Milk, livestock rare standouts amid broader 2011 commodity slump

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Milk: It did a trader good in 2011, and so did cheese.

Anyone who maintained a bullish view on the dairy market is likely closing out a profitable year, based on Chicago futures prices. The same goes for other livestock-based contracts, including cattle and hogs. Meanwhile, grain market bulls were battered as prices for corn, soybeans and wheat plunged during the second half of the year.

Dairy products outperformed crude oil and most other commodities in an otherwise largely soft year for prices of the raw materials used to feed and fuel the global economy. Cash-settled cheese futures traded on Chicago-based CME Group rose 28 percent this year through Dec. 28, based on the closest-to-expiration contract. Class III milk futures, an industry benchmark, were up 13 percent.

Livestock and dairy market strength reflects a combination of robust demand from China and other export markets and U.S. herds that are either shrinking or growing only modestly.

These same factors probably will remain in place in 2012, keeping cattle, hog and milk prices within reach of all-time highs hit earlier this year, analysts say. As a result, consumers grappling with surging food inflation may face even higher prices for milk, hamburger and other products.

“The story for dairy this year has been the strength of global demand,” said Alan Levitt, an independent consultant who writes CME Group’s Daily Dairy Report. “Even with world milk production up nearly 3 percent this year, global demand has been strong enough to absorb it.”

U.S. dairy exports totaled nearly $4 billion during the first 10 months of 2011, up 6.3 percent from all of 2010 and a record, according to industry data. Along with China, demand from North Africa, the Middle East and Mexico has also increased, Levitt said.

Emerging markets’ protein preferences spur structural shift

Export strength “reflects emerging markets’ ability and willingness to pay more for dairy, and protein in general, in their diets,” Levitt said. “This is a structural change. Global dairy prices have had to move into a higher price band to incent enough supply worldwide to meet global demand.”

In trading Dec. 28, Class III milk futures for delivery this month were unchanged at $18.66 per hundred pounds. The price, which reflects milk used to make cheese, touched an all-time high at $21.62 in August. December cheese futures were $1.794 a pound.

U.S. beef and pork exports were also on a record pace, contributing to rallies in CME cattle and hog markets. Live cattle futures were up 14 percent for the year through Dec. 28 after surging 25 percent in 2010. Lean hog futures were up 7.3 percent after jumping 22 percent last year. A year from now, cattle prices are expected to be another 5 percent higher, based on CME futures.

In grains, the most actively-traded agricultural futures markets, prices sagged amid growing global production and sliding U.S. exports.

Front-month corn futures in Chicago settled at $6.42 ½ a bushel on Dec. 28, up about 2.1 percent from the close of 2010 but down 20 percent from a record $7.99 ¾ in June. Soybean futures were $11.98 ¼ a bushel, down 14 percent this year, and wheat futures were $6.51 ¼ a bushel, down 18 percent (futures traders can also profit from declining prices by selling markets short).

Grain market weakness contributed to a slump in the Dow Jones/UBS Commodity Index, which was down almost 13 percent on the year after a 17-percent rally in 2010. Cotton, sugar and natural-gas prices were also down sharply, though oil was up about 9 percent. The index tracks prices for nearly two-dozen top commodity categories.

Commodity slump drags down other investments

Europe’s financial crisis and broader global economic malaise played a large role in weaker prices this year, fueling perceptions that demand for raw materials will erode and prompting speculators to slash bullish commodity bets, said Adam Patti, chief executive of IndexIQ, a Rye Brook, N.Y.-based investment company.

This year’s commodity slump extended beyond the futures markets into other investment products, including the IQ Global Agribusiness Small Cap exchange-traded fund started by IndexIQ earlier this year.

The ETF, which holds shares of top pork producer Smithfield Foods, Inc., as well as smaller dairy, fertilizer and machinery companies in various parts of the world, is down 14 percent since its launch in March.

Still, Patti is “very bullish” on agriculture longer-term, saying he expects rising incomes will continue to boost global demand for “more complex proteins” such as beef and pork, bolstering returns for companies in food-related industries. There are also “systemic” supply constraints because of a finite amount of farmland, he said.

The sell-off “let some of the air out of the commodity bubble, which is a good thing,” Patti said in an interview earlier this month. “But I don’t think the fundamentals have changed.”

“Market sentiment has just moved away from commodities generally, which makes this a great entry point” for investors, Patti continued. “Prices have pulled back, but there’s a longer-term growth story here. For an investor with a medium- to long-term horizon, this is a great place to be.”

In trading Dec. 28, December live cattle futures settled at $1.231 a pound, up from $1.079 at the end of 2010 for the front-month contract. February lean hog futures settled at 85.55 cents a pound, compared with 79.75 cents at the end of 2010.

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