Margin Watch Notes: Mid November

November 16, 2009 by Chip Whalen

Hog Margin Watch

Hog margins deteriorated in the first half of November due primarily to a selloff in hog futures that was concentrated on nearby contracts. Feed prices held relatively steady over the past two weeks, although there is a sense that corn prices in particular could be poised for additional strength due to the USDA?s latest crop report highlighting lower yields which may continue into the final January estimate. Production margins remain weak from a historical perspective, with 5-year percentiles at very low levels although Q2 2010 margins are still positive. Given a historical tendency for both April and June hog futures to decline over the next month, we have focused on increasing protection into this timeframe. Flexible price strategies would still allow for the possibility of a historically strong margin while at least protecting breakeven levels into next year. Maximum price strategies on feed costs, or protecting a range of higher prices for corn and meal similarly looks attractive to protect an overall profit margin in 2010.

Dairy Margin Watch

Milk production margins were mixed over the first half of November, as they declined in nearby Q4 and Q1 2010, but held steady beyond that into the middle of next year. Nearby milk futures have come under pressure recently with ideas that the market has become overbought, although feed costs have held up. Corn in particular showed strength following the latest USDA report highlighting a lower yield estimate due to the poor weather conditions over the last month. There are expectations for another potential yield reduction into the final January report as well. Despite the recent weakness, dairy margins remain positive throughout 2010 and flexible price strategies look attractive to protect a breakeven level as a worst-case scenario while allowing for potential improvement to what would represent historically high margin percentiles. Minimum/maximum price strategies on milk and maximum price feed strategies, or protecting a range of higher prices look attractive right now.

Beef Margin Watch

Beef production margins deteriorated during the first half of November as cattle futures succumbed to significant price weakness. Beef cutout values have been coming under pressure as lower-priced proteins, particularly pork, are offering increased competition in the meat case. Meanwhile, increases in unemployment appear to be damping consumer demand for eating out at steakhouses. Margins have also come under recent pressure as corn prices are showing strength following continued poor harvest weather through the end of October. The USDA lowered their yield forecast for corn in the November crop report, and there are expectations for further reductions into the final January estimate. While nearby margins remain positive through Q1 2010, deferred margins are now negative which highlights the importance of using flexible price strategies in the current environment. Protecting a maximum price or a range of higher prices would be desirable for corn and feeder cattle while protecting a minimum price or range of lower prices in live cattle would likewise be attractive right now.

Corn Margin Watch

Corn crop margins improved over the first half of November as futures have been firm in response to harvest delays in the Midwest. The USDA lowered their yield forecast in the latest crop report, citing the poor weather that has reduced test weights in key regions. There are expectations that a further cut to yields may be forthcoming in the January report as well. Offsetting some of the futures strength though, basis has begun deteriorating as more producers have been catching up with harvest and bringing their crops to market. Another negative is that the recent strength in futures appears to have compromised export demand which led the
USDA to lower their forecast in the November crop report. The market now appears to be encouraging storage given current futures spreads, and negative margins along with weak basis quotes in the cash market may likewise discourage a spot sale. Minimum/maximum price strategies look attractive for the 2009 crop, while a similar strategy in the 2010 crop would more than protect a positive margin while allowing improvement to a very high historical margin percentile.

Soybeans Margin Watch

Soybean crop margins held steady through the first half of November as stronger futures prices were basically offset by weaker basis values. With harvest progress picking up across the U.S. Midwest, more soybeans are being sold in the spot market which is weakening basis. Meanwhile, strong demand continues to support futures, particularly in the export market. The USDA raised their yield, production and ending stocks forecast in the November crop report, although the increased export projection seems to have garnered the most attention. Although nearby margins remain negative, a flexible price strategy would still protect current levels from deteriorating further while preserving the opportunity for a positive margin to be realized into 2010. New-crop margins are already positive and breakeven levels can be protected with very flexible strategies that would allow for a significant margin improvement should soybean prices rise next year.

Wheat Margin Watch

Wheat crop margins improved during the first half of November following a sharp rally since the beginning of the month. Recent USDA data would appear to call the price strength into question given the further increase to ending stocks on reduced export demand, which has taken both carryout and the stocks/use ratio up to 10-year highs. It appears that the rally has left U.S. wheat values uncompetitive in the world market, which the USDA highlighted in their November crop report. Basis has swung sharply over the past couple weeks, but remains at historically depressed levels. The current strength in the market is offering an opportunity to protect from a higher level, although the prevailing negative margins suggest that maintaining flexible price strategies is important to allow for improvement over time. Futures spreads continue to suggest the crop should be stored through the winter, so deferred positions protecting a range of lower prices and allowing for a range of higher prices would allow for this price flexibility at a limited cost.

About the Author

There is a risk of loss in futures and options trading. Past performance is not indicative of future results. 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 trading recommendation by Commodity & Ingredient Hedging, LLC. The rules and regulations of the individual exchanges should be consulted as the authoritative source on all contract specifications and regulations.