Evening Report: USDA still calling for food price increases to abate in 2022

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USDA still sees 2022 food price increases abating from 2021 marks... Inflationary pressures for food are set to post a second straight year of increases in overall food prices, restaurant and grocery prices that are above the 20-year average, according to the latest update from USDA’s Economic Research Service (ERS). It expects overall food price inflation at 3.0% to 4.0% in 2021, with grocery store prices (food at home) up 2.5% to 3.5% and restaurant (food away from home) prices up 4.0% to 5.0%. Restaurant prices are on the only overall category to be revised higher this month, previously having been forecast to increase by 3.5% to 4.5%.

But the increases for 2021 are coming after similar boosts in 2020 — overall food prices rose 3.4%, restaurant prices rose 3.4% and grocery store prices rose 3.5%. All of those levels were above the 20-year averages of 2.4% for all food prices, 2.8% for restaurant prices and 2.0% for grocery store prices.

The increased outlook for several food categories in 2021 versus the month-ago forecasts mean several categories will have seen back-to-back years that have risen more than the 20-year average. Meat, poultry and fish prices are expected to rise 5.0% to 6.0% after rising 6.3% in 2020. For meats, the forecast increase of 6.0% to 7.0% comes after an increase of 7.4% in 2020, while beef prices are seen rising 7.5% to 8.5% compared with the 9.6% increase for 2020. Pork prices are expected to increase 7.0% to 8.0% in 2021 after rising 6.3% in 2020.

Consumers are seeing more inflationary pressures for food than they have seen in a while, with the combination of increases for 2020 and 2021 taking a bigger portion of consumer spending than the 20-year average. While this is after increases in 2019 and 2018 that were below the 20-year averages and actual decreases in grocery store prices in 2016 and 2017, it still marks a series of increases that are sapping increased wages for consumers.

For 2022, ERS forecasts all food prices to rise 2.0% to 3.0%, restaurant prices to increase 3.0% to 4.0% and grocery store prices to rise 1.5% and 2.5%. While the 2022 outlooks are for food price inflation to moderate, these are early forecasts and will likely change — perhaps considerably. USDA’s initial outlooks for 2021 issued in July 2020 were for an overall rise in food prices of 2.0% to 3.0%, restaurant prices to rise 1.5% to 2.5% and grocery store prices to increase 1.0% to 2.0%. And several items within the grocery store were expected to decline from 2020 prices, including many of the meat categories.

Ag export forecast lowered, import outlook raised...  USDA projects U.S. ag exports in fiscal year (FY) 2022 at $175.5 billion, down $2.0 billion from the August forecast, but still a record if realized. The decline in the export forecast was driven by reductions in oilseed and oilseed product exports that were partially offset by increases in livestock, poultry, dairy, cotton and ethanol exports.

USDA forecasts ag imports in FY 2022 at $165.0 billion, up $5.5 billion from the August forecast, largely driven by expected higher imports of horticultural and livestock products.

If realized, this would leave the U.S. with a $10.5-billion ag trade surplus in FY 2022, down from $18.0 billion implied by the August forecast, but up from $8.9 billion in FY 2021.

USDA’s long-term baselines did not project a big increase in renewable diesel... USDA sources say the main driver for renewable diesel expansion in the U.S. are incentives under California’s LCFS program.  California consumes nearly all of U.S. renewable diesel production. California also consumes about 2.7 billion gallons of diesel, which could be replaced by renewable diesel over the next few years. “The benefits of producing renewable diesel with low carbon feedstocks are much higher than using soybean oil, and we expect the planned expansion of facilities using non-soybean oil feedstocks (Diamond Green, REG, PBF, Next Renewable, etc.) to fulfill the majority of demand in California,” says one USDA analyst.

Also, over the next few years, USDA expects soybean oil prices to remain strong as demand increases for renewable diesel. At such prices, USDA expects non-integrated Fatty Acid Methyl Esters (FAME) producers to reduce production as markets substitute for renewable diesel because it is considered a higher quality, drop-in replacement fuel. Thus, USDA’s forecast assumes some soybean oil-based renewable diesel expansion for the California market and substitution of renewable for FAME in markets outside of California.  USDA also assumes current policies, which don’t include proposed LCFS-type programs in other states or tax credits for sustainable aviation fuel (SAF).

Another reason: crushing impacts. High soybean oil prices may lift margins in the near term but if the U.S. overproduces meal and does not have a domestic/export market, margins will decline. USDA is constrained by assumptions in the growth of meal markets and the U.S. international market share as well as how high soybean oil prices can get before capital investments in renewable diesel plants aren’t as profitable. USDA notes it has seen actual capacity not meet announced/planned capacity in the past for both ethanol and FAME.  There is a possibility that this could happen for renewable diesel, USDA notes, especially with smaller announcements competing for higher cost feedstocks.

There is also the issue of capacity utilization. As seen with ethanol and FAME, capacity typically exceeds capacity utilization by a significant amount. While there are documented plans to expand, higher-priced feedstocks can delay or even reverse expansion plans. 

Early Australia wheat harvest shows lower protein, raising supply woes... Early harvest results for Australia's near-record wheat crop are showing lower-than-expected protein levels, raising concerns over supplies to a market already suffering shortfalls from key Northern Hemisphere exporters. Australia is expected to be a key wheat exporter in the 2021-22 season, but heavy rains have hampered harvesting in some areas and caused some crop deterioration, analysts and traders said.

“In Western Australia this year, nearly half of the crop is standard white wheat,” said Ole Houe, director of advisory services at brokerage IKON Commodities in Sydney. “In a normal year, average standard wheat is just 25% of the overall output. We are going to get 200% to 300% more feed wheat than a normal year,” he said. Australian Premium White (APW) wheat, popular among Asian millers, has 10.5% protein, while Australian Standard White (ASW) wheat has below 9% protein.

Wheat importers, especially in Asia, were looking forward to a bumper Australian crop to replenish supplies left short by export curbs in the Black Sea region. However, the lower protein values are now raising fresh concerns about the volumes of high-quality wheat from Australia.

“Traders have pre-sold higher quality milling wheat to buyers but we are seeing more lower protein wheat as harvest starts in Australia,” said one Singapore-based trader. “Many suppliers are now caught short on milling wheat sales.”

Lower milling wheat output in Australia is likely to result in higher demand for supplies from the U.S. and Canada, further underpinning global prices that have scaled 9-year highs this week.

Rail transport into Vancouver to restart Wednesday... Canadian Pacific Railway (CP) said its main rail line from Kamloops to Vancouver is back open for transport of grain and other goods after repairs at 30 locations. Calgary-based CP said it would “closely co-ordinate with customers and terminals to clear (freight) backlogs as quickly and efficiently as possible,” and that would require “weekend work and flexible schedules” at customer and terminal locations.

Canadian National Railway (CN) says it will restart limited service along the Kamloops to Vancouver corridor on Wednesday.

CP and CN railroads have collaborated and will share the same rail line, transporting a mix of commodities at reduced speeds until full operations are resumed.

STB accepts Canadian Pacific/Kansas City Southern’s merger... The U.S. Surface Transportation Board (STB) has accepted Canadian Pacific (CP) and Kansas City Southern’s (KCS) application to merge. The two companies filed an application to merge with the STB back in October, but since then two other railroads — scorned suitor Canadian National and Union Pacific — have urged the agency to reject the application. The review of the CP/KCS merger is expected to take nearly a year and will likely include public hearings and an extensive environmental review.