In the eye of the storm

by Staff
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Against the backdrop of crude oil futures reaching $134.35 per barrel on June 9 and wet weather delaying the planting of this year’s corn crop, Sosland Publishing Co. held its 31st Annual Purchasing Seminar, June 8 to 10 in Kansas City. Approximately 650 executives from throughout the food industry traveled to the meeting to learn how the commodity markets may evolve during the rest of 2008 and into 2009.

In his opening remarks Mark Sabo, president of Sosland Publishing, said, "It is not a coincidence that this year’s seminar attendance was the largest ever given the magnitude of the impact soaring commodity prices are having on food companies, consumers and economies around the world."

The wet weather and its effect on crop production took on added importance during the seminar as thunderstorms rolled through Kansas City off and on, and rivers in Iowa swelled from persistent rain. Jon B. Davis, chief meteorologist for the Chesapeake Energy Corp., Chicago, said that from a moisture perspective this has not been a good spring.

"This is the fourth wettest spring in the past 114 years," he said. "It has been very wet across the Midwest, and has developed into a long-term trend that started in the latter portion of last year."

Mr. Davis added that the stage is set for the "latest corn crop pollination that we have seen since 1995." He continued, "The risk is higher because of the lateness of the crop and the potential for hotter, drier weather in July and August. I would be stunned if there is not an issue that affects yield this summer."

Several presenters, including Steven A. Freed, director of research for ADM Investor Research Services, Inc., Chicago, and Corey Dencklau, director of grain products for Gavilon L.L.C., Omaha, said this year is all about corn, and the volatility of the market was underscored a day after their presentations on June 9.

The U.S. Department of Agriculture’s non-survey-based 5-bu-per-acre reduction in projected yield in the June 10 World Agriculture Supply and Demand Estimates report caught visitors at the meeting by surprise.

The change resulted in a reduction of projected corn production this year of 11,735 million bus, which would be below projected use of 12,510 million and result in very tight ending stocks of 673 million bus.

Mr. Freed predicted that wheat values would "attach" to corn, even though wheat currently was overvalued at the Chicago Board of Trade. Because of the weak dollar, wheat prices are lower in the rest of the world than in the United States. The larger wheat crop and smaller corn crop will necessitate the increased feeding of wheat, especially soft red winter.

World wheat ending stocks in 2008-09 are expected to increase for the first time in four years, Mr. Freed said. He also noted that total global demand for corn, wheat and oilseeds will exceed total planted area for the combined crops.

With demand growing, especially for use of corn to make ethanol, the United States will need 10 million more acres of corn in 2009 (than the projected 86 million acres in 2008) to meet demand, Mr. Dencklau said. For the current year, he said 4½ to 5 million acres of corn were at risk of abandonment or of not being planted because of weather. Corn will dictate the price of all feed ingredients, with millfeed being the most volatile of those, he said.

Mr. Dencklau encouraged seminar participants to "watch the profitability of ethanol" and to "pay attention to corn basis" in the coming year.

Following Mr. Davis’ weather outlook, William G. Lapp of Advanced Economic Solutions, Omaha, said "corn is king and there is no room for error."

While corn planted area, at 86 million acres, is down sharply from 2007, weather conditions have been difficult.

"We are going to have a very challenging year from a price standpoint," he said.

Noting that next year the federal government’s biofuels mandate will require 9 million more acres of corn devoted to production, Mr. Lapp said he did not think it would happen.

"(I think) there will be a change in policy," he said. At the time, Mr. Lapp did not outline what he thought the policy change may be, but in a subsequent panel discussion noted it could take the form of reduced tariffs on ethanol imports.

With regard to food inflation, Mr. Lapp said the 1970s are likely the best analogy analysts have to compare the current situation. He predicted food price inflation would increase 8% to 10% in the next five years.

Concern about the effects of a short corn crop on the commodity markets led to some disagreement among speakers at the Purchasing Seminar. In a question and answer period, panelists were asked "Who loses if the supply of corn is limited." One panelist noted the livestock feeding industry always has been the "shock absorber" in such situations.

But during a panel devoted to the outlook for beef, pork and poultry, D. Scott Brown, the program director for the Food and Agriculture Policy Research Institute, Columbia, Mo., disagreed.

"There has been a lot of consolidation and capital investment in the livestock sector," he said. "If people are expecting it to be the shock absorber, they are in for a rough ride."

Energy industry outlook

With spare production capacity in the Organization of Petroleum Exporting Countries hovering at a recent low of 3%, crude oil markets remain ripe for volatility, even as production climbed to new highs, said Tim Statts, director of risk management, Summit Energy, Louisville, Ky.

"Excess production at only 3% causes fear," Mr. Statts said.

His presentation on "Energy Supply and Demand" was awaited with particular anxiety this year because of the extraordinary strength in oil markets. Indeed, well before Mr. Statts took the stage, many, if not most, presenters had incorporated a crude oil price slide in their ingredient presentations, reflecting the overwhelming importance of energy markets in other ingredient markets in the current environment.

While OPEC members currently have little latitude to raise production, Mr. Statts said demand continues to grow rapidly in China and the Middle East.

"Growth may be slowing, but demand is still growing and will continue to grow," he said.

While energy subsidies are diminishing in several countries, Mr. Statts warned that reduced subsidies should not be expected from China or the Mideast. Within the United States, though, petroleum demand has slowed. It was the first time since 2001 demand has contracted.

A more quietly difficult market in recent months has been natural gas.

"We had been lulled for the last 1½ years by markets holding in a $6 to $8 range," Mr. Statts said. "Now we’re above $12 and production costs for natural gas are rising."

Importantly, natural gas has been shifting into more of a global market than has been the case in the past, Mr. Statts said.

Weather, acreage and soybean oil

Despite only modest growth in U.S. biodiesel production in 2007, soybean oil prices surged to record high levels in 2007-08, propelled upward by a smaller soybean crop than expected, said Paul Meyers, vice-president of commodity analysis for Connell Purchasing Services, Berkeley Heights, N.J.

Soybean planted area in 2007 was 63.6 million acres, down 16% from the year before and the smallest area of the decade.

Soybean oil use in biodiesel production, which nearly doubled in 2006 from the year before, climbed less than 10% in 2007 and may increase even less in 2008, Mr. Meyers said.

Stocks of soybean oil, which had been at burdensome levels throughout 2006-07 and early in 2007-08, have begun to give ground more recently. As a result, cash soybean oil premiums have rallied from the historically depressed levels prevailing earlier in the crop year.

Factors for oils/shortening buyers to watch in the coming year cited by Mr. Meyers include possible weather-driven shifts in soybean/ corn acreage, a like increase in soybean production from 2007 and a response from South American growers, expanding vegetable oil demand from Asia, the price of crude oil and the value of the U.S. dollar.

Challenging times for other markets

A dramatic downturn of per capita consumption of corn sweeteners has continued into 2007-08, said Thomas Earley, executive vicepresident of Promar International, Alexandria, Va.

Since hitting a record high of nearly 85 lbs in the late 1990s, per capita consumption of corn sweeteners declined roughly 10 lbs, Mr. Earley said. Over the same period, consumption of sugar has been flat, he added.

In contrast to other ingredient markets discussed at the Purchasing Seminar, Mr. Earley described sweeteners as one of the least volatile over the past year. Still, the sugar market was rocked by a tragic mid-February explosion at a Savannah, Ga., sugar refinery. Prices have climbed 4c to 5c a lb since before the explosion, but remained far beneath highs set in 2005 and 2006. He noted that the Savannah refinery’s production capacity equates to one sixth of the U.S. industry total.

"Adjustments have been difficult, but the industry is managing to work through the situation with steppedup capacity utilization and increased shipments from Mexico," he said.

Milk is being priced at the retail level increasingly as a loss leader, helping preserve sales, said Mary Keough Ledman, principal, Keough Ledman Associates, Inc., Libertyville, Ill.

"Volume has declined only 1.1% from 2007 despite much higher costs," she said. "But for this pricing policy, demand would be worse." The Consumer Price Index for milk has been flat since April, and butter prices have been under pressure.

Growth in cheese exports has been bolstered by drought in Oceania, and resultant reduced production there. Cheddar cheese exports in 2008 have been up 176% versus the same period in 2007 (which in turn was a much more active year for exports than 2006).

After climbing steadily in 2007, nonfat dry milk stocks levels have been edging downward, Ms. Ledman said.

For cocoa, Judith Ganes-Chase, president of J. Ganes Consulting, L.L.C., Katonah, N.Y., said some acreage could be lost as farmers plant regular food crops, especially rice. But that doesn’t seem like much of a threat overall. Supply of cocoa should be adequate and remain balanced this year, although higher quality supply will remain tight. Global cocoa stocks are down marginally but not as tight as in the 1970s and the stocks-to-use ratio remains high at over 40%.

Ms. Ganes-Chase sees grindings slowing and demand growing but at a slower rate than in the past couple of years (which was boosted by dark chocolate). She predicted relatively stable powder prices, but not likely to back off. A continued slow U.S. economy could dampen chocolate demand slightly.

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