Last year started on an upswing for commodities, driven by global economic optimism. Then a pair of shocks hit. First, oil prices surged with the “Arab Spring” revolts. Then, in March, Japan was hit by an earthquake, a tsunami and a nuclear disaster. Global economic optimism faded fast, leading to a summer economic “soft patch.” If things weren’t gloomy enough by mid-year, the partisan Congress took the country to the brink of default in August, precipitating Standard & Poor’s first downgrade of the United States’ credit rating in history.
Meanwhile, Greece flirted with default. Now, just about the entire European Union is in need of a German bailout. How will it affect the United States? No one really knows how intertwined American and European banks are, but what we do know is that overexposure to Eurobonds led to the demise of MF Global, which was the 8th-largest bankruptcy in U.S. history.
These global and domestic events eventually took the starch out of commodities prices. Futures contracts for corn, wheat, soy oil, coffee and crude oil all hit highs in the second quarter and annual lows in the fourth quarter of 2011. Proteins were not affected by the macroeconomic gyrations. Cattle and hog futures prices remained strong, driven by a devastating drought in the Southern Plains and strong global demand for U.S. beef and pork.
Moving into 2012, expect more of the wild swings that defined 2011. Global markets will continue to be schizophrenic, with the euro crisis curbing demand on one hand, and emerging markets — led by China — likely taking advantage of commodity market dips to stockpile supplies to meet their growing needs for energy, metals, grains, vegetable oil and proteins. Tight global supplies of many commodities will make prices very sensitive to supply and demand changes.
Fuel costs will again present one of the biggest commodity risks. After hitting a high of $113.93 per barrel April 29 and a low of $75.67 Oct. 4, crude prices recovered in the fourth quarter and are back above $100. The Middle East remains politically volatile, and hostilities with Iran are always a possibility. With relatively tight diesel supplies and $100 crude prices, a typical spring price rise could easily push diesel to $4.50 a gallon by summer.
Beef — One of the biggest questions that will be asked in 2012 is, “Where’s the beef?” The drought in Texas and Oklahoma structurally changed the cattle industry. Smaller cattle numbers, weaker imports and stronger exports mean even tighter beef supplies than last year. The USDA is projecting total domestic beef production in 2012 to be 4.7 percent lower than last year. Beef and cattle prices increased to record levels in 2011 and are expected to push even higher in 2012.
With unemployment high, consumer demand for “value” beef cuts has never been higher. That’s placed tremendous price pressure on ground beef, which accounts for almost half of all U.S. beef consumption. Lean beef 90s trimming, in particular, has felt the heat. Domestic 90s averaged $1.88 per pound for the year in 2011, up 18 percent from 2010 levels. A big reason is that U.S. beef 90s imports from Australia and Canada have dried up due to demand from emerging economies and the weakening of the U.S. dollar.
Coffee — According to the International Coffee Organization, total output in 2011-2012 is projected at 128.6 million bags, down 3.4 percent from 2010-2011. But early reports from Brazil are for a record-setting 55-million-bag crop for 2012-2013. Arabicas will be tight through at least April, and then new harvest supplies should start to build. Looking forward, 2011-2012 could be a balanced crop year, and 2012-2013 will likely provide a surplus. Coffee futures could average as high as $2.20 in the first half of 2012, but should be lower in the second half of 2012. The problem for coffee buyers will be lack of quality, even within the Arabica category. That could mean steep premiums or “differentials” above what coffee futures are trading for.
Dairy — Last year was unique, with record highs in milk output, exports and prices. A surge in exports inflated prices for most of the year, and then exports dropped and prices plummeted. Block cheese prices have declined from $2 per pound in mid-November to the low $1.50s in late January. Block cheese averaged $1.81 for 2011, up 20 percent from 2010, but is forecast by the U.S. Department of Agriculture to decline to $1.70 for 2012. Butter prices have fallen from $1.88 per pound in early November to the upper $1.50s. Butter averaged $1.97 for 2011, up 16 percent from 2010, but is projected to decline to $1.66 on average for 2012.
Grain — The USDA in January raised projected 2011-2012 corn output by 48 million bushels to 12.36 billion bushels, but that surprised most analysts, who were expecting a decrease in the 80-million-bushel range. That USDA report, combined with drought-relieving rain in Argentina, the world’s second-largest corn exporter, took the steam out of prices. Corn futures that were $6.52 before the report dropped below $6, but bounced back to $6.20 in late January. Corn supplies remain historically tight, and prices will be sensitive to any changes in fundamentals, such as big Chinese purchases on market dips, as was the case in 2011. Wheat futures moved in lock-step with corn, from $6.41 to $6.03 to $6.20. That’s because wheat prices are competitive with corn, leading to wheat-for-corn feed substituting.
Pork — Depending on corn prices, producers may bring heavier hogs to market — or not. Corn in the $5.50 range will encourage heavier hogs; $6.50 corn will not. Hog supplies for the February-May period are expected to be up 2 percent from last year. But lower breeding stock numbers and high corn prices could lead to smaller supplies for the second half. Hog futures hit a seasonal low of $83.15 per hundredweight in mid-December and are back above $86. The June 2012 contract is trading in the upper-$90s. Cash pork bellies, at $1.20 per pound in late January, could be $1.40 by April. Ham prices dropped from 90 cents to 72 cents per pound in December, but pre-Easter prices will peak in the 85-cent range.
Poultry — The USDA is projecting a 1.7-percent drop in broiler output in 2012. USDA weighted average boneless skinless breast, at $1.30 per pound in late January, should rise steadily, with highs near $1.70 by April and May. Leg quarters are strong at 53 cents, versus 36 cents a year ago. Export demand should keep prices in the low-50-cent range through the first quarter. Driven by lower bird numbers, wing prices have been off to the races. Prices rose 50 cents per pound since early December and were at a record-high, pre-Superbowl peak of $1.92 in late January.
John T. Barone is president of Market Vision Inc. in Fairfield, N.J., and can be reached for comment at jbarone@mktvsn.com.
