Understanding Commodity Markets One Consumer At A Time – DTN

My New Year’s resolution is to eat more beef. It’s not that I don’t already eat enough of the stuff; it’s just that I suddenly have a need to draw down the household inventory. An old upright freezer in the basement stopped working just before the weekend, and all the steaks and sausages and FoodSaver bags full of frozen peppers and green beans needed to find new homes. Most of it could be rearranged into other freezers, and — conveniently enough — the temperature in the garage has been sub-zero for several days, giving us time to move things around.

Seeing hundreds of pounds of meat laid out in boxes on the floor of the garage was an interesting sight. In 2016, the average American consumer ate 53.1 pounds of beef (measured as boneless weight at the retail counter), and in the year that just passed, the number may have been as high as 54.4 pounds, according to USDA’s latest estimates.

Annual per capita pork demand has also recovered since hitting a low in 2015 (remember when bacon was over $6 per pound in the summer of 2014?). In 2017, the average American consumer ate about 47 pounds of pork (boneless weight).

Consumers of agricultural products are sensitive about prices. So ag commodity prices, which are “low” at the moment, might be our biggest selling point in 2018.

Hog futures are securely in the middle of their typical trading range since 2004. Live cattle futures, similarly, are 28% below their late-2014 highs. And as all grain farmers are aware, the grains and oilseeds have seen their prices diminish back to the same levels seen a decade ago, far away from the $7.65 corn and $13 wheat of 2008, or the $16 soybeans of 2012.

Conventional wisdom about staple grains — products included in almost every meal, like wheat or rice — says that demand for those staples is “inelastic.” If demand for a product is elastic, then consumers will buy and consume more of that product when it’s cheap, and less of that product when it’s expensive. But if demand is perfectly inelastic, then consumers would buy and consume the same amount of the product no matter what the price is.

Demand for wheat isn’t perfectly inelastic, but it did used to be pretty predictable and unshakeable by year-to-year price fluctuations. Americans ate toast for breakfast, a sandwich for lunch, and a roll with their dinner (or otherwise consumed bread made from wheat flour several times per day). The per capita use of wheat for human consumption in 1990 was pretty similar to the per capita wheat use in 1960. Twenty years ago, in 1998, the annual demand for wheat flour in the United States amounted to over 200 pounds of wheat per person, which is comparable to the annual per capita demand 70 years ago, in 1948.

But then things changed. Consumers started behaving differently, making different choices. They sought out more exotic carbohydrates to accompany their meals, or decided to forego carbohydrates altogether during the Atkins diet fad of 2003 and 2004. Now there’s the gluten-free fad, which continues to exacerbate the downward trend of per capita wheat consumption in the U.S. Price sensitivity wasn’t the cause of these changing choices — on average, gluten-free products are 242% more expensive than regular products.*

So this period of low commodity prices may not be enough to spark fresh demand in the wheat market. Not from the average U.S. consumer, anyway. We must continue to wait for the backlash against the gluten-free fad to make its way onto the trendiest grocery store shelves.

Meanwhile, the trend for per capita consumption of corn is much more promising. Rather than considering just the corn used in human food products (corn meal, corn flour, corn chips, high-fructose corn syrup, etc.), I took a look at the total domestic use of corn divided by the U.S. population. This quantity has risen steadily, with some evidence of sensitivity to price (a 6% dip in per capita demand between 2011 and the higher-priced environment of 2012). In 1998, the average American used up 1,515 pounds of corn, one way or another. By 2017, the average American accounted for 2,151 pounds of corn disappearance — over a ton of corn!

Some of those 2,151 pounds went into the 54 pounds of beef and 47 pounds of pork eaten by the consumer (and some of it went into all the pounds of poultry and eggs and milk eaten by the consumer). But a lot of it (over 40%) went into ethanol. That means the year-by-year change in per capita corn usage tells a story more like the demand for crude oil or copper or cotton — consumer products whose greater usage signals a growing economy. More ethanol going through more engines, even if those engines are half a globe away and using American-exported ethanol, means that the global consumer is likely feeling better and better about spending money in 2018.

If my annual ton of corn was laid out before me in the same way my annual beef goal was laid out in front of me over the weekend, the corn would occupy 38 bushel baskets, or about seven 50-gallon drums. The next time I get annoyed at someone hogging the grocery-store aisle with their cart full of Oreos, I will try to remember that the corn syrup and corn starch that went into those cookies counts toward that consumer’s 2,151 total pounds of consumption — a number which is trending upward and will hopefully be followed by similar consumer behavior not just in the U.S., but all across the globe.

Elaine Kub is the author of “Mastering the Grain Markets: How Profits Are Really Made” and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.

* Gluten-Free and Regular Foods: A Cost Comparison. Laci Stevens BSc, Mohsin Rashid FRCPC. Canadian Journal of Dietetic Practice and Research, 2008, 69:147-150, https://doi.org/…

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