Corn is the commodity king — the primary feed and cost input for cattle, hogs, poultry and dairy cows. Higher corn prices have halted livestock expansion plans and could prompt further producer cutbacks. Commodity prices have surged and plunged several times in recent months, but for the most part supply and demand fundamentals remain bullish for livestock and agricultural commodities. This is particularly true of corn, where old-crop supplies are record low, and a wet spring has slowed new-crop planting. Ninety-three percent of the crop had been planted as of June 5. At this point farmers generally switch to soybean planting. So some of the corn crop won’t be planted at all, and anything planted after mid-May was late and is subject to the yield declines that come from weak root structure and vulnerability to summer heat. Missouri River flooding and “spillway” flooding could take out additional planted corn acreage.
Besides Mother Nature, other factors are driving prices. Global demand remains strong. A big corn purchase by China helped send prices soaring in late May. But of all the issues surrounding corn and commodities, the two biggest wounds are self-inflicted. Ethanol production will consume 37 percent of the projected 2011/12 U.S. corn crop, or 5.05 billion bushels. In addition, Congress is gridlocked on fiscal policy, which has left the Federal Reserve to fight the recession on its own. Through its quantitative easing program the Fed has flooded the economy with liquidity and sharply reduced the value of the dollar. Any commodity traded on U.S. futures exchanges and priced in U.S. dollars tends to readjust higher every time the dollar weakens. Also, U.S. exports are now cheaper and more attractive to foreign buyers, and that increased export demand also helps drive prices higher.
The weather may pass, but China, ethanol, loose monetary policy and a weaker dollar are more firmly entrenched than your mother-in-law. Expect exceptionally tight U.S. supplies and high corn prices to negatively impact livestock, poultry and dairy production for the remainder of 2011 and in 2012. Corn futures, which had dropped to $6.16 after Japan’s earthquake and dipped to $6.68 in early May, hit a record-high $7.85 June 8 after the USDA announced yet another decrease to season-ending corn supplies.
Beef — Drought in the Southern Plains has decimated grazing pastures, forcing producers to liquidate cows. Roughly one-third of the U.S. cowherd is located in areas affected by the drought. May’s U.S. Department of Agriculture cattle report showed feedlot inventory at 11.2 million head, up 7 percent from a year ago. April new placements were up a larger-than-expected 10 percent from a year ago. As a result, slaughter rates will climb into late summer. Beef prices have slumped from April levels and will likely remain soft into August. Grilling demand has been very slow to develop this spring due to cool/wet weather in heavily populated areas along the East Coast and in the Midwest. A good Memorial Day weekend helped retail sales, but overall beef supplies are higher than expected, and summer price forecasts are lower. However, once this mini-glut has passed, the pipeline should be relatively empty. Beef output is projected to be down 6 percent in the fourth quarter compared with a year ago.
Coffee — Expect a wild ride for prices as a weakening La Niña increases the chance of June-August winter damage to Brazil’s crop. Stockpiles in producing countries have fallen to the lowest level in 50 years. The next few months will be precarious for coffee buyers, with possibly severe price spikes at times. Businesses that have not covered their needs through August need to do so quickly. But relief should start creeping into futures markets come September. Brazil’s 2011/12 crop, at 42 million to 45 million bags, could be a record for an “off-year” crop, and the 2012/13 crop could be a 60-million-bag, record-large monster crop.
Dairy — Milk production is expected to rise by 1.3 percent in 2011 and 1.7 percent in 2012 despite record-high feed prices. The USDA is projecting the all-milk price at $19.20 per hundredweight in 2011 and $17.85 in 2012, compared with $16.29 in 2010. Strong exports will continue to support dairy product prices. Block cheese at $2.11 on June 8 had jumped 39 cents in three weeks. But high retail prices will likely take a toll on summer cheese sales, and block prices are not likely to push higher. The USDA is projecting block to average at $1.78 in 2011 and $1.71 in 2012, compared with $1.52 in 2010. Butter prices remain strong at $2.13. The Oceania market is $2.18, and Western Europe is $2.70. The USDA is projecting butter at $1.95 in 2011 and $1.68 in 2012, compared with $1.70 in 2010.
Grain — Hard red winter wheat output keeps falling while soft red wheat supplies gain. That’s a big problem because high-protein, hard, milling-grade — winter and spring — wheat is in very short supply globally. Wet weather is preventing planting of spring wheat in the Northern Plains, while growers of winter wheat in the Southern Plains and Western Europe have seen drought cut their output. Grain markets pulled back following reports that Russia would lift wheat export restrictions. But the Russian wheat is likely to be of a lower, feed-grade quality and may be more of a threat to U.S. corn exports than to wheat. Chicago wheat futures in early June were $7.45, while Kansas City, Mo., hard red winter wheat futures were $8.71, and Minneapolis spring wheat futures were $10.20, trading at a large premium over soft red wheat.
Pork — Output in 2011 will be up just 1 percent from a year ago. Hog slaughter this year is down 0.9 percent, but due to heavier weights, year-to-date pork production is up 1.2 percent. That small supply increase has been met with huge export demand, particularly from China, South Korea and Japan. Pork imports by South Korea, which lost 30 percent of its hog herd to foot-and-mouth disease, tripled in the first quarter compared with a year ago. The USDA is projecting hogs at $63.50 per hundredweight in both 2011 and 2012, up 15 percent from $55.06 in 2010. USDA ham markets look to gain 6 to 7 cents and trade near 80 cents per pound this summer. Pork bellies at $1.17 are well below April’s record high of $1.50, but look to remain strong in the $1.20s.
Poultry — The bounce back in corn prices will further discourage chicken producers, who are already reeling from high costs and weak market prices. Chicken output over the first four months of 2011 is up 4 percent from a year ago, and net supplies are up 5 percent due to ambitious production in 2010 and faltering exports. Slaughter weights are expected to remain large, partially offsetting reduced slaughter levels. Also, the bigger producers are not willing to sacrifice market share, so they have been slow to make production cuts. But egg sets turned negative in May and were 1.6 percent below May 2010 levels.
First-quarter chicken output was up 6.4 percent from a year ago but should fall to a 1.4-percent year-over-year increase in the second quarter. Production looks to decline by 1 percent in the second half of 2011. Chicken cold-storage inventories are 18 percent larger than a year ago. Breast-meat supplies are up 32 percent. So while higher prices are expected at some point later this year, it’s going to take some time to work off this mountain of excess inventories. USDA weighted-average boneless skinless breast at $1.25 per pound in early June is 30 cents below a year ago. Wings at 83 cents are 40 cents less than last year. Whole broiler prices, which started off the first quarter of 2011 5 percent below 2010 levels, are projected to average $88 per hundredweight in the fourth quarter versus $80 in the fourth quarter of 2010. The USDA is projecting broilers at $84 in 2011 and $86 in 2012, compared with $82.90 in 2010.
John T. Barone is president of Market Vision Inc. in Fairfield, N.J., and can be reached for comment at jbarone@mktvsn.com.
