Commodity, ingredient prices trending lower at year end

by Ron Sterk
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Most commodity and ingredient prices are ending the year on a weak note after reaching historical highs in some cases earlier in the year. How that bodes for pricing in 2012 remains uncertain, but there appears to be general agreement a subdued economic recovery is likely to restrain runaway prices, which is good news for food processors.

Any number of outside factors also will be at play, not the least of which is a presidential election in the United States in 2012. The value of the U.S. dollar in mid-December rose to near an 11-month high, making U.S. products more expensive in world markets. Gold futures prices have plunged nearly 18% since early February, but at around $1,575 per oz still were up about 14% from a year ago. And some energy prices were up in 2011, boosting a major input cost for food processors, although the energy outlook calls for mostly flat prices in 2012.

A variety of sources agreed in projecting increased domestic and global production of most major crops in 2012, due to incentives from strong prices in 2011. Sugar supplies are expected to increase but remain fairly tight and cocoa supplies are expected to remain ample, with prices for both trending lower at year end.

Grain markets at-a-glance

A snapshot of mid-December prices for major grains, oilseeds and other key ingredients, as well as energy costs, compared with 2011 highs and values a year earlier, and projected 2012 prices when available, paints the picture well.

Nearby futures prices for hard red winter wheat in Kansas City were near $6.40 a bu on Dec. 15, down 35% from the year’s high near $9.90 in February and down 21% from $8.11 a year earlier.
Chicago soft red winter wheat futures were near $5.80 last week, down 34% from the February high of $8.93 and down 24% from $7.65 on Dec. 15, 2010.

Hard red spring wheat futures in Minneapolis were near $8.15 in mid-December, down about 24% from the late May high near $10.78 but down only 3% from $8.43 a year ago. Spring wheat prices have been mostly supported by lower-than-expected 2011 production, down about 30% from 2010 due to adverse weather during much of the season.

In its Dec. 9 World Agri-cultural Supply and Demand Estimates, the U.S. Department of Agriculture projected the 2011-12 (June-May) average farm price for all varieties of wheat to range from $7.05@7.55 a bu, down modestly from $7@8.40 projected in June but well above $5.70 in 2010-11. Deferred futures prices (December 2012 contract) feature carrying charges for Kansas City wheat of about 50c a bu and for Chicago wheat of about 70c. But the Minneapolis December 2012 contract was at an inverse of about 50c a bu, indicating the trade expects spring wheat production to rebound in 2012.

Nearby corn futures prices hit an all-time high just ¼c shy of $8 a bu in early June, but were down about 27% to $5.80 last week, which was about even with the year-ago level. The December 2012 futures price was around $5.40 a bu last week, in part reflecting ideas of increased corn production in 2012. The U.S.D.A. projected the average farm price of corn in 2011-12 (September-August) to average $5.90@6.90 a bu, down from $6.20@7.20 in November but above $5.18 in 2010-11.

Nearby January rough rice futures prices were trading near $13.60 a cwt last week, down 25% from the 2011 high in September but down only 3% from about $14 a year ago. Although down 23% from 2010, U.S. rice production was competing with record large global rice outturn, which restricted export potential, and large domestic carryover. The U.S.D.A. projected the average farm price of rough rice to range from $14@15 a cwt in 2011-12 (August-July), up from $12.70 in 2010-11.

Soybean and soybean oil futures prices dipped to 14-month lows last week. Nearby soybean futures at around $11.10 a bu were down about 25% from the late August high and were about 15% below a year ago. Nearby soybean oil prices were trading below 49c a lb, down about 20% from an April high above 60c and about 10% below the same time last year. The U.S.D.A. projected wide 2011-12 average price ranges of $10.70@12.70 a bu for soybeans and 50.5@54.5c a lb for soybean oil, compared with $11.30 and 53.2c, respectively, in 2010-11.

Sugar, cocoa and eggs

Prices for bulk refined sugar have remained remarkably strong throughout 2011, mainly due to robust demand and tight supplies despite record imports from Mexico. In December values dropped back to about even with year-ago levels, and were seen modestly weaker but still historically high at around 55@57c a lb f.o.b. in 2012. Contracted prices for corn sweetener products were up about 10% to 20% from 2011, equal to about $2@4 a cwt depending on product and region.

Cocoa powder prices were historically high through much of 2011, due in part to supply disruptions from key producer Ivory Coast early in the year, and strong demand for powder to produce lower-cost chocolate. But prices for natural cocoa powder have declined about 35c a lb, or 15%, since mid-September and dipped below year-ago values for the first time this year in early December as demand appeared more satisfied despite strong domestic and global cocoa bean grind data. Pricing for 2012 has been at weaker levels, in part due to forecast continued surplus cocoa bean supply.

Egg product prices ended the year flat to more than 40% above year-ago levels, mostly ranging from 15% to 25% higher, with the greatest gains in whites products and the smallest in yolks, according to Food Business News data. The U.S.D.A. forecast Grade A large retail eggs to average $1.14 a dozen in 2011, up 8% from 2010, and projected a lower average in 2012 ranging from $1.02@1.09.

Eyeing energy prices

While most agricultural prices are down from a year ago, most energy prices are up. The U.S. average on-highway diesel fuel price was $3.89 a gallon last week, up 21% from $3.23 a year ago. The Energy Information Administration of the U.S. Department of Energy forecast diesel fuel prices will average $3.85 a gallon in 2011 and 2012, up 29% from $2.99 in 2010.

Crude oil futures prices in New York dropped about 5% last week, trading below $95 a barrel and were down about $20, or 17%, from the 2011 high near $115 in early May, but were about 8% above year-ago values around $88.

Working inventories of nat-ural gas were record high for the date at the end of November, according to the E.I.A., which was expected to result in lower average prices in 2012. The E.I.A. projected Henry Hub natural gas prices to average $3.70 per million British thermal units in 2012, down 8% from $4.02 in 2011.

A key energy question of concern to agricultural interests is the blenders’ credit of 45c a gallon for ethanol and $1 a gallon for biodiesel, both of which are set to expire on Dec. 31, 2011, pending some late congressional action. About 40% of the corn crop was expected to be used for the production of ethanol and about 20% of soybean oil production for biodiesel in 2011-12. While some negative impact was expected on grain and oilseed values, analysts have tempered earlier ideas of sharp price declines, especially in the case of corn, because the industry has had time to prepare for potential credit losses and the widespread use of ethanol as a gasoline additive was expected to support continued production of the biofuel.

While many commodity prices have come down from highs earlier in 2011, and are below year-ago values in many cases, most still remain historically strong.

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