The commodities markets didn’t need new legislation to find their financial equilibrium; they just needed a bear market to burn the neophyte investors. That bear market in crude oil, natural gas, corn and soybeans—to name a few—may be at hand. Index investors withdrew about $4 billion from agricultural futures in July and were on pace to pull another $3 billion to $4 billion in August.
To paraphrase President Clinton’s former Securities and Exchange Commission Chairman Arthur Levitt in a recent Wall Street Journal article: “We have been inundated with media coverage of turbulent markets, profiteering, fraud, collapse, finger-pointing, blame-laying and Monday-morning quarterbacking. There have been loud calls for someone to fix everything that has gone wrong. But quick fixes and knee-jerk responses generally do more harm than good by creating new problems with every attempted solution.”
He added: “Don’t bias the market by imposing artificial constraints. It is clear that we need more transparency—about the risk that firms take on, valuation methodologies, conflicts of interest, profit sources and leverage by business product. Disclosure, combined with the scrutiny of the press and the investing public, is the only way to control excess.”
Beef—Prices for cattle, hogs and broilers have not kept pace with rising feed and energy costs. As a result, producer margins are in the red and output reductions are forthcoming. In cattle, smaller feedlot inventories point to reduced second-half beef output and further output declines in 2009. After gaining about 3 percent in the first half of 2008, beef output is projected to decline by 1 percent in the second half. Fourth-quarter 2008 output could be as much as 4 percent below a year ago. However, smaller beef supplies will be met with weak economic demand and consumer trade-down to cheaper proteins.
Coffee—Futures prices have been stagnant in the $1.35 to $1.40 per pound range, despite a non-damaging winter in Brazil and a forthcoming bumper crop. Roasters and speculators have been buying on market dips and putting a floor under prices. Also, there just has not been enough harvested volume out of Brazil—yet—to turn traders bearish. In June, the USDA estimated 2008-09 world coffee production at a record-high 140.6 million bags and consumption at 135.8 million. Even so, 2008-09 ending coffee stocks at 17.2 million bags will remain historically low.
Dairy—Out of nowhere and without warning, cheese prices are in freefall. Block and barrel plummeted by 35 cents per pound in the first week of August. With prices in retreat, retail buyers will wait for a bottom before booking product for the fall holidays. That could send cheese lower at times in August, but a recovery by September is likely.
Butter is almost the opposite of cheese. Butter inventories are declining seasonally, fueling concerns about supply availability for fourth-quarter holiday needs. As a result, retailers are aggressively contracting and prices are rising. At a three-year high of $1.67 in early August, butter prices have increased by 14 cents over the past month.
Milk producer margins were squeezed by higher feed costs and lower milk prices in July, and more pain was on the way in August. The milk-feed ratio was just 1.82 in July, versus 3.16 a year ago. Producers historically reduce output when the ratio falls below 3.0 for any length of time. Following a 2.8-percent increase in first-half milk output, a flat-to-negative second-half output threatens to pull down the annual average increase to the 1-percent range.
Grain—It’s been one of the biggest one-month market reverses in history. After the Midwest flood scare sent corn futures to record highs of $7.54 per bushel in late June, prices plunged to $4.98 by Aug. 8. Following a month of near-perfect growing weather, several private analysts are projecting an upward revision to above 12 billion bushels this year, which would go a long way to keeping corn prices at or below current levels.
Wheat fundamentals had been bearish until corn prices took off in June. Now they have come back down. Chicago wheat futures, which peaked at a record high of $12.70 per bushel in mid-March and were still $9.24 in late June, dropped to $7.65 in early August. Global 2008-09 wheat production is forecast to be up 7.6 percent from 2007-08, and world wheat ending stocks look to be 13 percent higher. World output will get a big boost this year from Australia, which will produce roughly 23 million metric tons, up 77 percent from last year’s drought-reduced crop of 13 million metric tons.
Oil—It’s been mostly the drop in soybean and crude oil prices that has allowed soy-oil futures to drop to near 50 cents per pound, down from 67 cents in early July. Globally, prospects for tighter supplies and a weak U.S. dollar continue to support soybean oil prices. However, some of the energy and speculative “premiums” appear to be finally coming out of soy-oil prices, and that will hopefully support prices at or below current levels.
Pork—The torrid pace of export sales has pork prices on the rise, despite larger than expected production gains. 2008 pork exports are projected at 4.56 billion pounds, up 45 percent above last year’s record-setting 3.14 billion pounds. As a result, ham market prices gained another 10 cents per pound in July, adding to this past spring’s sharp price gains. Look for ham markets at or just above current levels through fall. Pork trimmings prices have soared along with beef trimmings. Meanwhile, 72-percent-lean trimmings soared 26 cents per pound higher in July to hit 98 cents in early August, and 42-percent trimmings reached 85 cents, up 25 cents from July.
Poultry—Broiler output, up close to 5 percent in the first half of 2008, will be nearly flat in the second half due to sharply higher feed cost and declining producer margins. Chicken producers are currently benefiting from record export sales, which are trimming excess supplies and keeping prices high, but negative returns are expected in the second half of the year. Broiler prices, which were $76.40 per hundredweight in 2007, are projected at $82 in 2008 and $88.50 in 2009.
U.S. Department of Agriculture boneless skinless breast markets dropped to $1.28 per pound in early August, 18 cents lower than a month ago. Labor Day prices could get back into the $1.40s, but are looking like $1.30s for October and November. USDA bulk unsized wings in the upper 90 cents are expected to gradually edge higher through January.
In turkey, 16-pound-to-22-pound frozen toms, now in the mid-90-cent range, will inch higher into Thanksgiving, probably hitting $1 in October. The USDA’s 2008 turkey forecast is 89 cents, up from 82 cents in 2007. Prices in 2009 are projected higher at more than 92 cents.
