July 30, 2012


Reduced US corn, soy production increases Europe meat prices



The current US drought has reduced the country's harvest expectations, pushing grain and soy prices to record highs and making meat more costly in Europe, as the price for feeding animals rises.


Poultry, pork and beef companies in Europe are dependent on these prices for feed, which accounts for 50% to 70% of their cost of production.


The USDA estimated that corn production in the US declined 12% in July, while soy production fell around 5%. The US is the largest producer of corn and soy, and the drought, the worst in 56 years, is depressing global supplies and driving prices higher.


The drought-driven rally for grain prices spells trouble for industry margins, as Europe's meat sector hasn't found a remedy for such swings, and can only pass on higher prices to consumers.


While corn and soy crops would benefit from more rain, corn has less room to benefit this season because it has finished its pollination phase, which determines the number of kernels produced. Soy needs rain in the next few weeks, as plants will be filling their pods with beans.


The condition of both crops in the US Midwest continued to deteriorate last week, the USDA said. It said only 26% of the corn crop was in good-to-excellent condition, down 5% points from the week before. Soy dropped 3% points to 31%.


Crops in Iowa and Illinois are particularly poor due to patches of irreversible drought damage, Commerzbank said, although it noted that a good Chinese corn crop is expected to reduce that country's import needs, which could ease the grain's global situation somewhat.


However, severe drought and disease in South America has already placed strong demand on US soy inventories, as the region is usually the top supplier of soy from March to August, before the US harvest hits the market.


The UK usually purchases its soy from Brazil, but has already bought 112,000 tonnes from the US for delivery during 2012-2013 because of the drought in that region. The shipment is the largest the UK has bought from the US in five years on an annual basis and reflects tight world supplies.


Citigroup has warned that weather forecasts suggest US soy yields may fall further at the end of July and the beginning of August, exacerbating the situation.


"The next two weeks are going to be a critical time period -- if we don't get a substantial amount of rain to increase quality, then the market response could potentially be even more explosive than we've already seen," said Erin FitzPatrick, commodity analyst at Rabobank.


Front-month soy for August delivery fell 38 1/2 cents, or 2.3%, to US$16.55 3/4 a bushel at the Chicago Board of Trade on July26, after having hit an all-time closing high of US$17.57 1/2 on July 20. The lowest close of the last few months was registered on both May 31 and June 4 at US$13.40.


Soy consumption has been remarkably strong recently, supported by Chinese demand. China's 5.6 million tonnes of imports in July were the highest since November 2011, rising by 31% on the year.


Barclays said acreage devoted to soy in China is lower for a third successive year in 2012 as farmers increase domestic corn production, which bodes well for higher 2012-13 soy imports.


As such, the potential for poor soy output from the US points to rationing, with higher prices needed to reduce short-term demand -- at least until South America returns to the market in early 2013.


European processors will have to buy more expensive raw materials as feed, while also facing resistance from retailers to pass on higher costs, which means many are set to reduce the size of their herd.


"Given current economic conditions the consumer will continue to trade down and take the cheaper parts of the various species," said Jeroen Leffelaar, global co-head of animal protein at Rabobank. "Poultry consumption may be hit less hard since it is the cheapest protein . . . Eventually European consumers will have to face the fact that poultry meat, like pork and beef, will become more expensive."

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