SRM ban could affect milk production, raise poultry costs

Nation's Restaurant News, Feb 23, 2004 by John Barone

An international panel recently recommended changes to the U.S. government's response to mad cow disease that include the exclusion of specified risk materials, or SRM, from all animal feed as well as the exclusion of all meat protein from feeds for ruminant animals.

The report also said the United States needs a broader surveillance program because of the high probability that there are other infected animals within the domestic food chain. The Food and Drug Administration and U.S. Department of Agriculture will consider the panel's recommendations but are not bound to follow them. A potential ban on animal protein in feed is not a huge concern with cattle but could affect milk output significantly, as dairy cows would not be able to produce at their current levels if they were fed soy protein. A ban on SRM could change how meat and bone meal, or MBM, is processed or whether it still could be used. More than 40 percent of MBM goes into poultry feed. Thus, prices for poultry could move higher depending on what, if any, further feed changes are adopted.

Separately, beef prices are on an upward swing, and coffee prices have settled back moderately. Butter prices are continuing to surge while grain and soy oil prices are remaining firm. Pork supplies are forecast to increase, and chicken prices have spiked but should move lower later this month.

Beef--Markets have been volatile because of conflicting USDA reports. January's USDA cattle report showed December's new feedlot placements to be up 9.6 percent and total feedlot inventories up 6.2 percent. The increases were larger than expected; however, the USDA's semiannual inventory report came in on the low side, at 94.9 million head. That number was down 1.3 percent from last year's level and was the lowest since 1959. The lower-total-inventory, higher-feedlot numbers pointed to a huge cow sell-off in late 2003 as ranchers cashed in on record high prices. While cattle prices will be lower than last year, which experienced record highs, forecasts for the mid-to-upper $70s per hundredweight could make 2004 the third-highest year ever. Middle-meat prices, for such cuts as ribs and loins, already are off to the races ahead of the peak spring demand period. If no further cases of mad cow are found in the United States, price highs for May and June could approach those of last spring.

Coffee--Tighter supply fundamentals finally caught up with prices in January as coffee futures surged from 68 cents per pound to 79 cents per pound before dropping back into the low 70s in February. Global production will be down about 15 percent because of a big drop in Brazilian output from 48.5 million bags in 2002-2003 to 28.5 million bags in 2003-2004. This season's crop is estimated to be back in the 40-million-bag range. At one time the crop was thought to be as large as 45 million to 50 million bags before dry conditions brought about reduced yields. As a result, markets remain volatile, and another run at 80 cents per pound is possible. In the near future, however, generally weaker prices are expected through the month of April. Come June, however, prices likely will rise again because of speculative trading before the Brazilian winter season and the potential for freeze damage.

Dairy--Low milk and high cow prices encouraged producers to reduce the herds by 2 percent last year, to a record low of 9 million head. Continued herd reductions are anticipated this year, which will dampen milk output during the first half of 2004. Cheese prices, sup ported by Super Bowl sales, were firm in January and began edging higher in February. Butter prices continued to surge. So far this year, the Chicago "AA" cash market gained 25 cents a pound. Supplies have remained tight, with output down 10.2 percent in December, versus year-ago levels. And dairy prices are likely to remain firm until after the Easter and Passover holidays. Peak seasonal milk production should help take some of the steam out of prices by May.

Grain--In January, anticipating usage, the USDA cut the corn crop size forecast. As a result, futures prices rose from $2.50 a bushel in early January to around $2.70 a bushel in February. However, a serious outbreak of avian flu is devastating poultry flocks in Asia and could help put a dent in U.S. corn exports sales. Even so, prices are not likely to fall below $2.60, and spring and summer rallies into the $3 range are likely. USDA wheat reports brought no surprises, but strong, steady export sales are helping to support prices. China could be a net corn and wheat importer by year-end, a fact that is helping to support higher prices for both grains. Chicago wheat futures were in the $3.70s in February, down from the $4 level earlier this year. Current prices, however, are likely to hit the lower end of a $3.75 to $4 trading range.

Oil--The FDA's new cattle-feeding regulations fall far short of those hoped for by traders. Feed use of meat and bone meal still will be permitted for hogs and poultry. Market participants were betting that a total ban of MBM would have led to greater soy meal usage. However, an international panel recommended stricter feed standards, and it remains to be seen how the FDA and USDA will respond. Soybean oil prices dipped briefly to about 28 cents a pound but quickly recovered into the 30-cent range. December's crush report showed a smaller-than-expected increase in soy oil stocks. In addition, the market is concerned that lower soybean supplies further would limit potential increases in soybean crush in 2004. Summer rallies into the low 30s are likely before South American output pressures prices to decrease later this year. Third-quarter prices look to be closer to 28 cents per pound, and fourth-quarter prices should be in the 26-cent range.