Margin Watch: Mid-August

August 17, 2010 by Chip Whalen

Margins deteriorated since the end of July, particularly in nearby Q3, although most of that drop is due to the fact that the margin is now being calculated solely off the October hog contract with August now expired. Deferred margins however are still anywhere from $1.25-$3.50/cwt. worse than they were two weeks ago following a combination of both lower hog prices and higher feed costs. The USDA’s August WASDE report lowered corn ending stocks despite the fact that production was increased to a record high 13.365 billion bushels following an upward yield revision to 165 bushels per acre… Get the Complete Report »

Margins deteriorated sharply over the past two weeks with the exception of the spot period in Q3. Higher feed costs were the main culprit behind the reduced margins, although deferred milk prices are also lower based on CME Class III futures–particularly 2011 contracts. Nearby values have held up as export demand remains strong while milk production has been compromised by very hot summer weather. Weakness in deferred contracts is likely due to expectations of a large spring flush in Oceania reducing U.S. exports in 2011. Meanwhile, the USDA’s August WASDE report indicated lower ending stocks for corn… Get the Complete Report »

Margins again improved significantly since the end of July, particularly in nearby Q3 where costs are already fixed. Sharply higher cattle prices have more than offset a similar rise in feed costs with corn up as well over the past two weeks. In addition, fed cattle values have outpaced those of feeder cattle prices, improving profitability in deferred periods where both values remain variable to the forward profit margin. Beef prices remain supported on strong export demand. Total US beef shipments in June were 204.5 million pounds, 17.8% higher than a year ago and the highest monthly beef export volume since August 2008. Corn prices meanwhile have found support recently from a strong rally in wheat prices brought on by a catastrophic drought in Russia… Get the Complete Report »

New-crop margins have improved over the last two weeks, as advances in the futures market have offset a slight decline in basis. NASS reported its first estimate of yields for this year’s crop at 165.0 bushels/acre which would represent a new all-time record. The market, however reacted positively to the news, as the world situation has dominated a potential domestic surplus. USDA increased exports by 100 million bushels to 2.050 billion bushels, reflecting the recent increase in the pace of sales. At present, U.S. corn is the cheapest global feed grain, and this helps explain the increase in USDA’s export projection from last month. The recent pace of weekly sales would seem to confirm this, and exports may rise further in coming reports… Get the Complete Report »

Margins improved based on a higher futures market, although new-crop basis is significantly weaker compared to old-crop basis, reflecting a discount of $0.73 relative to spot delivery levels. NASS reported its first estimate of yields for the 2010/2011 crop at 44.0 bushels/acre, matching last year’s record. Ending stocks for the 2010/11 crop year were left unchanged at 360 million bushels despite lower beginning stocks carried in from the current marketing year. These lower carry-in stocks, coupled with an increase in the crush by 5 million bushels, an increase in exports by 65 million bushels, and residual usage up 3 million bushels… Get the Complete Report »

Margins on the nearby contract have deteriorated over the last two weeks, as the futures are near the same level while the basis has weakened. Deferred margins, however, have deteriorated significantly. World wheat production was lowered by 15.3 million tons, with the majority of the reduction coming from the Former Soviet Union, where production is forecast down 13.41 million tons from last month. Russia, Kazakhstan and Ukraine have all put bans on exports. In turn, USDA raised U.S. exports by 200 million bushels from last month, due to the export restrictions out of Eastern Europe. Global ending stocks are 174.8 million tons… Get the Complete Report »

About the Author

Chip Whalen, CIH

Chip Whalen

Chip is one of our resident educators with over fifteen years of teaching, trading, and senior risk management experience.

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.

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