Margin Watch Notes: Mid-October

October 15, 2009 by Chip Whalen

Hog Margin Watch

Margins remained relatively unchanged through the first half of October, as a higher price trend in hogs was largely offset by higher feed costs with rising corn and soybean meal prices. The USDA report last week confirmed higher yield estimates for both corn and soybeans, however a hard freeze last weekend likely affected some late maturing crops and most traders expect the yield and production figures to drop slightly in upcoming reports. Meanwhile, hog prices have recovered with higher cutout values, although production is expected to be large in Q4 and nearby futures are trading at a premium to the cash index. With margins still in the red or just barely breakeven through 2010, flexible strategies to at least protect a cost of production have been the focus recently. We have been protecting a $12 range of hog prices to lower price levels while allowing for a similar range of upside opportunity. Given the rise in feed costs, we have been protecting a range of higher prices of approximately 80 cents in corn and $60-$80 in soybean meal from current price levels, allowing for all opportunity to lower prices.

Dairy Margin Watch

Milk production margins deteriorated during the first half of October as a sharp rally in feed costs more than offset slightly higher milk prices in the same period. While the USDA forecast an increase in production and ending stocks for both corn and soybeans in their October crop report, there is concern that last weekend?s freeze may have resulted in some crop losses through the Midwest and Plains. CWT announced a new round of their herd retirement program which offered some support to milk futures, and Rabobank noted in a research report that global dairy prices are rising from stronger demand and a positive economic outlook. Although margins have deteriorated recently, it is still possible to protect a breakeven margin by establishing a minimum milk price around current levels while allowing for an improvement to higher prices of approximately $2.00-$3.00/cwt. Given the sharp rise in feed costs recently, we have focused on strategies to protect a range of higher prices in corn and soybean meal of approximately 80 cents and $60-$80/ton, respectively.

Beef Margin Watch

Beef production margins deteriorated through the first half of October as a slight rise in fat cattle prices failed to keep up with sharply rising feed costs. Corn futures have rallied about 50 cents since the beginning of the month, despite the fact that the USDA raised production and ending stocks in their recent October crop report. There is concern that last weekend?s freeze will slightly reduce the size of the corn crop, while recent improving ethanol margins suggest that demand might be stronger than the government is forecasting. Meanwhile, there is optimism that beef prices may begin rising as feedlot inventories tighten and domestic demand improves as we approach the holiday season. Given the sharp rise in corn prices recently, we have focused on protecting a range of higher prices in deferred periods of about 80 cents. For cattle, maximum price strategies look attractive to protect feeder prices while minimum/maximum price combinations are similarly favorable for live cattle that will protect current values and retain a window of opportunity for about a $10.00/cwt. improvement in a rising market.

Crop Margin Watch

Corn crop margins improved significantly since the end of September as futures prices posted a sharp rally of about 50 cents/bushel since the beginning of the month. Although the USDA raised production and ending stocks in their recent October crop report, there remains concern that last weekend?s freeze hit still-immature crops in some areas of the Midwest which may trim the yield estimate in upcoming reports. Meanwhile, although the ethanol forecast remained unchanged for 2009/10, margins have improved significantly since the summer and there is optimism that blending rates will increase as a result. The current rally represents an excellent opportunity to protect the first positive margin we have seen since earlier this summer. About 80 cents of upside could be re-opened on a sale using the July contract for a cost of approximately 20 cents. 2010 margins also look quite favorable right now, and a minimum/maximum price strategy could be employed on the December contract that would protect a floor of $4.00/bushel while allowing for a $1.00 improvement in price for a net cost of about 20 cents.

Soybeans Margin Watch

Soybean crop margins have improved by around $1.00/bushel since the end of September following a sharp rally in futures since the beginning of the month. The USDA raised production and ending stocks slightly in their recent October crop report, with exports increased on expectations of stronger demand from China due to lower domestic production. While Argentina?s crop forecast was also increased and current conditions are quite favorable for early seeding, the USDA is projecting a ?best case scenario? right now for South American production. The 2009 margin remains negative, but is much closer to breakeven now which represents an opportunity to at least protect that level. Given the very strong nearby basis, it is best to move any beans currently being harvested and execute a re-ownership strategy on the board. $1.00 of upside in the January contract between $10 and $11 currently costs around 30 cents. In November 2010, protecting a $2.00 range of lower prices and leaving open a $2.00 range of higher prices would cost around 20 cents. This would still allow for a positive margin on next year?s crop while preserving upside opportunity.

Wheat Margin Watch

Wheat crop margins have improved significantly since the end of September and are now back to about a breakeven level in old-crop. A sharp, short-covering rally in wheat futures has restored positive margins despite a bearish fundamental outlook, as the USDA raised ending stocks in their recent October crop report. At over 40%, the stocks/use ratio is projected at a 10-year high, and the government noted increasing competition on the world market with higher crop forecasts for Canada, Australia, the EU and FSU. While basis levels remain wide, they have nonetheless improved over the last couple of weeks. It now would cost around 30 cents to protect current price levels in the March contract and allow for $1.00 of opportunity to rising prices. For new-crop, protecting a $1.00 range of lower prices and allowing for a $1.00 range of opportunity to participate in higher prices would currently cost around 10 cents. Both of these combinations seem attractive given existing wheat margins.

About the Author

The information contained in this publication is taken from sources believed to be reliable, but is not guaranteed by Commodity & Ingredient Hedging, LLC, nor any affiliates, as to accuracy or completeness, and is intended for purposes of information and education only. Nothing therein should be considered as a solicitation to trade commodities or a trade recommendation by Commodity & Ingredient Hedging, LLC. All references to market conditions are current as of the date of the presentation. Past performance is not indicative of future results.