What a difference a year makes
by Ron Sterk
The past year was one that saw dramatic swings from 2012 in prices and supplies for many commodities. The severe drought of 2012 dictated market activity for several crops a year ago, while 2013 saw much improved weather, farmers’ response to high prices and upswings in demand for several key ingredients.
Corn: Of all the commodities, changes in the corn market may have been the most dramatic in 2013. Production in 2012 was slashed 13% from 2011 and nearby corn futures prices rose to record highs above $8 a bu in the summer of 2012 as drought devastated America’s heartland. By the end of 2013, nearby corn futures prices were 40% below year-ago levels (down nearly 50% from 2012 record highs) as production soared to a record 13,989 million bus, up 30% from 2012. While the year ended with a rift over exports of an unapproved bioengineered strain of corn to China, larger supplies and lower prices were expected to boost demand from domestic livestock feeders by 17% and overall exports by 98% in 2013-14, as well as drive down prices for corn sweeteners and other corn products. Corn carryover on Sept. 1, 2014, was forecast at 1,792 million bus, up 117% from a year earlier, according to data from the U.S. Department of Agriculture.
Soybeans: Due largely to soaring demand from China, soybean prices held up relatively well in 2013 despite the third largest crop in history of 3,258 million bus, up 7% from 2012, and strong competition from Brazil, which has nearly equaled the United States in production and taken over the top spot in exports. Although U.S. soybean production was much less affected than corn by the drought in 2012, nearby futures prices followed corn to historic highs above $17.50 a bu that summer. By the end of 2013, nearby futures prices were trading down only about 8% from a year earlier (down 25% from 2012 highs). The global market has for the most part been supported by seemingly insatiable demand from China, which accounts for over 60% of total soybean imports and shows no signs of letting up any time soon.
Wheat: The wheat market was mostly a follower in 2013, with record global production limiting opportunities for the export of U.S. wheat, with the exception of Brazil emerging as a key buyer. U.S. wheat production actually declined 6% from 2012, but nearby futures prices still dropped about 20% to 25%, with pressure from corn and world markets. Most pressure was on U.S. hard red spring wheat due to record production in Canada and free trade between the two nations. Brazil became an important buyer of U.S. wheat due to smaller crops from its traditional sources. Another element of the wheat market was historically high cash basis levels, especially for hard red winter. Lower futures prices discouraged farmers from selling wheat and buyers had to boost basis levels to bring adequate supplies to the market.
Sugar: Ample domestic and global supplies dominated the sugar market in 2013. Strong production and record high imports from Mexico pushed domestic sugar prices about 10% to 15% below year-earlier levels and resulted in the first forfeitures on government loans by sugar processors in nearly a decade. The U.S.D.A. spent an estimated $259 million in efforts to support the market, as prescribed in the U.S. sugar program. Many buyers took advantage of sugar prices near five-year lows and covered needs for most if not all of 2014.
Cocoa: Global demand for chocolate, and thus for cocoa butter, was on an upswing in 2013, outstripping demand for cocoa powder, used in chocolate milk, baked goods and other applications. Quarterly cocoa bean grind, an indicator of cocoa and chocolate demand, posted strong year-over-year gains in top-consuming Europe as well as in North America and Asia during most of 2013. Meanwhile, amid some uncertainty about production in top-producing West Africa, cocoa bean futures prices ended the year around $2,800 a tonne, up about 20% from a year ago. Cocoa butter prices soared 75% to over $7,800 a tonne from late 2012, while cocoa powder prices fell about 40% (down 60% from May 2011 highs).
Eggs: Nearly as dramatic as corn but on a smaller scale were changes in egg products in 2013. Most attention was on egg whites, with prices for dried whites soaring 80% since February to record highs near $9 a lb. Changes were demand driven as McDonald’s and other restaurant chains introduced egg white entrees. Before the end of the year whites-only frozen breakfast entrees were being offered in grocery stores. The new demand for whites restricted the supply available for drying, and prices skyrocketed. At the same time, egg yolk supplies exceeded demand and prices tumbled.
Food processors’ ingredient buyers may rightly be looking at 2014 with a wary eye after the drama of the past two years in these and other ingredients. At the same time, as in any period of price and supply volatility, buying opportunities exist.