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eNews from Thursday, August 23, 2007

Soyatech Feature: Food and Commodity Price Increases, U.S. Soybean Crop - Advanced Economic Solutions' Monthly Update

Food Inflation Indicators

Food inflation rates have been on the rise over the past 6 months, both at the consumer level as well as the wholesale level.  Wholesale prices, as measured by the Bureau of Labor Statistics Producer Price Index for Food, have had an average gain of 7.2% over the past 6 months.  The rise in prices has been broad-based, and more a function of the overall rise in commodity prices than any one-time weather event.  



Consumer prices for food (as measured by the CPI-Food) have been rising at a 5.1% rate over the past 6 months.  With the continued pressure on costs (as reflected in the PPI-Food), it appears likely that higher rates of food inflation are likely to remain in place for the remainder of 2007 and into 2008.

The AES index of food input prices parallels the rise in the PPI-Food in recent months.  The index, an average of 21 inputs commonly used in food production, has risen by 17% during the first half of 2007.  Several of the markets tracked in the AES index have had year-to-year gains of over 30% (including dairy, eggs, cocoa, corn and vegoil).



There are several reasons for the sharply higher prices, but at the core is corn, the largest and most important of agricultural commodities.  More analysis of corn is provided later in this report, but the higher corn prices reflect the strong growth in the use of corn for ethanol, and thus the need to plant more acreage.

Overall commodity prices (agricultural and non-agricultural) have risen sharply since 2002.  The leader in the overall surge has been crude oil, where prices of $70-80 per barrel are about triple the level normally seen during much of the past 25 years.  The CRB index of 18 commodities (graphed below) has declined about 10% over the past year but remains about double the level seen in early 2002. 

CRB Commodity Price Index




One of the primary catalysts for the spectacular rise in commodity prices has been the strong global economic growth in recent years.  Since 2003, world GDP (adjusted for inflation) has risen by an average of 3.4%, with favorable economic conditions in developed economies, as well as developing economies.  Note that over the past 5 years, real GDP has risen at an annual rate of over 10% in China.

A second factor has been the weakness in the value of the US dollar relative to other currencies around the world.  With a substantial trade deficit and relatively low inflation and interest rates, the trade-weighted value of the US dollar has declined by 50% since 2002.  The current financial challenges in the US housing market could result in a 25-50 basis point decline in short-term interest rates, and this would add to the decline in value of the US dollar. 

Trade-Weighted Value of US Dollar




USDA 1st Estimate of 2007 US Soybean Crop: 2625 mm

The USDA’s first official forecast of the 2007 US soybean crop was 2625 mm bushels, based upon a national average yield of 41.5 bushels per acre.  This represents a decline of 18% from last year, due to a 15% reduction in planted acreage and slightly lower yields.  Trade estimates for the report ranged from 2550 mm to 2722 mm, so the actual report was not a significant surprise.  


This USDA forecast is based upon conditions as of August 1, and of course the outcome of the crop will change based upon weather events up until around September 10.  The USDA is rating 56% of the crop good or excellent as of August 6, or about average.  The heat facing the Midwest is likely to reduce yields in the next USDA report.  Note that historically the average change in the USDA August crop estimate to the final is 6.7% (equal to 175 mm bushels in 2007).  During the past 20 years the crop has declined from August to the final in 12 years or 67% of the time.  While the USDA August forecast is useful, the potential for change in the coming months will keep soybean futures volatile.


USDA Supply/Demand Estimates

The USDA lowered their forecast for 06/07 ending stocks from 600 mm to 575 mm bushels, based upon increased old crop demand for both exports and crush.  This resulted in a reduced ending stocks estimate for 07/08 as well, declining from 245 mm to 220 mm.  This equates to 7.4% of usage, a relatively tight supply/demand situation for soybeans.  Until the crop size is more clearly defined, there remains a risk that demand will need to be rationed (through higher prices) during the 2007/08 crop year.

The soyoil supply/demand was “loosened” in this report – stocks at the end of the 06/07 crop year are now forecast to total 3060 mm pounds (vs. 2940 last month), while the 2007/08 forecast of ending stocks of soyoil was raised from 2105 mm to 2225 mm pounds.  Historically, 3 B pounds is an extremely large ending stocks total, while 2.2 B pounds would be near the long-term average for ending stocks.


Bio-Diesel Demand for Soyoil Remains Strong

Monthly data continue to show an upward trend in the use of soyoil for bio-diesel production (“methyl ester” use).  During June 2007, soyoil used for bio-diesel is reported at 254 mm pounds, up 45% from a year ago.  For the October-September 2006/07 year, we are on track to reach 2.5 B pounds, a 61% gain from last year.  This means bio-diesel will represent 12% of total soyoil use in 06/07.  With domestic food use unchanged in 06/07, bio-diesel will represent all of the growth in demand this year.  The USDA is forecasting a 40% increase in bio-diesel use of soyoil in 07/08 to 3.5 B pounds (equal to 16% of use).


Although margins for bio-diesel have been below break-even for several months, capacity continues to climb.   While soyoil use for bio-diesel will total 2.5 B pounds in 06/07, the National Bio-Diesel Board estimates that as of June 2007, there were 148 plants with the capacity to use over 5 B pounds of soyoil annually in the production of bio-diesel.


Focus on South American Soybean Acreage / Production

The market is already looking forward to the potential for South America (Brazil and Argentina) to expand planted acreage and offset the loss of soybean acres in the US.  Brazil and Argentina are forecast to increase area planted to soybeans by 4% and 6% respectively.  Brazil has the greater potential to expand planted soybean area, but the strength in Brazil’s currency (the real) means the incentive to grow more soybeans is not as strong as it would appear.

-by Bill Lapp, President - Advanced Economic Solutions

(c) 2007 Advanced Economic Solutions

This monthly report is produced for the Soyatech eNews and may not be subsequently reproduced in any form without express written permission from the copyright holder, Advanced Economic Solutions.

For more insights from Bill Lapp, register today for the Soya & Oilseed Summit (www.soyasummit.com) to be held Nov. 11-13 in Chicago. Mr. Lapp will present the opening talk "Competition for Commodities: Trends in the U.S. and Global Marketplace" and he will also sit on the closing panel, "Food vs. Fuel: Evaluating an International Issue."

 

 

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