While better times may seem a long way off, the recession of 2008-2009 will eventually give way to the economic recovery of 2010-2011. That’s the good news. The bad news is that there are a number of forces at work that could make rising food costs synonymous with the recovery.
For starters, the Federal Reserve already has pumped $800 billion into the nation’s financial system over the past nine months, not counting the impending $878 billion fiscal stimulus package. Most economists are confident that the Fed will slow money growth and raise interest rates appropriately next year, but given the depth of the economic downturn, the Fed is certain to err on the side of recovery and be slow to respond to future inflationary threats.
Secondly, the dollar closed the month of April at multiweek lows against most other currencies. This will be a recurring theme as the economy bottoms and investors become less risk-averse. With the Treasury and Fed printing money to combat the recession, the dollar likely will continue to weaken as the economy recovers. Commodities, priced in U.S. dollars, tend to move higher as the dollar weakens. This has allowed crude-oil prices to remain in the $50 range, even in the face of growing supplies and weaker demand.
Finally, meat, dairy and grain producers are cutting capacity in response to weaker demand. As both U.S. and world demand begin to recover, higher commodity prices are inevitable. Profits will recover, and producers will eventually expand supplies, albeit at a lag behind recovering demand. As was the case in 2008, rising commodity prices are likely to kick off another influx of speculative money, amplifying price gains and complicating hedging programs. Looking forward, the challenge for 2010-2011 will be trying to project the timing and severity of potential price gains in commodity markets.
Beef—The big three “grilling” holidays are upon us: Memorial Day on May 25, Father’s Day on June 21 and July 4th. Tighter beef supplies helped prices move higher in April, with middle meats hitting seasonal price highs about a month earlier than usual. However, increasing supplies and heavier placement weights in the face of softer demand will cap those price increases in May and June. Ground beef remains in high demand as a “value” item, but dairy-herd liquidation and imports of 90-percent lean beef trimmings, or “90s,” will act to slow—but not stop—price increases through summer.
Coffee—The International Coffee Organization reduced its estimate of the 2008-09 world coffee crop from 127.8 million bags to 127 million bags, while leaving consumption unchanged at 128 million bags, meaning there will be a 1 million bag deficit. Look for tight global supplies, with a sprinkle of spec/fund buying, to push prices gradually higher this year. Also, coffee typically moves higher in May when traders begin worrying about the potential for freeze damage during the Brazilian winter, which runs from June through August. Coffee futures at $1.1985 per pound on May 1 are up a nickel from a month ago, but within the $1.05 to $1.20 trading range of the past six months.
Dairy—The dairy industry is shrinking in response to sharply reduced export sales and weaker domestic demand. 2009 cheese exports are forecast to be 45 percent lower than in 2008, and butter exports are expected to be down 50 percent. As a result, the U.S. Department of Agriculture lowered its estimate of 2009 milk production and raised diary price projections. Average butter prices for 2009 are now projected at $1.20 per pound and block cheese at $1.30, but those numbers still represent declines of 16 percent for butter and 31 percent for cheese compared with 2008.
Block cheese prices, which had hit highs of $2.28 in May 2008, were nearly half that much at slightly more than $1.15 on May 1. Butter was at $1.23, compared to $1.44 a year ago. Dairy prices will eventually rebound. It remains to be seen if industry efforts to reduce herds and production will have a big enough impact on supplies before the cheese market hits its typical seasonal price peak in September.
Grain—Cool, wet conditions have delayed seeding this spring and raised the potential for lower crop yields. As a result, preseason grain prices have been volatile. Corn futures prices jumped from lows of $3.43 per bushel in March to $4.06 on May 1. Chicago wheat futures that were below $5 in early March closed at $5.57 on May 1. In April’s Supply & Demand report, the USDA raised 2008-09 price projections for corn, wheat, rice and soybeans.
Pork—The swine flu media frenzy has created unwarranted fears of pork consumption and import bans on U.S. pork and meat products. As of May 1, 13 countries had banned pork from U.S. states with documented flu cases. In addition, exports to Mexico have plummeted as people there continue to avoid restaurants and pork. As a result, there is a mountain of pork available for U.S. consumption and prices have tumbled. Lean-hog futures, which hit highs of $72.25 per hundredweight on April 17, closed at $58.48 on May 1, down 19 percent in two weeks.
Poultry—The USDA projects broiler output to be down sharply in 2009, about 4 percent below 2008 levels. But demand has also declined. Exports are forecast to be down 13 percent in 2009, and swine flu issues are likely to magnify that decline. As a result, even with lower production, chicken product prices remain subdued. USDA boneless skinless breast was at $1.50 per pound on May 1 and could hit $1.60 by June, with highs in the $1.70 range this summer. Look for a boneless skinless breast average near $1.50 this year, up roughly 20 cents per pound from $1.29 in 2008 and very close to the $1.48 level of 2007. USDA whole wings at a wholesale price of $1.37 on May 1 are still sky-high for this time of year. Look for wings to bottom at around $1.15 in July before heading higher again into fall.
Soy—Higher-than-expected U.S. soybean exports and lower-than-expected global acreage has helped fuel a run-up in prices across the soy complex. Weak domestic demand for soymeal has led to a 9.6-percent decline in soybean crush through the first seven months of the 2008-09 marketing year. Soy oil futures have jumped from lows of just below 30 cents per pound in mid-March to more than 37 cents per pound on May 1. The USDA’s 2008-09 soy oil forecast is up a penny at 31 cents per pound, and odds are it will be bumped higher again in the USDA’s May report.