Soy oil prices continue to climb with demand for energy

Nation's Restaurant News,  June 25, 2007  by John T. Barone

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The energy premium continues to drive soy oil prices. Chicago Board of Trade futures prices hit 23-year highs near 36 cents per pound in early June and show few signs of abating. Despite large domestic soy oil inventories, the United States Department of Agriculture's forecast that soy oil usage will jump from 2.5 billion pounds in 2006-07 to 3.8 billion pounds in 2007-08 has traders anticipating tighter supplies. In May, the USDA sharply cut its forecast of soybean oil ending stocks for the 2007-08 crop year.

Overseas, the European Union's approach to alternative fuel centers on vegetable oil-based biodiesel. The EU has set targets for biofuel usage of 5.75 percent by 2010 and 10 percent by 2020. Vegetable oil-based fuel use by India and China also is growing rapidly. As a result, biodiesel made from vegetable oil is expected to be in even greater demand around the world than both grain- and sugar-based ethanol.

U.S. soybean prices are poised to head higher this summer. With more acreage converted to corn, there are concerns about adequate domestic and global production. The USDA cut its long-range projection for 2007-08 soybean ending stocks to 320 million bushels, down sharply from an expected 2006-07 carryout of 610 million bushels. Big money from hedge funds and speculators will help support prices for both soybeans and soy oil. Forward soy oil futures contracts for 2008 are averaging just below 38 cents.

Beef--Because of high feed costs, cattle are being kept on pasture for as long as possible before being sent to feedlots. As a result, feedlot placement weights are increasing. Given ample "off-feedlot" cattle supplies, placements are expected to show monthly year-over-year increases from June through October. The result will be a larger number of heavier cattle available for slaughter from midsummer through late fall.

Beef prices are down from Memorial Day highs, but with just 17 days between Father's Day and July 4th, prices can remain elevated through the end of June. Come July, middle meat prices will start heading lower with most cuts bottoming seasonally between August and October. Ground beef prices will rise and fall with the summer holidays, likely softening in mid-July before rebounding in late August ahead of Labor Day.

Coffee--The USDA projected 2007-08 world coffee output at 118.9 million bags, a decrease of 9 percent from a year earlier. The decrease is due to a cyclically lower 2007-08 Brazilian crop, projected at 36.2 million bags compared with 46.7 million the previous year. Global ending stocks for 2007-08 are expected to fall to a 47-year low of just 16.8 million bags.

The specter of lower global supplies, along with the approaching Brazilian winter, sent coffee futures from lows of $1.03 in early May to $1.15 in early June. However, with harvest under way, supplies are increasing seasonally. A slow upward price trend is likely through July.

However, as is the case every Brazilian winter, if June and July pass with no freeze damage, speculative money will exit and prices could dip in August.

Dairy--Cheese prices continue to move higher. Market psychology is now dominating supply and demand fundamentals. Traders are looking beyond the current milk output, which is at a seasonal peak, and focusing on expectations of tighter supplies by midsummer.

The block cheese market hit $1.99 on June 7, up roughly q cents from a month earlier. Year-ago prices were in the $1.20 range.

As a result of dry pasture conditions, low winter forage stocks and the Co-ops Working Together dairy herd buyout program, first-quarter cow slaughter was 15 percent above 2006. In April, the number of dairy cows slaughtered was up 25 percent from 2006. Cow numbers will move below 2006 levels in the second quarter and will likely stay there for the year. The milk-feed ratio was 2.52 in May -- below the 3.0 level, which represents profitability, for the 17th consecutive month. Historically, it has taken roughly six months or more with the ratio at 3.0 or higher to prompt dairy cow herd expansions.

According to the USDA, butter prices, which were $1.22 per pound in 2006, will likely average $1.37 in 2007 and $1.40 in 2008. Block cheese, which was $1.25 in 2006, is expected to average $1.50 in 2007 and $1.48 in 2008. Prices for nonfat dry milk and whey will be higher in 2007 and higher still in 2008 and will continue adding support to milk, cheese and butter prices.

Grain--In its Supply & Demand Report for May, the USDA said corn use in 2007-08 will expand substantially, despite lower exports and feed demand, because of a projected 58-percent increase in ethanol-based corn use. Corn futures were in the $3.80 per bushel range in early June. In June 2006, corn futures averaged $2.37.

Drought conditions in Ukraine and Russia are adding to concerns about already tight global wheat stocks. Heavy rains and flooding also have delayed harvest of winter wheat in Oklahoma and Texas. The International Grains Council predicted that world carryout for 2007-08 would drop to the lowest level since 1981. As a result, Chicago wheat futures have soared from $4.19 in early April to the mid-$5.20s in early June.