On a seasonally adjusted basis, the U.S. Consumer Price Index decreased 1.0 percent in October after being virtually unchanged in September, according to the Bureau of Labor Statistics.
The consumer price index for all items less food and energy decreased 0.1 percent in October after increasing 0.1 percent in September.
The Producer Price Index for Finished Goods fell 2.8 percent in October, seasonally adjusted. This decrease followed a 0.4-percent decline in September and a 0.9-percent fall in August.
Prices for goods other than foods and energy rose 0.4 percent for the second consecutive month.
Source: Bureau of Labor Statistics
“Final production estimates for U.S. corn and soybean crops will be released in January by the USDA. Until then, prices will be influenced by the development of Southern Hemisphere crops; the pace of consumption; and general demand as reflected in the financial, currency, and energy markets.”
The USDA’s final production forecasts for 2008 U.S. crops include a corn crop of 12.02 billion bushels and a soybean crop of 2.921 billion bushels. Those forecasts reflect U.S. average yields of 153.8 and 39.3 bushels, respectively.
The forecast size of the corn crop is 13 million bushels smaller than the revised October projection and 46 million bushels smaller than the average trade guess. The average yield forecast is 0.1 bushel below the October forecast.
For the corn supply and demand balance sheet, some revisions were made in both the 2007-08 estimates and the 2008-09 projections. For last year, the estimate of the amount of corn used for ethanol was increased by 26 million bushels, offset with a 25 million bushel reduction in the estimate of feed use.
For the current year, the projection of exports was reduced by 50 million bushels, to only 1.9 billion. That forecast is 536 million, or 22 percent, below the record exports of last year. The lower projection reflects the sluggish pace of exports and export sales experienced so far this year and the large grain crops outside the United States.
Coarse grain production outside of the United States is now projected at a record 767.9 million tons, two million tons larger than the October forecast and 41 million tons larger than last year’s production.
Wheat production outside the United States is projected at 614.3 million tons, 2.2 million tons larger than the October forecast and 60 million tons larger than last year’s production.
Stocks of U.S. corn at the end of the current marketing year are projected at 1.124 billion bushels, 500 million less than the inventory on Sept. 1, 2008, but 36 million larger than the October forecast. The 2008-09 U.S. average farm price is forecast in a range of $4 to $4.80, compared to the average of $4.20 received for the 2007 crop.
The forecast size of the 2008 U.S. soybean crop is 17 million bushels smaller than the October forecast and about five million larger than the average pre-report guess.
The U.S. average yield forecast is 0.2 bushel below the October forecast and the lowest yield in five years.
“The USDA’s projection of the 2008-09 domestic soybean crush was reduced by 15 million bushels, resulting in an unchanged forecast of year-ending stocks. The projection of marketing year exports was left unchanged at 1.02 billion bushels despite the fast start to the 2008-09 export program. The projection is 12 percent smaller than the record shipments of a year ago.
“Through the first 9.5 weeks of the year, export inspections were about 3 percent larger than those of a year ago.”
Unshipped sales as of Oct. 30 were 27 percent larger than the outstanding sales of a year earlier. The forecast size of the 2009 Brazilian soybean crop was reduced by 92 million bushels. That is about 37 million less than the 2008 harvest.
The projection of Brazilian soybean exports during the current marketing year was reduced by 55 million bushels. Argentine production in 2009 is still projected to be 158 million bushels larger than in 2008. The projection of 2008-09 Argentine soybean exports was increased by about 30 million bushels from the October projection.
The 2008-09 U.S. average farm price of soybeans is now projected in a range of $9.10 to $10.60, 60 cents lower than the October projection. The average price received last year was $10.10.
Source: University of Illinois College of Agricultural, Consumer and Environmental Sciences.
U.S. productivity rose 1.1 percent in the nonfarm business sector in third-quarter 2008, as hours fell faster than output, according to the Bureau of Labor Statistics
Unit labor costs grew 3.6 percent.
Manufacturing productivity declined 1.0 percent; unit labor costs increased 6.1 percent.
All rates are seasonally adjusted annual rates.
Dairy producers likely face negative profit margins this year as feed costs exceed milk prices, according to a University of Illinois Extension study.
“Higher feed costs will be the reason for the decrease in returns,” said Dale Lattz, U of I Extension farm financial management specialist who prepared the study, “Returns Exceed Costs for Dairy Producers in 2007, Profit Margins Likely to Turn Negative in 2008”
“Milk prices are also expected to average slightly lower than in 2007.”
Last year, however, was a good year for Illinois dairy producers, the study indicated.
“Higher milk prices in 2007 more than offset higher costs, resulting in returns exceeding total economic costs. The average price received for milk in 2007 was 46 percent higher than the average in 2006.
“The average milk price for 2008 is projected to be about 3 percent less, or about 60 cents less per hundredweight, than the average for 2007.”
Continued strong domestic and international demand for dairy products has helped keep milk prices strong even with increased supplies. U.S. milk production is expected to increase about 2.2 percent in 2008 due to an increase in the number of milk cows and increased milk production per cow.
In 2007, milk production per cow for all herds in Illinois averaged 20,702 pounds. The average was 1,227 pounds more per cow than in 2006. The highest level was in 2001 when milk production was 20,715 pounds per cow.
But while milk prices are expected to remain fairly constant through the rest of 2008, feed costs are expected to increase significantly.
“Corn and soybean prices remained high most of the year. Feed costs per 100 pounds of milk produced would average about $11 using prices of $4.75 per bushel for corn, 21 cents a pound for protein, and $130 a ton for hay. This is based on annual feed consumption per cow, including replacement animals of 123 bushels of corn, 4,362 pounds of protein, and 8.2 tons of hay or hay equivalents.
“If non-feed costs per 100 pounds of milk produced averaged $9.50, total costs to produce 100 pounds of milk would be $20.50. A 3 percent decrease in milk prices in 2008 for Illinois producers would result in an annual price of about $18.25 per 100 pounds.”
Combining total economic costs of $20.50 per 100 pounds produced would leave the average Illinois producer with total economic costs exceeding returns in 2008 by $2.25 per 100 pounds of milk produced.
Source: Illinois College of Agricultural, Consumer and Environmental Sciences.
Purdue University Extension marketing specialist Chris Hurt has some simple advice for nervous cattle producers: don’t panic.
“Odds favor a recession and not a depression. Understanding the magnitude of the recession is becoming easier as the impacts of the past few weeks affect consumer spending, business investment decisions, and trade.
“Markets often anticipate the worst, and if the worst does not occur, there is some recovery. That may well be the direction for the cattle markets as well. If so, this would enable cattle prices to recover several dollars per hundred, but feed prices would be expected to rise as well.”
The U.S. cattle market, along with U.S. agriculture in general, is caught in the web of uncertainty created by the financial crisis of 2008.
“Both domestic and foreign demand for beef is related to consumer incomes. “Where the U.S. and world economies go is expected to plot the direction for cattle prices. As a consequence, beef supply fundamentals seem less important to prices, at least for now.”
The U.S. stock market, as measured by the S&P 500 index, was down 23 percent from Sept. 26 to Oct. 17. The impact on the cattle market was robust as well with December live cattle futures falling 10 percent and the price of finished cattle falling $8.50 per live hundredweight.
“The recent financial losses for the cattle industry were particularly large for feedlots that did not have finished cattle forward-sold, especially those who had purchased high-priced calves and high-priced feed this past summer.
“The most likely group in this category is small-farmer feedlots as many large commercial feedlots have a greater tendency to have cattle forward-sold. The negative financial impacts on cow-calf producers have been somewhat less in recent weeks as November feeder cattle futures fell only 7 percent.”
Looking forward, the current decline in feed prices has been a huge advantage in reducing costs of finishing cattle and helped to keep the declines in calf prices more moderate.
“Feed prices have fallen by a much larger percentage than have cattle futures. During the last three weeks, December corn futures fell by 25 percent, with December soybean meal futures down 20 percent.”
Beef demand and cattle prices are directly impacted by consumer incomes. The current financial crisis may reduce those incomes and, therefore, cattle prices.
“The magnitude of the decline in incomes will influence the magnitude of the decline in cattle prices. The last two recessions in the U.S. were very mild. This recession may be more severe, more like the recessions of 1974 and 1975 and again in 1981 and 1982 when real Gross Domestic Product (GDP) dropped near 3 percent.
“A drop of that magnitude this time could have a $4.50 to $5 per hundredweight negative impact on live cattle prices, not as much as prices have already dropped. This would suggest that the live cattle futures decline of $10.25 per hundredweight over the past three weeks is too much.”
At present, the leading indicator for the cattle sector is probably the stock indexes. If there is a general improvement in global financial concerns, those will be quickly reflected in stock prices. Indicators today say that the credit crisis is easing somewhat and money flow between banks is beginning to improve some.
“The odds of a financial collapse are now somewhat lower as the governments of the world’s major economies have pledged to make sure the collapse will not occur.”
For the cattle producer, buying feed at this time is a consideration with both harvest and a financial crisis weighing on grain prices.
“That has to be done with a view to the risk-bearing ability of the individual firm. In these uncertain times, locking in feed costs without pricing output leaves one in a vulnerable position if the recession is worse than anticipated.
“Taking positive margins by establishing both input and output prices is always the more comfortable strategy in uncertain times.”
Recovery in finished-cattle prices to the low-to-mid $90s would seem to be the most likely possibility in coming months. A recovery of $5 to $7 per hundredweight might be appropriate to expect for feeder cattle and calf prices as well.
Source: University of Illinois College of Agricultural, Consumer and Environmental Sciences.
With the supply side of the corn and soybean price equation becoming more settled, price direction will now come primarily from the demand side, where there are some positive developments, according to University of Illinois Extension marketing specialist Darrel Good.
“Export sales for the week ended October 2 were relatively large and well above the weekly pace needed to reach the USDA projections for the year. Feed prices are now low enough that livestock feeding margins are generally profitable, ethanol production margins exceed operating costs, and low prices will not encourage a large supply response in the southern hemisphere.
“It appears that value now exceeds the price of corn and soybeans. For those prices to stabilize and/or rebound, confidence in the financial markets will have to be demonstrated. In late June, we were asking if the highs were near, now the question is whether the lows are near.”
Corn and soybean prices have been pummeled by negative fundamental news since early September. In addition to larger production forecasts, corn and soybean prices have continued to be pressured by declining stock prices and energy prices that threaten demand prospects.
The USDA’s October Crop Production report that report contained a 2008 soybean production forecast of 2.983 billion bushels, 49 million larger than the September forecast and 63 million larger than the average pre-report guess.
“Despite a three bushel increase in the forecast of the Illinois average yield, the forecast of the U.S. average yield, at 39.5 bushels, was 0.5 bushels below the September forecast. That forecast is 2.2 bushels below the 2007 average and would be the lowest average yield in five years.
“The larger crop forecast was the result of a larger acreage estimate. At 76.983 million, planted acreage is 2.2 million above the previous estimate. The harvested acreage forecast of 75.479 is 2.138 million above the September forecast.”
In the USDA’s revised supply and demand projections, the larger crop forecast was partially offset with a 36 million bushel increase in projected use during the current marketing year. Year ending stocks are now projected at 220 million bushels. Based on current projections, an increase in U.S. soybean acreage will not be required in 2009. If the 2009 yield is near 42.5 bushels, harvested acreage at this year’s level would result in a crop of 3.208 billion bushels.
“If year ending stocks can be reduced to about 125 million bushels, then 3.31 billion bushels would be available for consumption during the 2009-10 marketing year. That would be 335 million above projected use for the current year and 237 million above the record consumption of 2006-07. If the 2009 South American crop lives up to current expectations, world supplies would likely be sufficient with a two to three million acre reduction in U.S. acreage in 2009.”
For corn, the 2008 U.S. crop is now projected at 12.2 billion bushels, 128 million bushels larger than the September forecast. Planted acreage of corn is now estimated at 86.909, 68,000 less than the previous estimate, while area harvested for grain is estimated at 79,197 million acres, 93,000 below the September forecast.
The U.S. average yield is forecast at 154 bushels, 1.7 bushels above the September forecast, reflecting higher yield prospects in the major producing states of Illinois, Iowa, Kansas, Minnesota, and Nebraska. Yield prospects declined in Indiana, Ohio, and South Dakota.
On the consumption side of the equation, the USDA increased projected use during the current marketing year by 40 million bushels. The projection of feed use was increased by 150 million bushels and the forecast of processing uses of corn was reduced by 110 million.
“Most of that reduction, 100 million bushels, was in the ethanol category. Year-ending stocks are projected at 1.154 billion bushels, 136 million above the September forecast. The projected level of year ending stocks is relatively small and would force a reduction in use during the 2009-10 marketing year unless production is increased in 2009.”
“The major implication of the October corn and soybean production forecasts is that there may not need to be much of an acreage battle in 2009. However, corn prices will have to be high enough in relation to soybean prices to motivate a modest acreage shift.”
Source: University of Illinois College of Agricultural, Consumer and Environmental Sciences
The implications of the current meltdown in U.S. credit markets is a major concern for agricultural commodities because it calls into question the potential for economic growth in the United States and the rest of the world, according to University of Illinois Extension marketing specialist Darrel Good.
“That concern is reinforced by the sharp decline in stock prices and underlying economic indicators such as unemployment rates and housing starts. Prospects of an economic slowdown threaten the robust domestic and export demand for U.S. agricultural commodities enjoyed over the past two years.
“A widespread economic slowdown could result in weaker demand for meat and for livestock feed. In addition, an economic slowdown might contribute to a weaker demand for crude oil and further declines in the prices of unleaded gasoline. Lower gasoline prices imply lower ethanol prices which imply lower breakeven corn prices for ethanol producers.”
Corn and soybean prices have dropped sharply over the past two weeks, continuing the slide from the early summer peaks. The decline in December 2008 corn futures now exceeds $3.60 and the drop in November 2008 soybean futures is nearly $7.
“Some of the recent decline reflects the larger supplies revealed in the USDA’s September Grain Stocks report. That report revealed Sept. 1 inventories of soybeans of 205 million bushels. That is about 55 million more than expected after the release of the Census Bureau estimate showing August 2008 crush about 15 million bushels lower than expected.”
The year-ending inventory resulted in a 91 million bushels increase in the estimated size of the 2007 crop. The increase reflected more acres and higher yields than earlier estimated.
“It was generally believed that the crop estimate would be increased enough to bring residual use up to a normal level. The large year-ending stocks were a definite surprise.”
Sept. 1 inventories of corn were estimated at 1.624 billion bushels, 48 million bushels larger than projected in USDA’s September supply and demand report. Summer corn feeding may have been less than expected due to feeding of low-priced wheat.
In addition to larger year-ending stocks, larger corn and soybean production estimates by some private forecasters and an accelerating pace of harvest have added supply-side pressures to prices. The USDA will release new production forecasts on Oct. 10.
“While supply issues are at play, much of the recent decline in prices reflects concerns about the current and future demand for corn and soybeans. The current pace of exports and export sales of corn, for example, is especially slow.
“The USDA projects a 17.5 percent year-over-year decline in exports, but current export commitments are 37 percent less than those of a year ago. The pace of soybean export commitments exceeds that of a year ago by 4 percent, even though USDA projects a 13.4 percent decline for the year. The pace of new sales, however, has declined relative to that of a year ago every week since the middle of August. The smaller-than-expected domestic soybean crush in August also suggests that demand for soybean meal is softening.”
Even with the legitimate concerns about demand, prices may well get overdone on the low side as traders adjust to the new developments.
“The problem, of course, is that the extent and magnitude of any economic slowdown and demand weakness for agricultural commodities is not known. The overreaction of prices to the high side this spring was confirmed when weather patterns changed and the extent of crop losses became clearer. That happened in a relatively short period of time.
“The U.S. and world economic situation may take much longer to sort out.”
Current corn and soybean prices project to very tight margins for producers for the 2009 crop, particularly for those with high land costs.
“Prices are not likely high enough to generate any increase in acreage in 2009, but if demand weakens sufficiently, an increase may not be needed. For the 2008 crop, the lower prices now being experienced may be partially offset by insurance payments, particularly for soybeans, for those who have revenue insurance products.
“For those who decide to hold inventory in anticipation of an eventual price recovery, the Commodity Credit Corporation (CCC) loan program can be a source of some cash flow.”
Source: University of Illinois College of Agricultural, Consumer and Environmental Sciences
Early USDA forecasts for the 2008-09 corn and soybean marketing year project substantial declines in U.S. exports from the record levels reached in the 2007-08 marketing year,
The sharpest decline is projected for corn. The USDA currently projects U.S. corn exports for the marketing year that just ended on August 31, 2008, at 2.425 billion bushels. U.S. corn export inspections as of August 31 totaled 2.337 billion bushels, and exports reported in the weekly U.S. Export Sales report through August 28 totaled 2.349 billion bushels.
Census Bureau estimates are only available through June 2008. At that juncture, cumulative Census Bureau estimates exceeded inspections by 81 million bushels and estimates in the U.S. Export Sales report by 55 million bushels. If that margin persisted through August, exports will be near the USDA projection. Exports of 2.425 billion bushels would be record large, according to University of Illinois marketing specialist Darrel Good.
“For the 2008-09 marketing year, the USDA projects U.S. corn exports at 2 billion bushels, or nearly 18 percent below exports of the year just ended.”
A number of factors point to prospects of weaker demand for U.S. corn. Both wheat and coarse grain production outside the United States are expected to be record large in 2008-09. Foreign wheat production is forecast at 603.4 million tons, nearly 9 percent larger than the 2007-08 crops. Feed use of wheat outside the United States is projected at 113 million tons, nearly 17 million tons more than fed last year, he said.
“Most of that increase is expected in the European Union (EU). That increase results in a projected decline in EU corn imports of 354 million bushels. Although the United States exports virtually no corn to the EU, the decline in import demand makes more corn from other sources available to the world market.”
The USDA projects 2008-09 foreign coarse grain production at 760.3 million tons, nearly 5 percent larger than production in 2007-08. Fifty-eight percent of the year-over-year increase in foreign coarse grain production is corn. Larger corn exports are projected for South Africa and the Ukraine,.
The strengthening U.S. dollar is also generally believed to be a negative factor for demand for U.S. corn. Although such expectations appear logical, there is not a strong statistical relationship between the value of the U.S. dollar and U.S. corn export volume, Good said.
A more serious concern about export demand may stem from prospects of a broader economic slowdown that could slow the rate of increase in world meat demand and therefore the rate of increase in corn feeding.
“As of August 28, the USDA reported that 359 million bushels of U.S. corn had been sold for export during the 2008-09 marketing year. That is nearly 30 percent less than sales at the same time last year.”
Early sales do not always provide a good forecast of marketing year exports, but at a minimum, importers are buying at a much slower pace so far this year compared to both 2007 and 2006, he said.
For the year ended August 31, 2008, the USDA expects U.S. soybean exports to have totaled a record 1.145 billion bushels. Export inspections through August 31 totaled 1.116 billion bushels, and cumulative exports reported in the U.S. Export Sales report through August 28 totaled 1.117 billion bushels, Good said.
Through June, however, cumulative Census Bureau export estimates exceeded USDA estimates by about 35 million bushels.
For the 2008-09 marketing year, the USDA projects U.S. soybean exports at one billion bushels, or nearly 13 percent less than was exported during the year just ended.
“The decline reflects expectations of a small decline in total world exports and larger exports from Argentina and Brazil. Imports by China are expected to account for 47 percent of total world imports but are expected to be only about 1.5 percent larger than imports in 2007-08.“That follows a 23 percent increase last year,” he noted. “Chinese consumption of soybeans is expected to increase by nearly 5.5 percent, but the larger harvest there this year will slow the rate of import growth.”
Through August 28, the USDA reported that 279 million bushels of U.S. soybeans had been sold for export during the 2008-09 marketing year. That is an 11.5 percent increase from outstanding sales of a year ago.
Source: University of Illinois College of Agricultural, Consumer and Environmental Sciences
More pork is being produced in the United States but less is available for U.S. consumers, according to Purdue University Extension marketing specialist Chris Hurt:
“What does more pork production but less available for U.S. consumers mean? Pork exports grew by 68 percent in the first half of the year and imports fell by 15 percent meaning that 1.1 billion pounds less pork was available for domestic consumers.
“By the second quarter, U.S. pork production was 9 percent higher, but U.S. consumers had 6 percent less pork available to consume.”
This has been a remarkable year for the U.S. pork industry. Saddled with extraordinary feed and energy prices and producing 20 percent more pork in the first half of the year, profits seemed a distant dream.
“Salvation has come in the form of international trade as cheap U.S. pork, subsidized with producer losses, and the weak dollar have made pork trade more important than exports are for the corn market.
“For the 2007-08 marketing year, corn exports represented 19 percent of total corn use. For 2008-09, current USDA forecasts are for exports to represent only 16 percent.
“Pork exports, in contrast, are forecast by the USDA to represent 23 percent of U.S. production in 2008 and 22 percent in 2009.”
While trade has been the salvation of the pork industry in 2008, it also presents vulnerabilities as the U.S. industry has become dependent on these trade impacts to continue.
The anticipated favorable pork trade and the potential for declining U.S. pork production into 2009 provide a bullish tilt on pork and live hog prices. Per capita supplies available for U.S. consumers are expected to be down by 8 percent in the current quarter and down 10 percent in the fourth quarter.
For all of 2008, per capita pork supplies available to U.S. consumers will be down about 5 percent. Supplies will drop an additional 2 to 3 percent in 2009, making pork available to U.S. consumers relatively tight over the next 18 months.
“What might go wrong? The export surge has been led by China which in the past has had some unpredictable trade patterns. In the first half of 2008, the increased pork shipments to China and Hong Kong represented 50 percent of the increased pork sales.”
Hurt noted there are at least three concerns in regards to China.
“China has primarily had a policy of self-sufficiency in food production in the last decade with the exception of soybeans and soy products. The question of whether China is making a fundamental shift away from self-sufficiency and toward some dependency on imported pork could have profound implications for the U.S. pork industry.”
Russia provides another source of concern with regard to continued strong pork trade. Russia accounted for 13 percent of the increased pork exports in the first half of the year. Russia tends to be a “value shopper,” Hurt noted.
“They look for the lowest-priced source of animal protein. As the price of U.S. pork rises, the attraction for Russia will be reduced.”
As there has never been this large influence on pork price from international trade, there is little historical experience for evaluating the impact on hog prices. As a result, the futures market rather than a computer model is used to forecast prices for 51 to 52 percent lean carcasses.
“Prices drop from their current low $60s into the very high $50s into September. The final quarter of the year will average in the mid-$50s with recovery into the higher $50s for the first quarter of 2009. The highest prices will be in the spring and summer of 2009, with averages in the mid-$60s.
“Prices then drop seasonally into the higher $50s for the final quarter of the year. This would provide 2008 price averages of about $511.50, the highest yearly average since 2004. In 2009, all price records would fall with an average in the low $60s for the year and record-high prices for each quarter.”
Can hog producers compete for high corn prices?
“Yes, if these hog price forecasts hold, then hog producers will able able to pay about $6.25 per bushel for corn in 2009 and still break even compared with only $4 in calendar years 2007 and 2008.
“But to get to this strong competitive position three conditions must occur: pork producers must continue to reduce farrowings somewhat; our foreign customers must continue to buy U.S. pork; and crude oil prices need to stay under $140 per barrel in order to compete with ethanol processors for corn.”
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