Margin Watch Notes: September

September 30, 2009 by Chip Whalen

Hog Margin Watch

Margins were essentially flat through the second half of September, with minimal movement in the hog, corn and soybean meal markets. The USDA’s quarterly hog inventory data revealed the beginning signs of herd liquidation, although unfortunately not as significant as what has been experienced in past cycles of similar negative margins. This preserves an element of risk that supplies will remain burdensome over the medium-term without an improvement in demand. Meanwhile, the feared early frost never materialized for the corn and soybean crops, which preserves the possibility of record yields this fall. End of month quarterly stocks figures from the USDA confirmed better than expected feed & residual usage for corn in the June-August quarter as well as a larger implied soybean crop last season. Our focus remains on protecting breakeven margins in the second half of 2010 with flexible price strategies to preserve what hopefully will be an improvement in profitability over the longer-term.

Dairy Margin Watch

Milk margins showed little change since the middle of September, and remain about average from a historical basis. The premium on deferred milk futures along with weaker feed prices based on lower soybean meal values in particular are providing positive margins through all of 2010. Opportunities to protect these margins are showing up in minimum/maximum price structures on milk, allowing for an improvement of roughly $2.00-$3.00/cwt. on the Class III contract while protecting current price levels for a cost of about $0.50/cwt. On feed, physical coverage in the cash market or long futures positions are attractive from a historical perspective around harvest time. Alternatively, a maximum price strategy or protecting a range of higher prices is likewise attractive for corn and soybean meal. Recent weather and current forecasts do not suggest the growing season will end early for the corn and soybean crops this season, which should help preserve the possibility of record yields in many areas.

Beef Margin Watch

Beef production margins were flat to weaker through the second half of September, as cattle prices deteriorated while corn prices began to firm. The movement between feeder and fat cattle were more or less offsetting, although corn prices moved higher on risk premium being added to the market over fears of a potential early frost. While that has failed to materialize following late September weather that was nearly ideal for crop maturation through the Corn Belt, prices have held up until harvest results are better known. In terms of beef margin strategies, this historically is a good time of year to cover feed costs in the physical market or through a long futures position. Alternatively, a maximum price strategy or protecting a range of higher prices also looks attractive for corn–particularly in deferred periods. For the cattle side of the margin, we have been utilizing maximum price structures for feeder cattle and minimum or minimum/maximum price structures on fat cattle values.

Corn Margin Watch

Corn crop margins improved since the middle of September, as basis values held relatively steady while futures prices firmed. Risk premium was put into the market with concerns over the possibility of an early frost prematurely ending the growing season, although this never materialized. Meanwhile, the USDA’s small grains report at the end of the month revealed lower quarterly stocks than analysts were expecting. This would suggest that feed usage during the June-August quarter was strong despite ongoing profitability struggles in the domestic livestock sector. While margins remain negative for the nearby harvest suggesting that basis and spreads will need to be managed carefully this crop year to earn a positive return on any un-protected bushels, next year’s corn crop is still showing positive margins where a minimum/maximum price strategy could be employed to lock in a floor above breakeven values while preserving the opportunity for a margin close to the highs from earlier this spring if prices improve heading into next year’s planting season.

Soybeans Margin Watch

Soybean crop margins were lower through the second half of the month as basis values deteriorated sharply while futures prices sold off from a spike in the middle of September. Some premium has been retained from a very slow early harvest pace in the Delta due to wet weather while export demand remains very strong. Meanwhile, the fear of an early frost has largely subsided as weather was nearly ideal for crops to finish maturing in late September. The USDA’s small grains report revealed larger soybean stocks on September 1st than the market was expecting, which suggests last year’s crop was understated. This will increase new-crop ending stocks in the October report. Margins remain deeply negative for the nearby harvest, while margins for the 2010 crop are now back in the red after briefly turning positive mid-month. Minimum and minimum/maximum price strategies can be utilized to at least protect against further losses on unprotected bushels, while preserving flexibility for the margin to improve heading into the spring planting season.

Wheat Margin Watch

Wheat crop margins were flat to lower since the middle of September as both futures prices and basis values weakened slightly. Contrary to the historical tendency, basis values have only improved marginally since late August as intense competition on the world market (particularly the Black Sea) has limited export opportunities for U.S. soft red winter wheat. Meanwhile, the USDA’s small grains report at the end of September revealed a larger U.S. wheat crop this season, although this was mostly expected by the market and concentrated in dark northern spring wheat. Lower prices through August and September have driven current crop year margins negative, although new-crop margins are still positive at over $1.00/bushel. For a cost of around $0.25-$0.30/bushel, minimum/maximum price strategies could be employed in both old-crop and new-crop wheat to protect current margin levels while allowing for the margin to potentially improve by $1.00 in a rising market.

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.