Second half commodity outlook

by Ron Sterk
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A midyear analysis reveals prices of many major commodities and commonly-used ingredients are falling, or at least down from a year ago, mostly due to increased production and rising supplies, with some notable exceptions. As a result, current pricing in many cases is more favorable to buyers than it has been for some time.

U.S. annual average price forecasts from the U.S. Department of Agriculture last week for the 2012-13 marketing year were lower for corn and wheat on projected increased supplies, higher for rice and soybeans, and mixed for soybean products. Outlooks for other ingredients, including dairy and eggs, were mixed but mostly lower for next year, with pricing for sugar and cocoa also declining.

For the current marketing year 2011-12, which includes most commodities except wheat, U.S. production and total supplies of corn, grain sorghum, oats, barley, soybeans, rice and wheat all were down from 2010-11, according to U.S.D.A. data in the June 12 World Agricultural Supply and Demand Estimates. Conversely, annual average prices paid to farmers in 2011-12 for all of those commodities were expected to be above year-earlier levels, including all wheat at a record $7.25 a bu, up 27% from 2010-11. Average 2011-12 prices for oats and barley are up 37% from 2010-11, sorghum up 20%, corn up 18%, rice up 11%, soybeans up 9%, soybean meal up 4% and the lone exception, soybean oil, down 3%.

But a much different picture is forecast for 2012-13, although it’s too early in the season to base production forecasts on actual survey data, again with the exception of winter wheat. Output and total supply in 2012-13 is forecast above year earlier levels for wheat, (total supply) up 3%; corn up 16%; soybeans up 3%; sorghum up 50%; barley up 28%; and oats up 5%; with rice down 7% as the lone exception.

Again, conversely, most 2012-13 average prices are expected to be lower than a year earlier but with a bit more variation. Using the mid-point of U.S.D.A. projections, the price of wheat is expected to be down 14% from 2011-12, corn down 25%, sorghum down 29%, oats down 21% and soybean meal down 3%, while prices for barley, soybeans and soybean oil are expected to rise 6% and rice 12%.
Those projections will be adjusted monthly by the U.S.D.A., and with the bulk of the growing season ahead for most commodities, the numbers may look quite different by fall, especially corn. Currently the U.S.D.A. projects record 2012 corn production of 14,790 million bus, in part based on a record average yield of 166 bus an acre, which most in the trade expect will be ratcheted downward, especially with concerns about dryness in some areas.

Sugar, cocoa, egg prices falling
Lower prices are expected or are already being paid for certain other key ingredients, including sugar, cocoa, egg products and milk products.

Total sugar supply, of which 28% consists of imports, in 2011-12 (ending Sept. 30) is estimated by the U.S.D.A. at 13,585,000 tons, raw value, up 4% from a year earlier. Supply in 2012-13 is projected 1% lower from this year, but a valid comparison is difficult because the U.S.D.A. sets part of next year’s import level at the World Trade Organization minimum and cannot adjust it until after April 1, 2013, resulting in an unrealistically lower import total. But prices are telling with bulk refined sugar currently trading around 45c a lb f.o.b. Midwest, down 10c, or 18%, from a year ago, and for next year around 40@42c a lb. There appears to be limited upside to sugar prices with an early and outstanding U.S. beet crop and global surpluses forecast through 2013-14.

Prices for natural cocoa pow-der, which have fallen more than 20% since September, are trading nearly flat through 2013. With 100% of the U.S. supply imported (as cocoa beans or products), supply depends mainly on West Africa, and to a lesser extent on Brazil and Indonesia. But like sugar, a global cocoa bean surplus also is forecast, in part due to economy-driven demand weakness in Europe. The exception is black cocoa powder, of which supplies are tight and demand still strong.

Egg prices are forecast by the U.S.D.A. to fall about 8% in 2012, from an average 115.3c a dozen in 2011, with 2013 prices projected slightly below 2012 levels. Egg production is forecast at 7,686 million dozen this year, up slightly from 2011, but is forecast to fall to 2011 levels next year.

Milk production continues to increase even as many dairy farmers are facing significant negative profit margins. The U.S.D.A. forecast 2012 output at 202.2 billion lbs, up 6 billion lbs, or 3%, from last year, with a “modest” gain of 400 million lbs projected in 2013. Prices for all classes of milk in 2012 were forecast to decline from 2011 but to turn higher again next year. Prices for butter in 2012 were forecast 25% lower than last year, cheese down 13%, nonfat dry milk down 25% and dry whey up 3%. Like milk, prices for all four products were forecast to increase next year.

Apple, tart cherry supplies tight
For other foods and ingredients, the most critical situation appears to be with tart cherries, 80% of which are grown in a concentrated area in Michigan that was hit by a freeze while trees were in bloom earlier than normal. Supplies may be down as much as 75% and are likely to become unavailable at any price, forcing buyers to use substitute products such as red raspberries.

Processing apple supplies also are tight, mainly because strong demand for fresh apples is pulling from processing supplies. Production also is expected lighter in some key areas, including Michigan and New York, due to frost damage.

Peanuts availability, on the other hand, should be much improved next year after two years of tight supplies and rising prices. Production is forecast to rise sharply this year based on a 25% increase in planting intentions, according to the U.S.D.A. Peanut prices peaked in mid-March but have fallen by 20% or more in anticipation of increased production this year.

Buying strategies still short term
Many ingredient buyers have gone month-to-month or a few months forward rather than locking in supplies at prices over a longer term of 6 to 12 months. Small and mid-size buyers of soy flour and corn products have especially adopted this pattern. The trend gained favor after many buyers were “burned” when prices ran up to what was then record highs in 2008. Fearing shortages, a number of buyers locked in supplies at never-before-seen levels, only to see prices plunge a couple of months later. While larger users of such products still tend to buy longer term, many smaller users buy only a month or at most a quarter ahead, catching both highs and lows but showing a better average.

A number of buyers also have embraced component buying for ingredients such as wheat flour, corn products, soy flour, soybean oil and oats flakes, among others. For example, a flour buyer may lock in the cash wheat basis at one time, the byproduct millfeed credit at another time and the wheat itself (via a futures contract) at yet another time, claiming the best value of each major component rather than flat pricing the entire purchase at one time.

Whether utilizing component buying, flat pricing or other scenarios, buyers should have greater opportunity to lock in ingredients at prices well below year-ago levels currently and in the months ahead.

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