Food Inflation for August 2011

Thursday, September 15th, 2011

The charts below outline the food inflation for August 2011.

PPI Food Detail for August 2011

CPI Food Detail for August 2011

Food Prices Continue to Accelerate

Monday, August 29th, 2011

Food Prices Continue to Accelerate During July 2011

 - CPI-Food gains 4.2% (vs. YA) during July

- PPI-Food gains 7.1% (vs. YA) during July

- Underlying commodity prices 15% above YA

- Chinese food prices up 15%

Consumer food prices (CPI-Food) rose by 4.2% during July (vs. YA) – the most rapid rate of gain in consumer prices since mid-2009. Gains in at-home food prices continue to accelerate at a more rapid rate (5.4%) than away from home prices (2.6%). Protein items (except chicken) continue to lead consumer food prices higher – beef prices were 9% higher and pork prices were 7% above year ago levels. By December of 2011, the CPI-Food is forecast to be 5.3% above year ago levels

Wholesale food costs (PPI-Food) rose by 7.2% from a year ago, the largest gain since September 2008. The upward pressure on costs continues, consistent with gains in the price of underlying commodities. The broad-based gain included sharp increases in wholesale prices for vegoil (+34%), coffee (+28%) and wheat flour (+20%). Gains in feed costs over the past four years is now translating into higher prices for protein (beef +14%, pork +12%) and dairy products (+18%)

The AES Food Input Cost Index is now 15% above a year ago and 45% higher than July 2009 levels. Prices in several markets reached a peak during the past 2-4 months, but the overall index has not declined. The markets continue to react to the combination of typical weather concerns as well as wild swings in the value of the US dollar. As long as corn and crude oil prices remain elevated, the downside potential for most commodities will be limited.

PPI –Food: The government’s report on wholesale prices is released around the middle of the following month, and reports on the change in a broad range of prices. During July 2011, the index of wholesale food costs rose by 7.1% from a year ago, the largest gain since September 2008. Of 22 items tracked and reported, eleven gained 10% or more from a year ago.

 The upward pressure on costs continues, consistent with gains in the price of underlying commodities. The broad-based gain included sharp increases in wholesale prices for vegoil (+34%), coffee (+28%) and wheat flour (+20%). The sharp gain in feed costs over the past four years is now translating into higher prices for protein (beef +14%, pork +12%), dairy (+18%) and egg (+19%). The notable exception is chicken – and the lack of price appreciation is resulting in significant margin pressure for producers.

Commodity Price Trends — The table below provides commodity price information as of August 15, 2011, along with historic comparisons. This gives an indication of commodity price trends, both short-term and longer-term. The AES index, listed at the top, represents an average of the items listed below, index to 2000=100.

 The AES Food Input Cost Index continues to record sharp gains from a year ago (+15% vs. YA, +45% vs. August 2009). Prices in several markets reached a peak during the past 2-4 months, but the overall index has not declined. The markets continue to react to the combination of typical weather concerns as well as wild swings in the value of the US dollar. After crude oil prices declined sharply last month (from $115 to near $90), the market has declined into an $80-90 range.

 The recent USDA crop estimates for corn, wheat and soybeans were bullish to prices. As long as corn and crude oil prices remain elevated, and we do not enter into a second recession, the downside potential for nearly all commodities will be limited.

CPI-Food –

The government reported consumer food prices (CPI-Food) continued to accelerate during July, rising by 4.2% versus a year ago – the most rapid rate of gain in consumer prices since mid-2009. Gains in at-home food prices continue to accelerate at a more rapid rate (5.4%) than away from home prices (2.6%).

We continue to believe that accelerating consumer food inflation is a direct response to a sustained multiple-year increase in the price of underlying commodity prices. Most notable is the sharp increase in the price of corn, a key underlying price driver for a wide variety of food products. This implies further acceleration in the rate of food inflation is likely during the next 6-18 months.

By December of 2011, the CPI-Food is forecast to be 5.3% above year ago levels. With the exception of 2008, this would be the highest rate of food inflation since 1982.

CPI-Food Index Values (with changes from YA during December)

 

At-Home vs. Away-From-Home Food Prices

 

Chinese Food Inflation – Consumer food inflation in China for July was reported at 15% (vs. YA), led by a 57% increase (vs. YA) in pork prices. Overall inflation was 6.5%, a rate higher than Chinese policy makers find tolerable.

Recap of USDA February 9 USDA Supply/Demand Reports

Monday, February 14th, 2011

 In their monthly WASDE report, the USDA released an update of their supply/demand estimates for US and world crops.  While this report is one of the least insightful (limited new USDA data), the market’s dramatic response to a small increase in corn usage is certainly noteworthy. 

Key fundamentals to follow over the next 60 days include a) the USDA initial 11/12 supply/demand projections (2/25), USDA’s Planting intention report (3/31), March 1 stocks (3/31), and USDA updated supply/demand reports (3/10, 4/8).

 Corn – The USDA further tightened the 2010/11 balance table

-          Ethanol use was increased from 4900 to 4950 mm (vs. 4568 YA), based upon November actual data and weekly implied usage information

-          Feed/residual left unchanged at 5200 (vs. 5140 mm YA) – the USDA probably won’t adjust this estimate until April (after March 1 stocks report)

-          Exports left unchanged at 1950 mm (vs. 1987 YA)

-          Total 10/11 US corn usage increased from 13430 to 13500 mm (vs. 13066 YA), resulting in ending stocks being reduced from 745 mm (5.5% of use) to 675 mm (5.0% of usage) — vs. 1708 mm (13.1% of use) last year.

 With this very modest change in the USDA estimate of demand (+0.5%), ending stocks are reduced to an extremely tight 5.0%, equal to 18 days of demand on September 1 – a stocks-use level matched in 1996.  We will have more adjustments to demand in the future, and some will be much larger than this month’s change – the implication is that prices will remain extremely volatile, and price upside could be dramatic.  Today’s 0.5% change in demand resulted in futures rising by 3.6% — in other words the price response (in percent change) was 7X the % change in USDA’s demand estimate. 

  Soybeans – The USDA made no adjustments to their 10/11 supply/demand:

-          Exports 1590 mm vs. 1501 YA

-          Crush 1655 mm vs. 1752 YA

-          Ending stocks 140 mm (4.2% of use) vs. last year’s 151 mm (4.5%)

 Weekly pace data on export shipments and sales, as well as the monthly crush data, are the key demand metrics to monitor.  USDA left total South American soybean production unchanged – increasing the Brazil crop from 67.5 MMT to 68.5 MMT, while reducing Argentina’s crop from 50.5 MMT to 49.5 MMT.

 Soymeal – Domestic use remains forecast at 30.5 mm tons (off 0.4% vs. YA), and exports remain forecast at 9.2 mm tons (-18% vs. YA).  Monthly crush data and weekly export sales/shipment data will dictate changes going forward

 Soyoil – The USDA’s forecast of 10/11 ending stocks was reduced by 100 mm to 2573 mm (vs. 3358 mm YA), reflecting forecast exports be revised up to 2800 mm (vs. 3357 mm).  Food use remains forecast at 14.20 B (vs. 14.18 B YA), and biodiesel remains forecast at 2.90 B (vs. 1.68 B YA).  The sharp rise in biodiesel use is predicated on big gains in usage during the coming months, as YTD biodiesel usage (through December 2010) is 70% below YA.  Usage to meet biodiesel mandates during 2011is the key unknown for the US soyoil balance table.

 Wheat – The 2010/11 balance table for all US wheat was left unchanged in the USDA’s February update:

-          Imports unchanged 110 mm (vs. 119 mm YA)

-          Exports unchanged at 1300 mm (vs. 881 mm YA)

-          Food use unchanged at 930 mm (vs. 917 mm YA)

-          Feed/residual unchanged at 170 mm (vs. 150 mm YA)

-          End stocks unchanged at 818 mm (vs. 976 YA)

 Modest by-class adjustments were made:

-          HRW end stocks left at 313 vs. 385 YA (dom use -10 mm, exports +10 mm)

-          SRW end stocks up 10 to 211 vs. 234 YA (dom use +10 mm, exports -20 mm)

-          HRS end stocks unchanged at 173 vs. 234 YA

-          White end stocks reduced 10 to 73 vs. 80 YA  (exports +10 mm)

-          Durum end stocks unchanged 48 vs. 35 YA

 Weekly crop conditions will begin to tell more about the potential of the winter wheat crop, and thus influence prices.  Beyond that, export sales and international events (Egypt is the world’s largest wheat importer) will drive prices.  While winter wheat acreage estimates were released in January, the first official USDA estimate of spring wheat acreage will be released on March 31.

 Note on 2011 Acreage – Market attention to the “need to buy acreage” during 2011 has intensified in recent weeks, and will continue to be an important driver of prices over the coming months.

 Based upon current prices and a state-by-state analysis, acreage planted to major crops during 2011 is projected as follows: corn 90.0 mm (vs. 88.2 YA), soybeans 79.0 mm (vs. 77.4YA), winter wheat 41.0 mm (vs. 37.3 YA), spring/durum wheat 15.3 mm (vs. 16.3 mm YA) and cotton 12.0 mm (vs. 11.0).  Note that the sum of above four crops is expected to rise by more than 7 mm acres, and the sum of corn and soybeans is projected to rise by 3.4 mm to the highest level on record.  Even after considering the gain from more double-cropping (SRW-soybeans), the larger universe of acreage that is required will be challenging to reach, and implies strong and very volatile prices during the coming year.

 -          Bill Lapp

Advanced Economic Solutions

1/18/11 Update

Wednesday, January 19th, 2011

Wholesale Food Costs Continue to Outpace Gains in Consumer Food Prices During December, While Global Food Inflation Rates Surge

•  - CPI-Food gains 1.5% (vs. YA) during Nov, with further gains expected
•  - PPI-Food gains 3.5% (vs. YA) during Oct, led by protein, dairy and softs
•  - Underlying commodity prices continue to rise sharply, now 19% above YA
•  - Global Food Prices rose 4% from last month and are 25% above YA Consumer food prices increased during

December by 1.5% (vs. a year ago. While historically the CPI has normally increased at a greater rate than the PPI-Food, this marks the 13th consecutive month that the CPI has lagged the PPI. At some point, likely over the course of the next 12-18 months, the higher costs being recorded at the wholesale level will translate more rapid rates of consumer food inflation.

Wholesale food costs remain both volatile but also relatively strong — the PPI-Food rose by 3.6% during December (vs. a year ago); this is consistent with the sharp gains in commodity food prices – the AES index as of early January was 19% ahead of year ago levels, approaching the record levels seen during 2008.

Globally, the UN reports that food prices during December were 25% higher than a year ago, and rose by 4% between November and December to record levels. While food inflation December remains relatively tame within the US, it is clearly a focus in developing countries such as China.

The trend in US food inflation rates during 2011 is expected to be higher – the CPI-Food is forecast to rise by 3.5-5% next year, while the PPI-Food is expected to gain 5-7%. Higher commodity prices have created a “cost bubble” within the US food system, and there is evidence that the costs incurred by food manufacturers and food service operators are likely to be passed on to consumers during 2011.

PPI –Food: The government’s report on wholesale prices is released around the middle of the following month, and reports on the change in a broad range of prices. During December 2010, the index of wholesale food costs rose by 3.5% from a year ago, outpacing the rate of food inflation at the consumer level for the 13th consecutive month . Based upon historical precedence, at some point during the next 6-12 months, these increases in wholesale costs will be passed on to consumers, implying higher rates of consumer food inflation during 2011.

The sharp rise in protein prices (except for chicken) are the most notable trend that has persisted – this is discussed in greater detail in the commodity section. Note that significant negative margins for the chicken industry at present are occurring (revenue near $.58 per pound vs. cost of production $.74). Thus it is likely that production cutbacks will tighten supplies and the wholesale prices for chicken should be expected to accelerate during the coming year as well.

Increasing “soft” commodity prices are translating into rising wholesale price for categories such as refined sugar (+14%) and coffee (+14%). Soyoil futures have increased by more than 50% since July, and the consequence is that the PPI for vegoil was 16% above a year ago during December.

Based upon sharp gains in most of the underlying commodities, the underlying strength in wholesale prices is likely to persist (if not accelerate) over the coming months.

The AES Food Input Cost Index is now 19% above a year ago, approaching record levels reached during 2008. The increase in the price of commodities listed below is consistent with the upward trend in commodity prices outside of agriculture (energy, metals, etc.). The “macro story” behind higher commodities is a weaker US dollar (aided and abetted by the Fed’s quantitative easing policy), as well as strong economic growth in China and other developing economies.

More specific to food commodities, an underlying driver behind the gains in most agricultural commodities has been increased corn prices. Corn is dominant among grains/oilseeds, and higher corn prices attract acreage away from other crops. At the same time, higher corn prices means higher feed costs for producers of proteins, dairy products and eggs. Growing ethanol demand and downward revisions to the US corn crop have resulted in corn prices surging to over $6, a gain over 69% over the past six months. Until the fundamentals change and corn prices retreat, there is limited downside for many of the commodities listed below.

Wheat prices have risen sharply since July as well, first driven by production shortfalls in Russia and subsequently by rising corn prices. Soybean oil prices are also up 50%, reflecting strong Chinese import demand (for both vegoil and soybeans) as well as increased use of US soyoil to produce biodiesel.

Protein availability in the US has shrunk sharply — since 2007 per capita meat supplies in the US have declined from 221 pounds to 206 pounds. Producer have reduced production during this period in response to weak domestic demand and rising feed costs. At the same time, rising exports and reduced meat imports have limited the available supply. The net result has been increased livestock prices during 2010 (live cattle +15%, live hogs +34% and broilers +7%) with additional gains expected during 2011.

Dairy prices rose sharply during 2010 – the average price of milk (farmer price) rose by 27% during the past year — butter prices rose by 40% during 2010, while cheese prices increased by a more modest but still sizable 17%. While milk output rose by 2% during 2010, exports of dairy product surged (+82% milk equivalent).

The net of these above trends (plus rising soft commodity prices) is that the gains we have seen during the past year are more likely to persist (or strengthen) than to reverse. Rising feed costs, strong demand from China, a weak dollar to encourage export demand, and at least modest continued improvement in consumer demand — combined, these all suggest more upward pressure on commodity prices during 2011 and beyond.

Advanced Economic Solutions – Bill Lapp

December 1st Update

Tuesday, December 7th, 2010

December 1^st, 2010 Update

Protein and Dairy Prices Drive Continued Acceleration In Food Prices

During October At Both Wholesale and Consumer Level

- CPI-Food gains 1.4% (vs. YA) during Oct, remaining relatively benign

- PPI-Food gains 3.6% (vs. YA) during Oct, led by protein/dairy price gains

- Underlying commodity prices continue to rise sharply, now 20% above YA

- Global Food Prices (Oct) rose 4% from last month and are 26% above YA

- Chinese food prices up 10% vs. YA during Oct, driving overall inflation to 4.4%

Consumer food prices increased during October by 1.4% (vs. a year ago), equal to

last month’s gain. Both “food at home” as well as “food away from home”

registered at 1.4% gain. Gains continue to be led by increases in the consumer

price of protein and dairy products.

Wholesale food costs remain both volatile but also relatively strong — the PPI-Food

rose by 3.6% during October (vs. a year ago); the index has gained an average of

4.5% over the past eight months, reflecting sharp gains in underlying commodity

prices. Increases in protein, dairy and soft commodities are the key drivers of the

acceleration in underlying prices.

PPI –Food: The government’s report on wholesale prices is released around the

middle of the following month, and reports on the change in a broad range of

prices. During October 2010, the index of wholesale food costs rose by 3.6% from a

year ago, with price gains averaging 4.5% since March. The volatility and strong

gains in wholesale prices are reflected in the table below — of the 20 items listed,

seven rose by 10% or more and three declined by 10% or more.

Pork continues to register the largest increase (+31%), but sharp gains in beef

(+14%), turkey (+16%) and dairy products (+14%) were also reported. With sugar

and coffee prices rising to extremely high levels, the PPI for refined sugar and

coffee registered gains of 23% and 11%, respectively. Likewise, a surge in vegoil

prices has resulted in the Producer Price Index for vegoils gaining 14% from a year

earlier. The gains in wholesale prices have been sustained for some time, and thus

it would seem inevitable that they will be passed on to consumers at some point in

the next 6-12 months.

Commodity Price Trends — The table below provides commodity price information

as of November 1, 2010, along with historic comparisons. This gives an indication

of commodity price trends, both short-term and longer-term. The AES index, listed

at the top, represents an average of the items listed below, index to 2000=100. The

AES Food Input Cost Index is now 12% above a year ago.

Each of these markets is driven to some extent by their own supply/demand

fundamentals. However two big-picture drivers continue to underpin the overall

price gains, particularly in recent months. First, the macro-economic environment

has been bullish commodities, due to strong economic growth in developing

economies as well as an implicit desire by the Fed to weaken the US dollar. The

second factor has been the 50% rise in corn prices over the past six months – which

has a) driven the price of other grains/oilseeds higher (due in part to competition

for the same acres), and b) driven feed costs for livestock and dairy prices higher.

The environment for commodities appears bullish going forward, although the

efforts by China to slow their economy could wipe out recent increases. The gains

already recorded have yet to be fully passed on to consumers, and are likely to be

the catalyst for higher rates of food inflation during 2011.

Source: Bill Lapp – Advanced Economic Solutions

October 15th Update

Monday, October 18th, 2010

Corn

The Oct 8^th USDA crop report dealt a huge surprise to upcoming yields to the corn corp. Crop futures increased dramatically after the US made surprise cuts to estimates for its corn and soybean yields and this has driven the market into another panic mode and frenzy.  Many expected a adjustment after the surprise in the Sept 30^th report however the adjustment in the most recent report are significantly lower than expected and came as a shock to both analysts and traders which has driven the panic.  Supplies are expected to remain tight on corn throughout the next year.  On Oct 13^th, the EPA announced that they will allow the use of a blend of up to 15% ethanol in vehicles 2007 or newer, though it appears the markets had already factored in the increase.

Soybean Oil

The recent USDA report also came as a shock to soybeans and soybean Oil as the soybeans yields were also lowered in surprising fashion.  Based on healthy reports from the fields over the last month, most analysts looked for higher yields and this has left many puzzled.  Even with the reduction in yield on soybeans, the upcoming crop is still forecast to be an all time record. Demand is forecast higher over the next 12 months and even with the record crop, ending stocks are forecast to decrease which fuels an increase in prices.  Soybean Oil usage for the upcoming 12 months is expected to increase dramatically due to exports and the fact that the USDA is still forecasting a 71% increase in BioDiesel year over year.  

Cheese

According to David Maloni with American Restaurant Association (http://www.americanrestaurantassociation.com);

“Exports have been very strong aided by the devalued US Dollar, international prices and export subsidies by the CWT.  Fresh cheese supplies (30 days and younger which are the only ones traded on the CME) are limited.  Domestic demand has been good aided by cheaper prices earlier this year.  Fat and protein solids in milk have been less than usual due to the hot summer.  Elevated butter markets are driving more milk away from cheese output and into butter output.”

Wheat

On Oct 8^th the USDA also lowered its forecast for American and global wheat inventories by more than the market had expected.  The inventory levels were decreased as the higher prices in corn will inevitably move some livestock feed users to wheat away from corn and increase the demand on the already strained world wheat supplies.

Chicken

The weakening of the US dollar could increase chicken exports and potentially drive the chicken leg quarter price higher.  With the recent dramatic increase in feed prices we will need to keep an eye on profitability as well as output from the larger poultry producers.

Cattle

Live Cattle prices have been relatively flat from Sept into Oct.  Producers could expect cost input pressure over the next few months which could cut production throughout the near term.

Crude Oil

Crude Oil prices have increased 7.3% since Sept and Oct is trending 5% higher than the YTD 2010 average.  This recent increase has primarily been driven by the devaluation of the US Dollar.  Supplies are considered adequate to more than adequate; however as the dollar declines global demand will continue to drive the barrel price higher.

US Dollar

The US Dollar index has decreased 6% in Oct versus Sept and is down 5% versus the YTD 2010 average.  Current Fed policy to put more money in the economy could drive the dollar lower over the near term and US commodities will most likely face upward pricing pressure.

For questions or for further information, please feel free to give us a call at

303-531-2680

October 1st Update

Monday, October 4th, 2010

October 1^st, 2010

Corn

Harvest is in full swing in the Midwest with a few brief rain interruptions.  Early yield reports are coming in under initial producer expectations in several locations.  Forecasted planted acreage is the second highest in the last 50 years and at current prices we could see this increase further for next year. 

The corn harvest is still forecast to be a record; however with tight feed supplies in numerous parts of the world due to various crop challenges, prices are expected to remain volatile for the foreseeable future. 

Soybean Oil

The soybean crop is still projected at a new historical record and more than 3.5% higher than the previous record set last year.  Soybeans and soybean oil have both been supported by increased exports specifically to China as they have absent from the U.S. bean market for a period of time.  This has caused unexpected increased demand which has driven the market dramatically higher in late September.  The drop in the US dollar value has also led to higher export demand and has further fueled domestic commodity prices. 

Cheese

According to David Maloni with American Restaurant Association (http://www.americanrestaurantassociation.com);

“Exports have been very strong aided by the devalued US Dollar, international prices and export subsidies by the CWT.  Fresh cheese supplies (30 days and younger which are the only ones traded on the CME) are limited.  Domestic demand has been good aided by cheaper prices earlier this year.  Fat and protein solids in milk have been less than usual due to the hot summer.  Elevated butter markets are driving more milk away from cheese output and into butter output.”

Wheat

Wheat prices have been drug down over the last week due to the appearance of a more balanced stocks to use ratio going forward.  Upcoming USDA reports will help us better understand world shortages, especially in the EU and FSU (Former Soviet Union).
Chicken

The weakening of the US dollar could increase chicken exports and potentially drive the chicken leg quarter price higher.  Russia is typically a large importer of US chicken; however due to various geopolitical issues, recent US exports to Russia have been drastically reduced.  Russia has stated many times over the last few years it is their goal to become independent from a protein standpoint and raise enough chicken and beef for its own domestic demand.  Early estimates indicated Russia was on track to become self sufficient for their chicken supply by 2013; however with the recent set back of wheat and barley feed due to droughts this could delay their independence further. 

Cattle

Retail beef prices have increased versus very deflated prices earlier in the year.

Beef slaughter rates for 2010 YTD are up year over year.  Two points of distinction from 2009 are that the percentages of cattle grading choice are up markedly above a year ago and recently the percentage of cattle grading prime is much higher than historical averages.  Beef exports also continue to improve versus historical averages.  Feed prices being at historical high levels could put further pressure on beef prices in the near future.

Crude Oil

The lack of US demand is currently stifling a large rise in energy prices at the present time; however with the US stated goal to double exports in the next five years; this is seen as likely to potentially devalue the US dollar further which could increase the overall cost for domestic commodity prices.

Bill Lapp – Advanced Economic Solutions                                        September 20, 2010

http://www.advancedeconomicsolutions.com/

Consumer Food Price Gains Continue to Edge Higher During August,

Driven By Larger Increases in Wholesale Food Costs

Consumer food prices increased during August by 1.0% (vs. a year ago), the largest

gain in 14 months and a continuation of a slight uptrend. This includes a 0.8%

rise in the price of “food at home”, and 1.2% higher prices for “food away from

home”. The CPI-Food has been gradually accelerating over the past ten months,

with the gain continuing to be led by gains in protein prices.

The monthly data continue to indicate a larger gain in wholesale food costs. The

PPI-Food rose by 3.8% during August (vs. a year ago), and has averaged a 4.6%

increase over the past six months. Surging pork costs (+31%) were a key driver,

but double-digit gains in wholesale prices were also recorded in several other

markets. The gain in wholesale prices remains consistent with the strong upward

trend in the underlying commodity price of those same items.

Higher rates of consumer food inflation in the US are coming, but the most rapid

gains are likely to be deferred until 2011. This reflects continued strong economic

headwinds, including high unemployment rates, fading consumer confidence, and

an extremely competitive environment both in retail and food service sales.

PPI –Food: The government’s report on wholesale prices is released around the

middle of the following month, and reports on the change in a broad range of

prices. During August 2010, the index of wholesale food costs rose by 3.8% from a

year ago, with price gains averaging 4.6% since March. As has been the case for

several months, the volatile nature of wholesale prices is reflected in the table below

– of the 20 items listed, 6 rose by 10% or more and 3 declined by 10% or more.

For questions or for further information, please feel free to give us a call at 303-531-2680

September 20th Update

Monday, September 20th, 2010

September 20th, 2010

Corn

The USDA lowered the upcoming corn crop yield as well as production estimates in the recent monthly Supply / Demand Estimates Report.  Corn outlook is still bullish.  US Supply is still abundant with a record crop expected for the upcoming harvest, however, there is talk of larger than expected exports due to the lack of feed for livestock in the Former Soviet Union and EU.

Soybean Oil

The USDA raised its estimate of the upcoming soybean harvest in the latest report, further increasing an already record soybean crop.  Export demand for the upcoming crop year has been increased however on anticipated above average demand from Asia.

Wheat

Wheat is still in a bull rally due to the true uncertainty of the Russian drought.  There have been very mixed reports coming out of Russia in regard to how long they expect the embargo to last.  This has kept US wheat markets very active over the last 45 days since the news hit the markets.

Chicken

The weakening of the US dollar could increase chicken exports and potentially drive the chicken leg quarter price higher.  Russia is typically a large importer of US chicken; however due to various geopolitical issues, recent US exports to Russia have been drastically reduced.  Russia has stated many times over the last few years it is their goal to become independent from a protein standpoint and raise enough chicken and beef for its own domestic demand.  Early estimates indicated Russia was on track to become self sufficient for their chicken supply by 2013; however with the recent set back of wheat and barley feed due to droughts this could delay their independence further. 

Cattle

Retail beef prices have increased versus very deflated prices earlier in the year.

Beef slaughter rates for 2010 YTD are up year over year and dairy cow slaughter rates have been a lower level than 2009.  Two points of distinction from 2009 are that the percentages of cattle grading choice are up markedly above a year ago and recently the percentage of cattle grading prime is much higher than historical averages.  Beef exports also continue to improve versus historical averages.  Feed prices being at historical high levels could put further pressure on beef prices in the near future.

Crude Oil

The lack of US demand is currently stifling a large rise in energy prices at the present time; however with the US stated goal to double exports in the next five years; this is seen as likely to potentially devalue the US dollar further which could increase the overall cost for domestic commodity prices.

The CPI increased 0.3 percent in August, the same increase as in July.

The Producer Price Index for Finished Goods increased 0.4 percent in August. This rise followed a 0.2-percent advance in July and a 0.5-percent decline in June.

For questions or for further information, please feel free to give us a call at 303-531-2680

The comments and data are provided for informational purposes only and are not intended to be used for specific trading strategies.  Past financial results are not necessarily indicative of future performance.  Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Any opinions or recommendations expressed are based upon information available to us and upon our general experience and judgment of commodity markets.  Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products.  Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including its content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors.  “Covered Parties” is defined as SpenDifference, LLC and the employees of the company.  Commodity trading involves risks, and you should fully understand those risks before trading.

Gains in Wholesale Food Costs Ease During June

Wednesday, August 18th, 2010

Each month the government reports on a broad range of wholesale prices. The report is released around the middle of the month reflecting the numbers of the previous month.  During June 2010, the government’s report indicates that the index of wholesale food costs rose by 2.4% from a year ago. This increase suggests a moderating from the gains of 5.0-6.8% during the previous three months.  The increasingly volatile nature of wholesale prices is reflected in the PPI-Food Detail table below. As the table shows, of the 20 items listed, 5 rose by 10% or more and 4 declined by 10% or more. Double-digit gains in wholesale prices were registered in protein, dairy and sugar costs. These gains are consistent with the upward trend in their respective underlying commodity prices over the past six months.

Large gains (vs. YA) were registered in protein and dairy costs; pork +27%, beef +15%, fish +11% and dairy +14%.  Although the underlying protein and dairy commodity markets have eased over the past 60 days, these costs are now being passed through to the wholesale segment of the food chain.  The sharp gain in refined sugar prices is also notable at +19%, reflecting multi-decade highs in pricing.

In contrast, significant declines in wholesale prices were posted for fresh vegetables -11%, eggs -16%, milled rice -13% and corn sweeteners -13%.  These indices are likely to remain volatile over the next 3-6 months, although some of the dramatic weather-related pricing moves that have impacted the fruit and vegetable markets may be largely behind us.

Trends in Commodity Prices

The table below provides commodity price information as of July 12, 2010, along with historic comparisons.

This gives an indication of commodity price trends, both short-term and longer-term.  The AES index, listed at the top of the table, represents an average of the items listed, index to 2000=100.  The AES Food Input Cost Index is now 22% above a year ago, but remains nearly 17% below peak levels reached during mid-2008.

The index of commodity prices has begun to move higher over the past month, including significant gains in grains vegoil over the past month.  Weather-related events and recent USDA reports are helping fuel the gains in corn, wheat, and soybean markets.  Soft commodities including, coffee, cocoa, and sugar, as well as proteins and dairy product prices remain well above a year ago.

We will continue to monitor and analyze wholesale prices and trends throughout the second half of 2010.

Bill Lapp

Consumer Food Inflation Remains Modest

Wednesday, August 4th, 2010

Remaining consistent with the previous month, Consumer Food Inflation (CPI-Food) rose by 0.7% during June from a year ago. This increase is equal to last month’s reported gain and includes at-home food prices as well as away-from-home food prices. The CPI indicates an increase of 0.2% from a year ago in at-home prices as well as a 1.2% gain in away-from-home food prices.  By item, the largest gains were found in beef and pork, each rising by more than 4%. Consumer dairy prices also rose by nearly 2%, reflecting gains in wholesale dairy costs.

However, in spite of these reported gains in consumer protein and dairy prices, the CPI-Food remains relatively benign. Of the 18 items listed in the CPI-Food Detail below, 10 items reported year-to-year declines during June.  The underlying commodity market behind many of these items has been rising for several months.  However these costs are not yet being “pushed” through the food chain to the consumer in most cases.

For now, economic circumstances and the economic environment have become the dominant drivers of consumer food prices.  Until some of the economic metrics begin to improve, most notably unemployment and consumer confidence, consumer food price gains are likely to lag behind the gains already being experienced in wholesale costs. While higher rates of consumer food inflation are coming with higher input costs ultimately passed on to consumers, the most rapid gains in the CPI-Food may be deferred until 2011.

The BLS reports both “at home” and “away-from-home” sub-index values for the CPI-Food.  In calculating the index for the CPI-Food, at-home has a 57% weighting and away-from-home has a 43% weighting.   The history of the change in these two indices is shown in the table below.

Detailed item-by-item data for products consumed at home is collected and reported each month as can be seen in the table below.  By contrast, the BLS provides little detail regarding away-from-home dining.  While changes in prices at restaurants and other food service establishments are important to understand, the BLS data provides only limited directional guidance.

Bill Lapp

Advanced Economic Solutions