—will likely be subdued. Rib-eyes and tenders are headed higher, but will remain well below year-ago levels. The USDA now expects choice steers to average $85 per hundredweight in 2009, down from $92.27 in 2008. Steer prices are expected to rebound back to $92 in 2010.

Coffee–Coffee managed to trade higher in July based on risk premiums for a potential freeze in Brazil. When no damaging weather occurred, prices began to falter in August. Coffee futures, at $1.20 in early September, are down from $1.31 a month ago. But coffee is likely to be near a bottom, and further downside potential is limited. Look for roasters to start buying on market dips and building their supply positions for the upcoming winter consumption season in North America and Europe. Global Arabica, or mild, supplies are historically tight, but many consumers have traded down to cheaper Robusta blends.

Dairy—The USDA temporarily increased price support payments by 15 percent for nonfat dry milk and 16 percent for cheese. That move allowed block to jump from lows of $1.09 in mid-July to $1.40 in mid-August, before settling back to the mid-$1.20s. Uncertainty is reigning as buyers and sellers try to project beyond Oct. 31. Will the inflated “temporary” price support policy be extended into November, or possibly even raised, and by how much and for how long? The market will remain unsettled until these questions are answered.

Economic recovery in 2010 and slightly lower milk production should help boost prices for all products next year. Block cheese is projected to average more than $1.24 this year and climb to $1.56 in 2010. Butter is expected to average $1.20 in 2009 and strengthen to $1.50 in 2010. Milk prices should recover from 2009 lows next year, but should remain well below the highs of 2007 and 2008. The Class III price is expected to average $10.80 per hundred-weight in 2009 and rise to $14.25 in 2010. The all-milk price average is expected to be $12.20 this year and projected to rise to $15.15 in 2010.

Grain—In its August Supply & Demand Report, the USDA raised its 2009 U.S. corn forecast from 12.29 billion bushels to 12.76 billion bushels and bumped corn yield from 153.4 bushels per acre to 159.5 bushels per acre. U.S. 2009-10 corn-ending stocks were increased from 1.550 billion bushels to 1.621 billion bushels. World corn-ending stocks were increased from 139 million tons to 141 million tons. Corn futures, which had run up to $3.58 in August, bottomed at $3 on Sept 4. However, a projected 2009-10 increase in ethanol usage from 4.1 billion bushels to 4.2 billion bushels will likely keep a floor under corn prices near current levels. The USDA reduced its 2009-10 corn price forecast from $4.30 per bushel to $3.75 to $3.50 per bushel over the past two months.

The 2009 U.S. wheat forecast was raised from 2.112 billion bushels to 2.184 billion bushels, and the yield increased from 41.9 bushels per acre to 43.3 bushels per acre. U.S. 2009-10 wheat-ending stocks were increased from 706 million bushels to 743 million bushels. World wheat-ending stocks were increased from 181 million tons to 184 million tons. Chicago wheat futures dropped from $5.49 to $4.29 in five weeks. Global wheat prices could rally if weather risks in Australia and other major producing countries are realized, reducing expected global production. The 2009-10 forecast at $5.20 per bushel is down 10 cents from last month’s estimate and significantly below the 2008-09 price of $6.78.

Poultry—In first half of 2009, broiler meat production was down 5.8 percent from a year earlier. But only a small decline in output is expected for the second half and that, combined with lower exports, will raise net poultry supplies by year’s end. That will help keep breast prices relatively inexpensive for the balance of the year and maybe even provide a little opportunity on wing and leg quarters by November.

The big news in poultry is the pending $2.5 billion offer by Brazilian company JBS to buy Pilgrim’s Pride out of Chapter 11 bankruptcy protection. The deal would include full payment of all Pilgrim’s creditors to the tune of $2.2 billion. While the deal will be under government scrutiny, it represents a great offer, given that Pilgrim’s stock at a little over $5 per share gives the company a market capitalization of just $360 million. JBS acquired Smithfield’s beef division last year and Swift & Co. in 2007.

Soy oil—Year-end U.S. soybean stocks are expected to hit a 32-year low. But the new harvest starts in late September and is expected to be record large–potentially raising ending stocks from 110 million bushels at the close of 2008-09 to well over 300 million for 2009-10. For soy oil, much will depend on soymeal demand, which will dictate how many of those beans will be crushed. Soybean crush has been dropping, but cheaper, new-harvest soybeans should combine with a weaker dollar and drive better soymeal export demand later this year and in 2010.

Soy oil futures hit highs of more than 38 cents in mid-August, but the recent sell-off in commodities knocked prices back to the 34-cent range in early September. Fundamentally, prices should drift lower. But most of the trading lately has been either more technically driven, or tied to moves in crude oil or the dollar.

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