2013 commodity outlook

by Ron Sterk
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As a new year begins, the price and supply pictures for many ingredients are far different from a year earlier. For some, such as sugar and cocoa powder, much lower prices are at hand, while others such as egg and dairy products are mixed and a few, including most grains, are starting 2013 at higher price levels.

Looking back, 2012 turned out to be a monumental year for the markets — from the worst Midwest drought in more than 50 years that led to record high corn and soybean prices to disruptions caused by Hurricane Sandy and a late-December blizzard. The year was wrought with tight supplies of corn and soybeans, shrinking supplies of milk, excess supplies of sugar and huge volatility in egg supplies and prices. Meanwhile, Washington struggled as political standoffs allowed the looming fiscal cliff to weigh on markets broadly in December.

Here’s what happened with some key ingredient prices in 2012 (publication dates prohibit an actual Dec. 31, 2011-Dec. 31, 2012, comparison) and what may lie ahead for 2013.

Old crop corn futures ended 2011 near $6.50 a bu compared with March through July 2013 futures around $6.90 a bu last week, up about 6% for the year but well below record highs near $8.50 a bu set in August as the impact of the summer drought became better realized. High corn prices crimped demand, especially export sales, which for the marketing year to date in mid-December 2012 were lagging the same period in 2011 by 48%.

A bit eerily, perhaps, prognosticators are forecasting sharply higher corn planted area in 2013 and a record large corn crop well above 14 billion bus, assuming a return to near normal yields and not unlike early forecasts of 14.79 billion bus for the 2012 crop, which was down 27% from those early forecasts. Whether the lingering effects of depleted soil moisture from the drought allows yields nearer trend in 2013 remains to be seen.

Nearby soybean futures prices ended 2011 near $12 a bu compared with nearby contracts trading around $14.15 a bu last week, up nearly 18% but again well below the September highs near $18 a bu. Unlike corn, the high prices had little impact on demand for limited U.S. and global soybean supplies with marketing year-to-date export sales through mid-December running 31% ahead of the same period a year earlier. Greater impact is expected to come later in the first quarter of 2013 as the harvest of a forecast record-large crop begins in South America.

Wheat futures prices (Kansas City hard red winter, Chicago soft red winter and Minneapolis hard red spring) were trading near 5-month lows last week, also the victim of limited foreign demand due to strong U.S. prices, which were in part pulled higher earlier in the summer by soaring corn and soybean values. Nearby March hard red winter wheat futures were trading near $8.20 a bu last week, up 14% from a year earlier, soft red futures near $7.70 a bu, up 18%, and hard spring futures near $8.65 a bu, up 2%.

Unlike corn and soybean futures in which nearby futures contracts were at a premium to deferred months due to expected larger 2013 crops of both, wheat futures prices were at a more typical carry (deferred contracts higher than nearby). Significant drought currently across much of the hard red winter wheat growing region of the Plains states has been the major supporting factor for new crop wheat futures, although it remains to be seen how winter and early spring moisture eventually will impact the crop.

Perhaps the biggest news in wheat was the sale of the 136-year-old Kansas City Board of Trade to the CME Group late in the year, although most expect all-electronic hard red winter wheat trading volume may be bolstered as a result.

Unaffected by the drought were sugar and cocoa powder prices, which at the end of 2012 were down about 40% and 20%, respectively, from a year earlier.

For sugar, ample domestic and foreign supplies (especially Mexico) pressured prices throughout 2012 with current Midwest beet sugar prices at 4½-year lows around 31c a lb f.o.b. Users already have most of their 2013 sugar needs covered, and beet sugar for 2014 has been offered around 30c a lb, suggesting nearly flat sugar prices over the next two years.

Cocoa powder prices ended 2012 at three-year lows, due in part to weak chocolate demand in top-consuming Europe tied to continued weak economic conditions, and uncertainty about demand in the United States. Nearly flat cocoa bean futures prices from nearby through 2014 contracts suggest little upside to cocoa powder prices, as does buyers’ slow off-take of already purchased supply in some cases and their hesitancy to book forward coverage aggressively.

Prices for egg and egg products and dairy products ended 2012 mixed compared with 2011, with egg supplies heavy but milk supplies lighter.

Prices for breaking eggs (used mostly by processors) on Dec. 28, 2012, were down about 6% from a year earlier while graded eggs (retail) were down nearly 20%. Nest run (breaking stock) eggs experienced wide price swings in 2012, from a low of 43c a dozen in May, to a high of 96c in September (up 123%) back down to 56c in December (down 42%), due largely to the drought and strong export demand. Supplies were ample and prices were below cost of production as 2012 ended, leading some in the industry to anticipate sharp cutbacks in laying flocks after the first of the year. Egg product prices, though, were mixed at year’s end with whites flat to down more than 10%, yolks up about 30% to 50% and whole eggs up about 5% to 20%. Good export demand continued as 2012 ended, but at a slower pace than earlier in the year.

Dairy product prices ended the year mixed with dry whey, lactose, 34% whey protein concentrate and casein flat to down 15% from a year earlier, along with butter down about 5%. But nonfat dry milk prices were up about 10%, buttermilk powder was up nearly 20% and cheese was up about 5%. The dairy industry was facing declining milk supplies, the result of herd culling in 2012 as soaring feed prices pushed profit margins into the red. After years of month over same month a year earlier increases in milk production, monthly output in the 23 major states fell below year-earlier levels in August 2012, as dairy cow numbers had declined month over previous month (same year) since April. But the decrease in milk supply may be short-lived with milk output rising from a year earlier in November and cow numbers increasing from October for the first time in six months. The U.S. Department of Agriculture expects milk production below year-earlier levels through the first half of 2013, but turning higher in the second half and about even with 2012 for the full year.

What’s in store for food prices in 2013? Despite the potential for record U.S. corn production and record South American soybean production, continued multi-year lows for sugar prices and mixed results for other ingredients, the U.S.D.A. suggests food prices will rise due to the lagging effects of the 2012 drought.

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By David Willenborg 1/4/2013 9:25:47 AM
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