The U.S. Department of Agriculture reported quarterly hog inventories at 67.5 million head, up slightly from a year ago and 3 percent above the previous quarterly report. But farrowing, or breeding, intentions were less than expected and point to smaller herds for 2013.
Producers said they will farrow 2.85 million sows for the September through November 2012 period, down 3 percent from 2011, and 2.82 million sows for the December 2012 through February 2013 period, down 1 percent from a year ago. If producers follow through with intentions, fewer sows kept for breeding will cut output and tighten pork supplies. In addition, U.S. pork exports are running 11 percent ahead of year-ago levels and are forecast to expand further in 2013 as world demand continues to grow.
While tighter supplies and strong exports will raise pork prices in 2013, there still will be plenty of pork for U.S. buyers. Herd liquidation has led to a temporary supply glut. Current pork supplies in cold storage are 31 percent above a year ago, and pork prices, excluding bellies, are roughly 20 percent below last year. Pork output will still be 1.5 percent above last year’s fourth quarter before turning negative in early 2013. The September “bacon shortage” news scare was related to the forthcoming ban on gestation stalls in the European Union and is not expected to affect U.S. pork supplies.
Beef — September’s USDA cattle report showed feedlot inventories at 10.62 million head, down slightly from last month’s dip of 0.2 percent and last year’s decline of 0.6 percent. New feedlot placements in July and August have averaged 11 percent below last year’s huge, drought-induced placements.
Last year’s drought was centered in the cattle country of Texas and Oklahoma, but this year’s drought is in corn country. With corn prices so high, feedlots have been resisting lighter-weight placements and forcing ranchers who have pasture to hang on to calves and feed them to heavier weights. The trends toward lower placements, fewer lightweight placements and record-low off-feedlot inventory all point to very tight beef supplies for 2013. Live cattle futures were trading at $123 per hundredweight in early October, but forward contracts for 2013 are trading in the $130 to $135 range.
Coffee — Futures prices jumped more than 20 cents per pound in September, from near $1.60 to the low $1.80s. Brazil harvested a record-large Arabica crop of just over 50 million bags, taking prices lower in August and September, but roasters are back in the market, buying for their seasonal winter needs and putting a floor under prices. Coffee traders already are looking ahead to next season’s crop, which will be cyclically smaller and will lead — eventually — to a tighter global supply situation. Expectations for an El Niño weather pattern could mean dry weather in Brazil, compounding problems with a crop that’s already going to be smaller than this year’s.
Dairy — Poor profit margins continue to take a toll on dairy producers. The September milk-price to feed-price ratio was near a record low at 1.46. Producers are considered profitable with a milk-feed ratio at 2.0 or higher, and that has not been the case since March 2011. As a result, dairy-cow slaughter is up 5.8 percent for the year to date and has accelerated to above 12 percent since summer.
The run up in cheese prices continues. From lows of $1.64 per pound in mid-July, block cheese finished September at $2.07. The USDA is projecting cheese to average $1.69 per pound for 2013, but that is likely 6 cents to 8 cents on the low side. Cheese futures for 2013 are trading in the $1.80s and make forward contracting very expensive. Butter prices have been on a similar trajectory, jumping from $1.64 to $1.95 per pound. Dairy prices increased a lot faster than expected, and as a result, many retail buyers have been scrambling to put on coverage for Thanksgiving. That extra demand accentuated the September price rise.
Grain — Markets have been volatile in recent weeks, plagued by changes in USDA reports. In September’s World Agricultural Supply and Demand Estimates the USDA lowered its 2012-2013 corn-price forecast from $8.20 to $7.90. Then, just two weeks later, the USDA’s statistics division reported quarterly corn stocks at 988 million bushels, which was 12.4 percent lower than a year ago and 16.3 percent below the USDA’s September World Agricultural Supply and Demand forecast. Corn futures, which had dropped to $7.16 per bushel in late September, jumped to $7.60 during the first week of October.
The USDA lowered its 2012-2013 wheat forecast from $8.30 to $8.10 per bushel despite a 9- percent reduction in Russian output. As of Sept. 30, 40 percent of the U.S. winter wheat crop was in the ground, up from 36 percent at this time last year but below the five-year average of 43 percent. Wheat futures are very strong — near $9 per bushel — but likely have peaked and should settle back a bit.
Poultry — The situation for poultry producers looks like a repeat of 2011, when high feed prices and relatively low chicken prices triggered some smaller company bankruptcies, industry consolidation and production cutbacks. So far this year, broiler-meat production is down 3.1 percent on a 4.1-percent decline in the number of birds slaughtered. The silver lining for 2013 is that U.S. farmers are likely to put a record corn crop in the ground for 2013, and their South American counterparts may do the same. If the weather cooperates in both hemispheres, corn prices have the potential to be substantially lower by mid-year. If that were to happen, and given the big price spreads between chicken and other proteins, poultry producers will be in the position of being able to increase output and positively impact protein supplies by the second half of 2013.
Vegetable oil — The USDA continues to lower both yield and output forecasts for the 2012-2013 soybean crop. Over the past two months the 2012-2013 price forecast for soymeal has been increased from $380 to $500 per short ton; soy oil has been increased from 54.5 cents to 56 cents per pound. But futures prices for soybean oil appear to have been oversold at 56 cents — given lower palm oil prices — and fell all the way to 50 cents in early October before the Chinese bought 21,000 tons of U.S. soy oil and effectively put a floor under the market. Coverage currently is recommended at the 50-cents to 51-cents level. A good South American soybean crop could present a buying opportunity in spring 2013.
John T. Barone is president of Market Vision Inc. in Fairfield, N.J., and can be reached for comment at jbarone@mktvsn.com.
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