Bullish Futures Market
Tuesday, February 22nd, 2011
Bullishness returned to futures markets on Thursday as a number of news items fueled interest in commodities. It seems that virtually every piece of news was supportive of commodity prices in one way or another.
* China announced that it is considering cutting import taxes on food items to control food cost inflation. Rich Feltes, VP of Research at R.J. O’Brien was quoted by Reuters today saying “In my view, this action is addressing the Chinese food inflation problem headon. It’s a real solution as opposed to a phony solution such as investigating speculators or capping edible oil prices.” China is joining other countries such as South Korea and Bangladesh in rolling back import duties to control food costs. Taiwan announced Thursday that is was considering lowering its sales tax on some staple items.
* USDA announced that corn and wheat exports were higher than expected this week with corn exports once again exceeding 1 million tons. Mexico has been a big buyer as it backstops potential losses from the frost damage to its winter corn crop. Wheat exports amounted to 726,200 tons, well above the top of the range of expectations, 600,000 tonnes.
* The Department of Labor announced that inflation inched higher in January, fueling further interest in commodities as inflation protection. The Consumer Price Index rose 0.4% while core inflation, which excludes food and energy, rose by 0.2%, the highest monthly gain since last March. The difference in those numbers obviously implies that food and energy prices rose faster than the total bundle of goods.
Energy prices led the way, gaining 2.4% for the month. All foods gained 0.9% from December’s level and meats were the major contributor to that increase, with prices rising 1.6% in January. The result of all of this news was to push old crop corn prices back to contract life highs. New crop corn contracts reversed the selloff of early this week but did not set new highs. Soybean contracts gained 38 to 45 cents/bushel and Chicago wheat rose by 13 to 18 cents per bushel.
Is it enough to re-ignite the upward trends for grains? Perhaps not on its own but it does underscore the sensitivity of these markets to factors well beyond the scope of U.S. supply and demand. The Department of Labor and USDA use data from the same price surveys to compute monthly average meat prices and those indicate some new records this month as well.
Both of the beef price series set new record highs in January with Choice beef reaching $4.542/lb. and All-Fresh hitting $4.255/lb. Those prices broke the previous records of $4.526 and $4.112 set back in August and September of 2008. And we are very confident that, barring some unforeseen issue with domestic demand or beef exports, this is just the first of many records for beef prices.
The beef cow herd and calf crop reductions of the past three years (driven by higher input costs) will begin to impact fed cattle supplies later this year. With the recent surge in beef demand, those shorter supplies will push retail — and wholesale and feedlot level — prices higher.
Professor James Mintert, then of Kansas State University, pegged it in August 2008 when he stated at the American Ag Economics Meetings “When demand starts to turn, these cattle supplies may be so low to drive explosive price increases.” We’re not sure about explosive but it certainly appears that more records are in store.
After a 13-cent drop in December, pork prices rose 2% form last month to $3.241/lb. That is over 12 cents below last October’s record but retail prices usually rise steadily from late winter into summer, suggesting that new records are likely for retail pork cuts as well. The January price was 12.6% higher than one year ago.
Turkey prices rose by nearly 6% in January to $1.459/lb. That is well below October’s record $1.677 but is by far the highest on record for January. Only chicken prices were lower in January, with the composite broiler price declining 3.7 cents to $1.758/lb. Though lower, that price is only 10 cents below the all-time high set back in May 2009.
The Daily Livestock Report by Steve Meyer and Len Steiner