Chicago wheat futures surged to $7.85 per bushel on Aug. 5, up 83 percent from a low of $4.28 on June 6. Over the past month, drought across wheat regions of Russia, Ukraine and Europe, excessive rain in Canada, and locusts in Australia have helped send prices higher. The situation in Russia is approaching catastrophic, leading officials to ban all grain exports beginning Aug. 15. The drought has helped ignite hundreds of fires in the Moscow area. Russia’s Agricultural Ministry cut its forecast for the country’s 2010 grain output to 70 million metric tons, down from earlier estimates of 90 million, and some analysts are already projecting that number will come in closer to 45 million tons. The ban has forced former Russian customers, such as Egypt, to look elsewhere. U.S wheat exports since July 1 are already 36 percent higher than a year ago.
Yet the current rally isn’t justified based on market fundamentals. Ample wheat storage supplies are expected to fill any production shortfall this year. The Food and Agriculture Organization, or FAO, cut its 2010 global wheat production forecast by 3.7 percent to 651 million metric tons but said it considers supplies to be adequate. The FAO said the world wheat market remains relatively balanced and that fears of a new global food crisis are not justified at this point. Supplies held by the traditional wheat exporters remain ample. In its July report, the U.S. Department of Agriculture bumped expected 2010-11 U.S. wheat output higher due to record-high yields — and also increased domestic ending stocks to 23-year highs of 1.09 billion bushels. According to the International Grain Council’s July report, global wheat stocks are close to an eight-year high, 59 percent higher than in the 2007-08 season when wheat prices hit $13. On Friday, Aug. 6, wheat prices fell to $7.25 as big exporters stepped up and sold millions of bushels from storage into the global supply chain.
What could possibly sustain continued elevated price levels? Speculative investors could easily carry this market higher, but prices should correct lower once there is more certainty about world wheat output this year. Looking beyond 2010, the 800-pound gorilla on the horizon is the emerging and developing former Third World, where consumers are becoming more affluent and upgrading their diets. The Organization for Economic Cooperation and Development expects average real grain, meat and dairy prices to be higher in the coming decade than in 1997-2006. The global stage is set for future food inflation. That’s going to make market participants increasingly sensitive to supply disruptions, such as the one currently occurring in wheat.
Beef — July’s USDA cattle report showed 10.07 million head on feed, up 3.3 percent from a year ago. Larger feedlot placements in the second quarter will lead to increased beef supplies by late summer. Second-half 2010 net supplies are projected to be up 0.5 percent because of increased domestic output, modestly larger imports and slower export growth. Most steak and trimmings prices are expected to trend lower into the fall. Chucks are steady; rounds are trending higher. September might be the best time to consider booking rib-eye and tenderloin for the year-end holidays. Looking forward, the mid-year USDA cattle inventory report at 100.8 million head, down 1.2 million from mid-year 2009, showed continued liquidation and prospects of smaller beef output for 2011. A reduction in expected corn stocks and acres would mean higher feed prices and will probably stall herd expansion until at least 2012.
Dairy — Prices moved sharply higher in July. Block cheese markets, which averaged below $1.40 per pound in June, jumped to $1.60 in mid-July; butter rose to six-year highs of $1.84. Prices look to remain elevated through fall. Globally, economic recovery in Asia and South America has combined with weaker production in Oceania to tighten world supplies. First-half U.S. butterfat exports were up 125 percent from last year. However, declining world prices in July plus rising U.S. prices should cool the pace of U.S. exports in the second half. In July’s supply report, the USDA increased expected 2010 and 2011 milk production by roughly a half-percent. The USDA is forecasting block cheese to average $1.48 in 2010, up 14.2 percent from $1.30 in 2009. So far, 2011 block prices look to be another 5.1 percent higher on average at $1.57. Butter, projected at $1.56 in 2010, is on pace to be up a whopping 29 percent from $1.21 in 2009. 2011 prices look to remain elevated in the mid-$1.40s.
Pork — According to the USDA, lower hog numbers mean lower pork output and continued high prices for the balance of the year. 2010 pork production is projected at 22.25 billion pounds, down 3.2 percent from 2009. The USDA is projecting hog prices to average $55 per hundredweight for 2010 and 2011, up 33 percent from 2009. Higher corn prices mean higher costs, but inflated hog prices should keep producers profitable. Consequently, pork production in 2011 is expected to be almost 2 percent above that in 2010, and prices look to be comparable to 2010. Ham market prices remained sky-high at 90 cents per pound in early August — 91 percent above a year ago. Ham prices likely have peaked and should be closer to 80 cents in September and 70 cents in October. Pork bellies averaged $1.11 per pound in June and $1.18 in July before soaring to a record-high of $1.50 in August — double year-ago levels. Bellies should be significantly lower after Labor Day.
Poultry — Broiler production for the first half of 2010 looks to be up 2.2 percent from 2009, but still 5 percent below 2008 levels. Second-half production is forecast up 3.2 percent from 2009. Both 2010 and 2011 output increases are projected at 2.7 percent above the prior year. Broiler exports, predominantly leg quarters, are down roughly 14 percent in the first half due to trade issues with Russia and China. Even though Russia is currently citing “technical issues” that are preventing it from restarting imports of U.S. poultry, exports to both countries are expected to resume, at least partially, in the second half of the year. 2010 projected broiler prices at $84 per hundredweight are up 8.2 percent from $77.60 in 2009. Prices look to remain near 2010 levels in 2011. Boneless skinless breast traded in the $1.60s per pound for most of July but looks to average closer to $1.50 in August and $1.40 in September. The USDA whole-wing market is in the mid-$1.20s and headed for the $1.30s through October, and higher in November. Leg quarters are 40 cents per pound but should edge higher into the low 40 cents range in August as exports to Russia come back on line.
Soybean oil — China has temporarily banned imports of Argentine soy-oil due to alleged solvent residues. Seventy-six percent of China’s soybean oil imports in 2009 were from Argentina. The U.S. should pick up a piece of this business. Stronger domestic demand, plus the ongoing China-Argentina dispute, has combined to push soy-oil futures higher. Short term, U.S. soy-oil supplies are ample at 3.55 billion pounds. That is only 11 million pounds less than the all-time record. However, the longer-term view is more bullish for prices. Globally, vegetable oil consumption is projected to increase 4.5 percent in 2010-11, led by increases for China and India. Soy-oil futures, which hit an annual low of about 35 cents per pound on July 6, were above 41 cents in early August.
John T. Barone is president of Market Vision Inc. in Fairfield, N.J., and can be reached for comment at jbarone@mktvsn.com.
