Cattle inventories are at the lowest levels in decades, according to a recent U.S. Department of Agriculture report, which pegged total cattle inventory at 89.3 million head, or 1.7 percent below a year ago and the lowest figure since 1952. Meanwhile, January’s monthly cattle report showed feedlot inventories at 11.19 million head, down 5.6 percent from a year ago. Cattle slaughter for the first half of 2013 looks to be 4 percent to 5 percent below a year ago. Replacement heifers are higher than expected at 5.4 million head, up 2 percent from a year ago, but heifers accounted for just 4.1 million head of feedlot inventory, down 9 percent from last year. So while producers may not be expanding yet, they are not liquidating breeding stock at the pace they were a year ago. That puts them in a position to begin expanding herds if drought-ravaged grazing land recovers this spring. Still, any potential herd expansion would not translate to increases in beef supplies until 2015.
The flip side to high beef and cattle prices, however, is declining demand. Citing both high cattle prices and weaker demand, Cargill announced it will close a large beef-processing facility in Plainview, Texas, that represents roughly 4 percent of U.S. slaughter capacity. Cattle futures prices reacted by dropping 6.6 percent during the first two weeks of January, but have since recovered some of those losses. The plant closing may have been bearish for short-term cattle prices, but reduced slaughter capacity means less beef output in 2013, and that’s bullish for medium- to long-term beef prices. Forward futures contracts for 2013 are still averaging $129 per hundredweight, 5.3 percent above 2012 levels. Middle-meat prices are expected to approach or exceed record-high year-ago levels this spring.
Coffee — Arabica futures, which were $1.83 per pound Oct. 3, dropped roughly 23 percent to near $1.40 by mid-February. According to Brazil’s Conab, the new crop will be in the range of 46 million to 50 million bags, depending on conditions through harvest. A 50-million-bag off-season crop would put world supplies at about 144 million bags, enough to keep prices relatively stable. The biggest threat is coming from “rust,” a fungus that can damage coffee plants, in Central America. Guatemala may lose one-third of its crop, and Costa Rica stands to lose as much as 30 percent to 40 percent. So far the International Coffee Organization has dropped Central American production expectations 2.8 percent to 20.3 million bags, and further reductions are likely.
Dairy — According to the USDA, the dairy-cow herd, at 9.22 million head Jan. 1, was very near year-ago levels. However, the number of milk-cow replacements was 1.5 percent below a year ago, and heifers expected to calve in 2013 were 4.5 percent fewer than in 2012. So cow numbers look to remain tight this year. Class III milk futures have been in retreat over the past three months, from above $21 per hundredweight in early November to $17.20 Feb. 11. The combination of high feed-input costs and lower milk prices will continue to inhibit dairy expansion. The long-term outlook is also bullish, with restricted U.S. supplies and booming international demand. The USDA now has 2013 block cheese conservatively pegged at $1.75 per pound for the year, up 2.5 percent from 2012. Butter prices for 2013 are projected at about $1.59 per pound, a penny lower than in 2012. Butter, currently at $1.56, will be headed higher as retail and commercial bakery demand kicks in ahead of the Easter and Passover holidays.
Grain, pork, poultry and vegetable oil
Grain — In February’s World Agricultural Supply and Demand Estimates the USDA bumped its estimate for domestic 2012-2013 corn ending stocks by 5 percent to 632 million bushels, mostly due to a 5.3-percent expected decline in corn exports. High prices for U.S. corn and a large Brazilian crop will cut into U.S. exports. Over the past two months the USDA has dropped its 2012-2013 corn price forecast from $7.60 to $7.30 per bushel. Corn futures, which finished January at $7.40, closed at $7.02 Feb. 11. The December 2013 corn contract at $5.58 per bushel embodies expectations for another large corn crop — hopefully sans drought — this year. For wheat, the USDA cut U.S. 2012-2013 ending stocks by 3.5 percent to 691 million bushels on higher anticipated feed usage. Drought still threatens winter wheat, which may break dormancy this spring in a soil moisture deficit.
Pork — More breeding inventory and an increase in pigs per litter prompted the USDA to bump projected 2013 pork production to 23.4 billion pounds, up 0.7 percent from a year ago. Frozen pork inventories at the end of 2012 were 14.4 percent larger than the prior year. Ham stocks and rib stocks, up 47 percent and 48 percent, respectively, are burdensome and have been weighing on prices. But belly stocks remain tight — down 11 percent from last year — and continue to support higher-than-expected prices. Hog producers are looking at a good chance for positive returns later this year and the prospect of cheaper corn by fall 2013. As a result, many are not cutting back herds or production. Hog futures contracts for 2013 are averaging close to $90 per hundredweight, 4.7 percent above 2012 levels. Ham markets in the mid-70-cents per pound are up a dime over the past month and headed for a pre-Easter high in the low-80-cent range.
Poultry — Broiler output declined for the second straight year in 2012, but 2013 could be different. With growing hatchery output and higher bird weights, the USDA revised its 2013 production estimate to 37.3 billion pounds, up 0.7 percent from 2012. In January chicken slaughter was up 0.3 percent from a year ago, bird weights were 2 percent higher, eggs set were up 1.7 percent, chicks placed were up 11 percent, and chicken production was an impressive 4.4 percent higher than in January 2012. Chicken in cold storage finished 2012 at 7.9 percent above the prior year. Breast-meat supplies were near year-ago levels. Leg-quarter inventories were up 9.3 percent on sluggish export sales. Wings supplies in storage were 68 percent higher than last year. That should help wing prices decline significantly now that football season is over. Of course, if McDonald’s moves ahead with plans to put wings on the menu, all bets are off. The USDA is currently forecasting 2013 broiler prices at 94 cents per pound, 8.5 percent above 2012 levels.
Vegetable oil — Soy oil prices are currently being driven by the prospects for increased biodiesel usage, expectations for higher palm oil prices, dry weather in Argentina and forecasts for a sharp decline in soy oil stocks in the second half of 2013. Soy oil supplies, which have been running above 3 billion pounds, could be halved by late in the year. Price weakness is expected this spring when large South American supplies begin hitting the market. But the longer-term outlook is bullish. Soy oil futures have traded in a very tight 49- to 53-cent-per-pound range so far this year. The USDA’s 2012-2013 soy oil forecast is 51 cents per pound.
John T. Barone is president of Market Vision Inc. in Fairfield, N.J., and can be reached for comment at [email protected].
