Diesel fuel and heating oil are two very similar types of petroleum products called distillates. Distillate inventories typically build through summer as heating oil usage fades, causing prices to fall seasonally. But this summer, global demand is exceeding supply and prices are soaring. That’s partially because diesel users now have one more thing to worry about: the Olympics.
China’s imports for the first four months of 2008 were reported to be roughly eight times higher than 2007 levels. Why? Because China is hoarding both diesel fuel and backup generators at Olympic venues to reinforce its unreliable power grid. Compounding the situation, China’s recent earthquake damaged several hydroelectric dams and coal-mining operations, increasing the need for diesel-driven generators to prevent power shortages.
In the United States, the move to ultralow-sulfur diesel over the last two years also has led to cost increases in diesel production and distribution. Heating-oil futures closed at a record high $3.95 per gallon on May 22 before easing a bit to the $3.80 range. But that’s still up 54 percent so far this year and nearly double the year-ago price. On-highway diesel prices, which look to average near $4.70 per gallon in June, are up 41 percent so far this year.
Foodservice operators are shouldering a triple-whammy of supply chain freight surcharges: first on raw materials being delivered to manufacturers; then on shipments from manufacturer to distributors; and finally from distributors to restaurants. Whether foodservice operators realize it or not, they are being hurt more by higher energy prices than by increases in food commodities.
Beef—May’s U.S. Department of Agriculture cattle report showed a continuation of the trend toward lower placements that began last month. New feedlot placements in April were down 2 percent, following an 11-percent year-over-year decline in March. Smaller March, April and—probably—May placements will result in tighter feed cattle supplies and less beef production as we move from summer into the fall. After gaining about 3 percent in the first half of 2008, beef output is projected to decline by about 1 percent in the second half of the year.
Prices for many steak cuts peaked seasonally in May and June and will decline through summer. Lower imports and strong demand from consumers trading down has pushed ground-beef prices sharply higher. Prices will decline after July 4, but still remain well above year-ago levels.
Coffee—The USDA estimated Brazil’s upcoming 2008-09 coffee crop on the high end of expectations at 51.1 million bags and Vietnam’s 2008-09 crop at 21.5 million bags, up from 17.5 million bags in 2007-08. Slower summer consumption and a weakening U.S. economy could pressure prices lower this year—but when? A recent trend toward mild winters will likely limit the possibility of frost damage during the Brazilian winter, which runs from July through August. Without Brazilian crop problems over the next few months, prices will likely be lower by mid-August.
Dairy—Seasonally, milk output peaks in May. But this year the extra milk hasn’t overcome the effects of increased export sales. Cheese market prices have been above $2 per pound and butter has steadily gained to near $1.50. Things won’t get any better next year. Higher feed prices will finally begin affecting milk output later this year, and production is forecast to rise by only 0.3 percent in 2009. Block cheese is now forecast to average $1.96 in 2008, up 12 percent from nearly $1.74 in 2007. 2009 prices look to remain high at $1.86. Butter is projected at $1.38 in 2008, a few cents above 2007’s $1.34. 2009 looks to be higher at $1.42.
Grain—Less acreage, lower yields and historic flooding have combined to send corn futures to record highs in the $7.30s in mid-June, nearly 3.5 times price levels of early 2006. In June’s Supply & Demand report, the USDA cut projected corn harvest by 3.2 percent to 11.7 billion bushels. That came on top of earlier forecasts for an 8 million-acre reduction in this year’s crop, versus a year ago—and that was before it started raining.
Epic flooding across the Midwest has prevented many farmers from getting crops planted and could wash out a good portion of what was planted. Early reports indicate another 2 million to 3 million acres will be lost and that there will be significantly lower yield from the crop that is already in the ground. Higher feed prices will begin affecting poultry prices this summer and will weigh on breeding decisions for cattle and hog producers and likely leading to higher meat prices in 2009.
In its first look at 2008-09, the USDA is calling for higher wheat production, lower exports and increased domestic use. U.S. output is projected up 16 percent from 2007-08 and global wheat output up 8 percent. Chicago wheat futures that peaked at a record high of $12.70 per bushel in mid-March had dropped all the way to $7.43 in late May before getting back into the $8.70s in June.
Oil—U.S. 2008-09 soybean output is projected to be up 16 percent for the year. However, soybean crush is forecast to increase by 1 percent, reflecting decline in demand for soybean meal. Cash soybean oil prices for 2008-09 are projected to be very near year-ago levels at 52 cents per pound. Soy oil futures were in the mid-60-cent range in June, up roughly 5 cents from a month ago, but further upside risk appears to be limited.
Pork—Production should decline this fall as producers respond to poor returns. In addition, hog imports are expected to be lower as Canadian producers reduce inventories due to the unfavorable exchange rate—or weak U.S. dollar—and higher feed and fuel costs. 2008 pork output is expected to surge to 7 percent above 2007 levels, but then decline by 2.4 percent in 2009. The USDA increased its average hog price estimate for 2008 from 41 cents per pound to 47 cents per pound over the past two months, mostly due to booming exports.
Poultry—Sharply higher feed costs are taking a toll on producer margins. After soaring to 4.4 percent above a year ago for the first half of 2008, broiler output will decline dramatically to a 0.2-percent second-half deficit. 2009 production will recover just modestly to 0.8 percent above 2008 levels. Broiler prices are now projected to increase from an average of 76 cents per pound in 2007 to nearly 82 cents in 2008 and nearly 86 cents in 2009.
USDA boneless skinless breast markets were still in the $1.40s in June and will likely not get above a $1.60 high this summer. Whole, or bulk, wings in the mid-90-cent range are down a nickel from a month ago and near a seasonal market bottom. Leg-quarter prices are at a record high in the 50-cent range and continue to be driven by strong export sales.
