Margin Watch Notes: Mid-September

September 15, 2009 by Chip Whalen

Hog Margin Watch

While still dismal from a historical standpoint, hog margins improved through the first half of September due primarily to a recovery in hog prices. On the feed side, corn prices were relatively flat over the past couple of weeks, although soybean meal showed notable weakness as prices begin to deteriorate heading into the fall harvest. The USDA raised ending stocks for both corn and soybeans in the September crop report, which should limit any sharp price advances this fall, though fears remain over the possibility of an early frost. Opportunities to protect a breakeven margin or better are now evident in the second half of 2010, and we have been active securing these margins with varying strategies. Minimum/maximum price structures on hogs look attractive at current values which will preserve the opportunity for a 90th percentile margin to be realized at the maximum price level, while securing feed costs with futures, physical, or a maximum price strategy looks attractive for corn and meal.

Dairy Margin Watch

Milk production margins have improved since the beginning of September based on a combination of higher milk prices and lower soybean meal prices. Milk appears to be gaining strength from stronger cheese demand out West while meal prices have been falling as old-crop premiums deteriorate heading towards the fall harvest. Corn prices have held relatively steady in the past two weeks. Margins are now close to breakeven for Q4, and positive throughout 2010 at current levels albeit still only average or slightly above average from a historical basis. Nonetheless, attractive strategies to secure breakeven or better levels in milk while allowing for historically strong margins to be realized with minimum/maximum price combinations have been popular with clients recently. This is particularly true as there is a historical tendency for milk prices to decline into the second half of September. Heading into harvest, we are looking to secure physical coverage on feed in the cash market.

Beef Margin Watch

Beef margins remained fairly flat through the first half of September as both feeder and fat cattle prices moved up and down together over the past two weeks while corn prices traded sideways. Beef exports remain sharply below year-ago levels, and continued summer weather is desired to extend the grilling season in the domestic market. On a positive note, corn prices should remain subdued based on the latest USDA report that increased both yield and production for this year?s crop. The corn stocks/use ratio is now showing a much more comfortable balance between supply and demand relative to the past two crop years. From a strategy standpoint, securing feed prices in the cash market close to harvest is historically attractive, and option strategies can be used to protect long inventory values. Maximum price strategies for feeder cattle, and minimum/maximum price combinations on fat cattle prices appear attractive right now to protect the cost and revenue associated with deferred groups.

About the Author

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