Dairy prices have moved sharply higher this summer. Block Cheddar cheese prices on the Chicago Mercantile Exchange averaged below $1.40 per pound in June, jumped to $1.55 for July and look to average above $1.60 in August. Butter has surged from an average of $1.64 in June to $1.78 in July, and was above $2 per pound in late August, a six-year high. Last year, butter averaged $1.20 for the month of August. Fundamentals remain slightly bullish for prices. The Department of Agriculture’s August Cold Storage Report showed butter inventories at five-year lows of 199.6 million pounds, 24 percent below last year’s levels. That’s at least partly because first-half 2010 butter exports were 200 percent higher than last year.
But supply increases should eventually take the edge off of prices. Year-over-year milk output jumped 2.9 percent in July and has been running above year-ago levels since March. Mexico is slapping 20-percent-to-25-percent “anti-dumping” tariffs on U.S. cheese imports, which likely would slow exports to our largest dairy trading partner. But it will take some time for building milk supply to translate into lower prices. In its August World Supply & Demand Estimate, the USDA hiked its milk, butter and cheese price forecasts for 2010, while reducing milk and cheese estimates for 2011.
Beef — The August USDA Cattle on Feed Report showed 9.87 million head on feed, up 2.4 percent from a year ago but still 2.7 percent below the five-year average for this time of year. New placements onto feedlots in July were 5.9 percent less than in 2009, but very close to the five-year average, and placement weights were skewed toward the highest — the 700- and 800-pound — categories. Taken together with large, year-over-year May and June placements, cattle supplies look to be ample through fall — a time of year when retailers traditionally focus on ham and turkey for the holidays.
Seasonally, holiday buyers should look for September market bottoms in rib eye and tenderloin. Steak and trimmings prices will be trending lower after Labor Day. Chucks and rounds will drift toward an October-November bottom before recovering for winter. Longer term, total cattle inventories on feedlots and pasture continue to decline. The USDA is projecting that beef production will decline by 1.2 percent in 2010 against 2009, and drop another 2 percent in 2011.
Grain — In August, the USDA cut its 2010-11 global wheat forecast by 2.3 percent, to 645.7 million tons, which is lower than expected and surprisingly below recent estimates from the International Grains Council and the Food and Agriculture Organization of the United Nations. Those groups had both projected 651 million tons. Wheat futures had surged to $7.85 per bushel Aug. 5, up 83 percent from $4.28 June 6, after Russia announced its drought-induced ban on grain exports for the balance of the year. But U.S. farmers pulled wheat out of storage and sold physical product into that rally, cooling futures back to $6.51 per bushel Aug. 17. Prices recovered again in late August as prospects for Russia’s fall harvest deteriorated further. USDA raised its forecast for 2010-11 U.S. wheat exports by 20 percent, to 1.2 billion bushels, because of lower expected output from Russia, Ukraine, Europe, Canada and Australia. Subsequently, the estimate for 2010-11 U.S. ending stocks was decreased by 13 percent, to 952 million bushels, but that’s still the second-highest projection in the last 23 years.
The USDA’s downward revisions of both corn acreage and corn ending stocks, combined with the possibility of Russian-feed imports, have led to the realization of tighter global supplies. Corn futures have jumped from a nine-month low of $3.25 per bushel June 29, to highs of $4.21 Aug. 20. Forward contracts for 2011 are averaging $4.50. As a result, higher break-even levels for cattle, hog, poultry and dairy producers could seriously threaten herd/flock expansion plans. Fortunately, the other big feedstock, soybean meal, is projected to average $270 per short ton in 2010-11, down 13 percent from a year ago. That could partially mitigate the effects of higher corn prices.
Pork — First-half pork exports were up 7.9 percent from a year ago, and the USDA is projecting year-over-year pork export growth of 10 percent in the second half of 2010. Meanwhile, U.S. live-swine imports for 2010 are expected to be down 10 percent from 2009. As a result, USDA dropped its 2010 pork output forecast to 3.3 percent below 2009. A smaller U.S. hog herd, along with growing exports and declining imports, will result in third-quarter hog prices of near $58 per hundredweight, 49 percent above prices in the third quarter of 2009. USDA weighted average 20-to- 23-pound ham market prices remained sky-high at 81 cents per pound in late August. That’s down from a midsummer high of 90 cents per pound, but still 72 percent above year-ago levels. Look for ham prices in the upper 80-cent range for Labor Day, and then in the 80-to-85-cent range through Thanksgiving. After averaging $1.11 per pound in June and $1.18 in July, pork bellies will average in the mid-$1.40s for August, versus just 66 cents per pound in August 2009. Bellies look to remain historically high — near $1.30 in September — and then move slightly lower, to roughly $1.10, in October.
Poultry — In the first half of 2010, broiler output was 2.3 percent higher than a year earlier, and second-half output is expected to be 3.2 percent higher. Larger production should be mostly mitigated by greater demand for poultry due to sharply higher beef and pork prices. Broiler exports, predominantly leg quarters, were down 14 percent in the first half due to trade issues with Russia and China. But Russia lifted its ban on poultry imports for eight U.S. poultry processing plants and 60 cold-storage facilities Aug. 16. An additional 19 processing plants should be approved this fall, adding to export demand. Boneless, skinless breast prices have been higher than expected, in the $1.60s per pound in August. Look for a Labor Day high in the $1.70-range, and then gradually declining prices through year’s end. The USDA whole-wing market, in the low-to-mid $1.20s in August, should trade in the $1.30s through November. Leg quarters look to be supported in the 40-to-43-cent range as Russian exports come back on line.
Soybean oil — Midyear soybean oil supplies were near an all-time high at 3.55 billion pounds. Production is declining, and exports to China jumped this summer, but a sharp drop in biodiesel usage has led to overall lower demand. According to the USDA, higher 2011 mandates in the Renewable Fuel Standard will dictate a strong recovery in U.S. biodiesel production, and soybean oil demand will start to overtake production. Soy oil futures have been supported in the 40-cent-per-pound range due to a tightening global vegetable oil market. 2011 soy oil futures contracts are averaging above 41 cents. Any setbacks into the 30-to-39-cent range need to be considered contracting opportunities.
- Block Cheddar prices have increased more than 20 cents per pound in the past two months, to $1.60 in August
- Butter jumped from $1.64 in June to above $2 in August
- 200 percent increase in butter exports is contributing to five-year lows in inventory
