The great dairy bear market of 2009 has ended. Too much milk, combined with a drop in global demand, led to the price collapse. But demand has stabilized, production is still contracting and the government is pouring money into price supports. As a result, it appears the current higher level of prices is here to stay.
The House approved a $121 billion agricultural bill, which includes $350 million for immediate support to dairy farmers. The intent is to extend and increase price supports for cheese and nonfat dry milk. The U.S. Department of Agriculture “temporarily” increased support prices for block cheese in September from $1.13 to $1.31, and the new target appears to be $1.40, although the industry is still debating how the funds should be used, that is for price support or dairy purchases.
But diary prices had been firming anyway, just based on fundamentals. Over the past 12 months, the group Cooperatives Working Together removed 250,000 dairy cows from U.S. herds, and just approved another round of removals targeting another 80,000 cows. As a result, the USDA projects 2009 milk output to be down about 1 percent from 2008, and production in 2010 is expected to decline another 1 percent based on a 2.8-percent smaller milking herd.
Global economic recovery and lower milk production will boost prices for all products in 2010. The block cheese market, at $1.52 in early November, is up sharply from $1.27 in September. Block is projected to average $1.27 this year and climb to $1.56, on average, in 2010. After spending the first three weeks for October in the $1.23-$1.25 range, butter has jumped to a pre-Thanksgiving high of $1.41. Butter is expected to average $1.18 in 2009 and jump to $1.46, on average, in 2010.
Beef—Wide price spreads between beef and competing pork and poultry are hurting beef demand. Pork and poultry-based holidays, such as Thanksgiving and Christmas, will help keep the retail focus off beef through year’s end. The Choice beef market came undone in September. With most prices dropping further than expected, there may not be much downside risk left in the market. Year-end holiday parties may be subdued, but are not yet extinct. #112A Choice rib eyes should get to at least $5.80 in late November. That compares with $7.13 last year. Select prices should top off at $5.15. #189A Choice tenderloins could still hit highs of $8.50 in December, but would be well below last year’s $10.21 peak. Select tenders look to be about a dollar below Choice.
USDA’s October cattle report showed 10.47 million head of cattle on feed, up 0.6 percent from 2008. New placements of cattle onto feedlots in September were up 4.7 percent, which was higher than expected for the second month in a row. Once the market works through tighter fourth-quarter beef supplies, higher slaughter weights and more beef output are expected in the first quarter of 2010. Beef output should decline by 1 percent in the fourth quarter and be up 1 percent in the first quarter of 2010. The pace of U.S. economic recovery in 2010 will hold the key to cattle and beef prices. The USDA now expects choice steers to average $83.32 per hundredweight in 2009, down 9.7 percent from $92.27 in 2008. Steer prices are expected to rebound back to $90.50 in 2010.
Coffee—Futures prices have rebounded from $1.20 in September to just above $1.40 in early November. Roasters have been big buyers over the past month as they prepare for the upcoming winter consumption season in North America and Europe. Wet harvest weather in Brazil, a weak U.S. dollar and a typhoon in Vietnam also supported coffee futures. Vietnam is now the world’s second-largest coffee producer and is expected to produce 19 million bags of mostly Robusta this year. However, the harvest in Colombia is underway, and that will be followed by harvests in Vietnam and Indonesia. Any further price increases from current levels likely will be modest.
Pork—Hog herds are declining, but pork supplies remain large. The USDA quarterly hogs and pigs report put inventory at 66.6 million head, down 2 percent from a year ago, but up 1 percent over the past three months. Breeding inventory was down 3 percent from last year and down 2 percent from the previous quarter. The June through August pig crop was down 2 percent from the same period in 2008. Sows farrowing during this period were down 4 percent. Farrowing intentions for the upcoming two quarters are down 3 percent from year-ago levels.
Given the current state of the pork industry, the prospective herd declines in output won’t be enough to significantly change fundamentals. Hog and pork prices continue to be hammered by excess supply, recession-reduced demand and a sharp drop in exports. With production expected to drop only 2 percent this year and next, pork producers will have to bank on world economic recovery and a rebound in exports. Some of that is likely, and prices will recover modestly next year. The USDA is projecting 2009 hog prices to average $39.69 per hundredweight, down 17 percent from $47.84 in 2008. Prices for next year are seen rebounding to $44.50.
This was not your father’s pre-Thanksgiving ham market, with prices sliding lower in September and holding steady in the first half of October. Domestic demand has been so anemic that it took news that China had lifted its import ban on U.S. pork to get prices moving higher. Ham prices have peaked and are headed lower in December. Pork bellies have rebounded to 75 cents from lows of 62 cents in mid-October, but should trade in the 65-cent-to-75-cent range through January.
Poultry—In the first half of 2009, broiler meat production was down 5.8 percent from a year earlier. But only a small decline in output is expected for the second half and that, combined with lower exports, will raise net poultry supplies by year’s end. That will help keep breast prices relatively inexpensive for the balance of the year. But wings are another story.
According to the USDA, a number of factors have pushed up wing prices. First, broilers slaughtered over the first half of 2009 were down 6 percent from the previous year, thus reducing the supply. Second, wing exports during the first six months of 2009 were 13 percent higher than in 2008. As a result, mid-year stocks of wings were down 19 percent from the previous year.
The lower available supply, higher exports and expanded food-service usage of wings have combined to put upward pressure on prices. The USDA whole wings market is trading in the upper $1.50s and showing no signs of weakness. The average price for wings this year will be an all-time high and is on pace to exceed the average price for boneless, skinless breast for the first time ever.
Soy oil—A record-large forecast for the 2009-10 soybean crop should help keep a cap on soy-oil prices, but only if crush remains large enough to keep up with growing export demand. Soybean crush rates have been waning because of less feed demand from declining hog herds and poultry flocks. From now until the new South American soybean crop is harvested in March 2010, the United States will be the major global source of soybean oil, and a weak U.S. dollar is making our soy oil relatively inexpensive to foreign buyers. Soy-oil futures, which were more than 33 cents per pound as recently as Oct. 7, jumped to highs of more than 38 cents Oct. 22 before settling back a bit to the 36-cent-to-37-cent range in early November.
