High corn futures prices could squeeze expansion plans for poultry

Nation's Restaurant News,  Nov 20, 2006  by John T. Barone

Tags: U.S. Department of Agriculture

• E-mail
• Print
• Link

In October, the U.S. Department of Agriculture dropped its corn output estimate by 2 percent, and a further reduction was expected in November. While this year's corn crop still will be the third largest on record, increased usage, especially for ethanol, led the USDA to slash year-ending supplies by 18 percent. The USDA also lowered world ending stocks to their lowest levels since 1984. In response to the USDA's report, corn futures jumped to 10-year highs in the $3.40s in early November, up $1.20 per bushel since mid-September. That's a number that could put a chill into potential expansion plans for poultry, egg and livestock producers.

Beef--October's USDA cattle report came in near expectations, but it does high-light a shift in the market. September feedlot placements dropped 5 percent, following three consecutive months of big year-over-year gains. Still, total feedlot inventories remain at a record high of 11.4 million head, up 9 percent from a year ago. While the drop in placements likely indicates that drought-scorched pastures improved a bit in September, producers continued to liquidate calves. Similar to July and August, feedlot placements for September in the lightest, under-600-pound category were big, up 28 percent from a year ago. A large number of these lightweight cattle will begin coming to market from December through March, and the increased supply will weigh on prices this winter.

Coffee--This has been one of the least volatile markets of 2006. Front-month futures prices have traded in the 95-cent to $1.12 range going back to February. Brazil is holding back a lot of supply, and that fact could depress markets at times and create a buying opportunity between now and April. Buyers should expect overreactions to any supply-chain disruptions, such as drought damage in Brazil during the flowering stage, which is occurring now, or the potential for freeze damage in July.

An expected cyclically smaller 2007-08 Brazilian crop, coupled with a growing world appetite for coffee, should keep coffee prices well supported next year. A supply surplus will eventually give way to a deficit, but possibly not until late 2007. The big timing question is: When will traders begin pricing lower supply fundamentals into the market? Look for coffee prices to perk up by mid-2007 or sooner. If speculative money comes pouring in, prices could move higher in a hurry.

Dairy--Corn prices are in a range that will squeeze producer profits. The milk price to feed price ratio dropped to 2.42 in October and has been below 3 for most of the year, a level that usually signals a cutback in output. Milk production for 2007 will eventually move lower because of fewer cows and less milk per cow. Cow numbers peaked in June and have now declined for several consecutive months. The USDA is forecasting a modest 0.66-percent increase in milk output for 2007. We think the USDA is optimistic and that the increase will be achieved only if nothing goes wrong on the producer side, such as an overly cold winter and/or a hot summer.

Butter and block cheese both hit highs in the mid-$1.30s in October, slipped back to the mid-$1.20s, then recovered again in early November. For this time of year, butter in the high $1.20s and cheese in the $1.30s compare favorably with highs of $1.6475 for butter and $1.5950 for block cheese in 2005.

Oil--The USDA forecast the soybean crop at a record 3.19 billion bushels, and raised its estimate of soy oil ending stocks for 2006-07 to 2.69 billion pounds. Stocks are at levels that have been historically associated with soy oil prices in the 20-cent range. However, there is now likely a 5-cent per pound energy premium in soy oil.

Futures declined sharply, from highs near 27 cents in August to lows below 24 cents in October. Speculators had discounted the value of soy oil with the decline in energy prices. However, that situation reversed itself in late October, and soy oil futures have recovered to back above 27 cents. Institutional investors with big positions have been in and out and back into this market. High corn and wheat prices are likely to hold through next year. That could shift a lot of acres away from soybeans in 2007-08.

Orange juice--The USDA's estimate of 135 million boxes for the 2006-07 Florida crop came in even lower than last year's hurricane-damaged 147 million-box crop, and far below the 200 million-plus crops of prior years. The report helped push frozen concentrated orange juice futures up 25 percent to 16-year highs of $2. Hurricanes, tree diseases and urban sprawl were all responsible for this year's drop in Florida orange output. Analysts say it could take two to three years before Florida nursery trees are sufficient to replace lost trees. With demand being slowed by high prices, further upside price potential is unlikely. Still, supply fundamentals will remain tight for the next few years.

Pork--The USDA increased both 2006 and 2007 forecasts for pork exports on the expectation that prices and exchange rates will keep U.S. pork competitive relative to other countries. Exports in 2006 are expected to be 2.97 billion pounds, 11 percent above 2005, and an additional 4-percent increase is expected in 2007. Exports will be 13 percent of total U.S. pork output this year, and 14 percent of production in 2007. That is more than double the rate of just six years ago in 2000, when overseas sales accounted for just 7 percent of total domestic pork production.