Diesel prices drive foodservice costs more than any other factor. Fuel and freight increase costs at every link in the supply chain. The national average of on-highway diesel prices hit $3.98 per gallon for the week ending April 1, and diesel was $4.32 in California. Those prices are $0.96 and $1.17 higher, respectively, than a year ago. Diesel prices averaged $2.99 for the year in 2010, and the Energy Information Administration is projecting a jump to an average of $3.81 in 2011. That’s a 27 percent increase, and it assumes no further supply disruptions from the Middle East or Africa. On the distributor side, diesel accounts for roughly 10 percent of total costs, so a 27 percent jump in fuel for this year adds up to about a 2.7 percent increase overall. For chain restaurant companies that specify proprietary products, even bigger costs could be accrued on inbound freight from manufacturers to distributors, especially on small deliveries.
Two factors can drive commodity prices higher. The first is supply and demand fundamentals. The second is fear, the kind of fear generated by major supply disruptions in already tight markets. Over the past two months, unrest in the Middle East has caused traders to bid up crude oil futures prices. However, that fear is being partially mitigated by the fact that Saudi Arabia has enough spare capacity to cover for the production losses elsewhere. But given the spreading discontent in the Middle East, there is a real chance that a major terrorist event or political upheaval in Saudi Arabia could precipitate an unprecedented spike in oil prices and a subsequent fuel crisis in the United States. Thus traders have built a “risk premium” into crude prices, and the rest of us will pay a premium at the pump because of it.
Beef — The U.S. Department of Agriculture March cattle report showed feedlot inventory at 11.4 million head, up 4.8 percent from a year ago. But February new feedlot placements were 0.6 percent lower than a year ago and again heavily skewed to the lightest-weight, under-600-pound category. That’s because poor winter grazing conditions sent a large number of calves to feedlots early, and now the pipeline is empty. Relatively ample supplies of cattle in the first quarter of 2011 will begin dropping in the second quarter and be much tighter in the second half of the year. Beef output is forecast to drop 1.5 percent in 2011 as the U.S. cattle herd shrinks to its smallest size in decades. Cattle futures were record high at $122 per hundredweight in early April, about 25 percent above a year ago. Meanwhile, grilling season is just around the corner. Expect record-high beef prices with peaks ahead of the “big three” grilling holidays: Memorial Day, Father’s Day and the Fourth of July.
Dairy — Block cheese, which hit $2.02 per pound March 7, plummeted to $1.57 just a month later. Seasonal indicators and milk futures prices had been pointing to a decline to about $1.75, so $1.57 is a bit of an overcorrection and not likely to last for long. Price downside should be limited by strong global cheese prices and a weak U.S. dollar. Oceania Cheddar is $1.99. Accounting for shipping, U.S. cheese is competitive globally at about $1.75 a pound. If U.S. prices remain low, expect to see exports — and prices — pick up in a hurry. Contracting forward remains difficult, with class III milk futures yielding block cheese prices of roughly $1.80 for the third quarter and $1.75 for the fourth quarter. Buying and storing block cheese at $1.57 might be a good idea for processors.
Butter prices remain in the stratosphere. At $1.97 per pound in early April, prices are down from March’s high of $2.08, but still 31 percent above a year ago. Most of the retail and commercial bakery buying for Easter and Passover is complete, and prices should move lower as spring milk output increases. However, with Oceania at $2.22 and Europe at $2.56, global demand and pricing will remain a big influence on U.S. markets.
Grain — With ethanol devouring 40 percent of this year’s U.S. crop and China making some big buys in March, traders had already been on edge about corn. So when USDA trimmed 178 million bushels off supplies in its quarterly grain stocks report, futures prices soared. Corn futures, which dropped to $6.16 per bushel shortly after the disaster in Japan, had jumped to $7.60 by April 4 and looked to be headed higher. There is justifiable concern that higher prices have not yet “rationed” corn demand and that there is an outside chance corn supplies will be depleted before the next crop is available. Before its recent report, the USDA was already projecting tight ending stocks of 675 million bushels and a 15-year-low stocks-to-use ratio of just 5 percent. Now stocks-to-use has dropped to 4.2 percent, the second-lowest level ever. Chicago wheat futures prices have had a similar $6.62 to $7.90 trajectory, riding higher mostly on corn’s coattails.
Pork — The USDA’s quarterly hogs and pigs report showed a little less than 64 million head March 1, up 0.6 percent from a year ago and a little more than expected. The December-February pig crop, up 1.4 percent from a year ago, plus a 2 percent increase in pigs per litter, will help yield a first-half pig crop a bit larger than last year. 2011 pork output is forecast up 0.4 percent. But export sales are projected to jump 10.6 percent in 2011 and will likely exceed any gains in output. Strong sales are expected to South Korea, which lost 25 percent of its hog herd to foot-and-mouth disease, and China, where domestic hog prices have hit $1 per pound. China imported 157 million pounds of U.S. pork in 2010, almost triple its purchases in 2009. Chinese pork imports look to jump another 6 percent in 2011. Pre-Easter ham market prices peaked in the high-80-cents-per-pound range, about 20 cents above a year ago, in late March and are trending lower. Pork bellies were record high at $1.50 in early April and should remain in the $1.40-$1.55 range for the next few months.
Poultry — The big question for producers is the outlook for profitability given the prospects of $8-per-bushel corn. Most growers and processors are sharply applying the brakes. Producer margins turned negative in late 2010 and continue to decline. There were 54.1 million breeder hens in the U.S. March 1, already 2.3 percent lower than a year ago and headed lower. For 2011, broiler output is forecast just 1.4 percent higher than 2010, with first-half gains giving way to second-half declines, year over year. Broiler prices, which started off the first quarter at 5 percent below 2010 levels, look to gradually gain ground and be 7 percent to 8 percent above a year ago by the fourth quarter. USDA boneless skinless breast prices, which spent most of January and February in the $1.10- to $1.20-per-pound range, are in the $1.30s and headed for a summer peak near $1.80. The USDA whole wing market is in the mid-80-cent-per-pound range, versus $1.40 a year ago. Wing markets could remain below $1 per pound through summer. n
