The U.S. Department of Agriculture reported cattle feedlot inventories at 11.9 million head, up 4 percent from a year ago. Drought in the Southern Plains continues to support early, lower-weight feedlot placements. So, even though feedlot inventories are larger than a year ago, supplies — particularly of choice-grade cattle — have been tight as more cattle are marketed at lower weights. Wal-Mart Stores Inc.’s switch from select to choice beef in its 3,800 U.S. stores will help put a premium on choice products at a time when lower slaughter weights are yielding less choice-grade cattle.
U.S. beef exports for the first nine months of 2011 were 27 percent above a year ago, with exports to Japan and South Korea up 36 percent and 47 percent, respectively. Despite a projected 5-percent decline in U.S. beef output in 2012, exports are expected to hold at or above 2011 levels due to strong Asian demand and favorable exchange rates. Cattle futures prices were trading near $122 per hundredweight in early December — 19 percent above year-ago levels — and forward contracts in the $124 to $129 range reflect expectations for even stronger prices in 2012.
Coffee — Futures prices have remained stubbornly high, mostly in the $2.30s per pound. November and December are busy buying months for coffee, as U.S. and European roasters build inventory ahead of the peak winter consumption season. So far, every market dip into the $2.20s has been met with strong roaster buying. The early reports from Brazil indicate normal flowering and expectations of a record-setting 50-million-bag crop next year. Conversely, fungus issues in Colombia will likely mean a third straight year of below-expected production. But 2011-2012 should be a balanced crop year, with supply meeting demand, and 2012-2013 will likely provide a surplus. It still appears that at some point in 2012 we’ll see $2 coffee.
Dairy — Cheese fundamentals are seasonally bearish. Holiday buying has concluded, export sales have dried up, and supplies are adequate. In October milk output was up 2.5 percent versus a year ago. Year-to-date U.S. milk output is up 1.6 percent. Globally, third-quarter milk output in New Zealand was up 10.5 percent, Australia was up 2.2 percent, Argentina was up 12.5 percent, and the European Union was up 2 percent. On the demand side, third-quarter domestic cheese use was down 0.6 percent. Block cheese prices have declined from $2 per pound in mid-October to $1.74 in early December. The USDA is projecting block cheese to average $1.82 for 2011, up 20 percent from 2010, and then decline to $1.73, on average, for 2012.
Third-quarter butter usage was up 12.2 percent, but Nov. 1 butter stocks were 19 percent above a year ago, and export sales turned sharply lower in September. In October butter prices fell from $1.88 per pound to $1.66 per pound, and are likely to trickle lower in December. The USDA is projecting butter to average $1.97 for 2011, up 16 percent from 2010, and then decline to $1.68, on average, for 2012.
Grain — In November’s World Agricultural Supply and Demand Estimates, the USDA again reduced U.S. corn yield while leaving total acreage unchanged. But lower yield was offset by a decline in feed usage due to expected large cuts in 2012 broiler feeding. U.S. corn ending stocks were reduced by 2.6 percent to 843 million bushels, but the 2011-2012 price forecast was left unchanged at $6.70. The report was mildly bullish, but remains overshadowed by the euro crisis, slower Chinese growth and ample world grain supplies. Corn futures, which were $6.60 pre-report, had dropped below $6 in early December.
Ethanol output has been strong as producers take advantage of the 45-cent-per-gallon blender’s credit that is set to expire at the end of the year. In 2011 ethanol hit a “blend wall,” or level at which the United States is producing more ethanol than we can consume at a 10-percent blend rate into gasoline. Ethanol exports, particularly to Brazil, are absorbing that excess. The USDA projection for 2011-2012 ethanol corn use at 5 billion bushels could be conservative if oil prices remain high, or too aggressive if Europe disintegrates into recession.
Pork — Strong export demand continues to support hogs at a time of year — post-Thanksgiving — when prices tend to decline seasonally. U.S. pork exports in September were 37 percent above a year ago, with shipments to China and Hong Kong up 166 percent, and exports to Japan, the top U.S. pork customer, 33 percent higher than a year ago. Meanwhile, U.S. fourth-quarter pork output is projected down 0.5 percent from last year. As a result, the USDA expects fourth-quarter hog prices to be roughly 30 percent above prices in the same year-ago period. Hog futures prices, at $87 per hundredweight in early December, are 26 percent above year-ago levels. Forward contracts for May-August 2012 are trading in the $97 to $100 range and reflect the anticipation of strong demand for U.S. pork in spring 2012.
Poultry — Following 4.8- percent gains in the first half of the year, broiler output slowed to just 0.3 percent above a year ago in the third quarter. Despite a 2.9-percent decline in bird numbers, a 3-percent rise in live weights pushed net output higher. For the fourth quarter, accelerating declines in bird numbers will sink output 5.1 percent below last year. That’s because financial losses have been driving major reductions in egg sets, placements and slaughter. The USDA reported the U.S. broiler hatchery flock at a 15-year low of 50.17 million birds. Egg sets and chick placements continue to run 6 percent to 8 percent below year-ago levels. For 2012 the USDA is projecting a 1.7-percent drop in broiler output.
Chicken in cold storage was 5.3 percent lower than a year ago in October, but was up 3.9 percent from the prior month. The increase in freezer stock was mostly in leg quarters, up 20 percent, which would indicate that October export sales took a hit. But the lull could be temporary. Russia won approval in November to join the World Trade Organization. More normalized trade with Russia should mean a jump in U.S. poultry exports for 2012.
USDA weighted average prices for boneless skinless chicken breast finally recovered a bit and were trading in the $1.25- to $1.30-per-pound range in early December. Reduced fourth-quarter output should push languishing breast prices into the $1.50s by spring of 2012. USDA whole wings prices, in the mid-$1.30s, could tack on another dime by late January, with a pre-Super Bowl peak well above $1.40.
Soybean oil — Prices in 2012 will be driven by increased use for biodiesel and smaller supplies, but those factors could be mitigated by lower export sales. Soy oil for biodiesel will expand from 2.55 billion pounds to 3.60 billion pounds in 2011-2012, accounting for almost all of the demand increase. But a global economic slowdown and smaller U.S. poultry flocks will cut both soymeal exports and domestic usage, resulting in lower crush rates and less soy oil. Lower U.S. supplies, ample world supplies of competing vegetable oils and another large South American soy harvest will increase global competition for beans, meal and oil in 2012. Soy-oil futures dipped below 50 cents per pound in late November. Sub-50-cent prices present a good opportunity to extend coverage for the first half of 2012. The 2012-2013 crop year, however, could see average prices in the 40-cent range.
John T. Barone is president of Market Vision Inc. in Fairfield, N.J., and can be reached for comment at jbarone@mktvsn.com.
