Margin Watch: Mid-July

July 15, 2010 by Chip Whalen

Hog
Margins deteriorated over the past two weeks, although still exist at very high historical levels–at or well above the 90th percentile of the past 5 years. The main culprit for the lower margins recently has been surging feed costs, with both corn and soybean meal posting sharp gains since the end of June. While hog prices have moved somewhat higher as well, the strength has not been nearly as pronounced. The June 30 acreage and stocks reports from the USDA surprised the market with corn acreage below the March planting intentions and June 1 stocks well below market expectations. While the outlook for new-crop corn is still promising, crop condition ratings have been gradually deteriorating with each passing week, and the tighter balance sheet that has resulted from the lower acreage and stocks has put some risk premium back into the market. The soybean market has likewise been bullish as stronger meal demand has increased the crush estimate, although old-crop supplies remain tight. Meanwhile, there are concerns over a potential… Get the Complete Report »

Dairy
Margins margins deteriorated since the end of June, particularly in deferred periods, as feed costs have soared while milk prices have remained relatively flat. The corn market has moved sharply higher since the June 30 stocks and acreage reports from the USDA that led to a tighter balance sheet in the latest July WASDE released on Friday. Soybean meal prices have also moved sharply higher, as stronger domestic demand in livestock feed rations was cited as the principal reason for an increased crush estimate in both the old-crop and new-crop soybean balance sheets. Milk’s strength meanwhile has been muted, with only the nearby August contract gaining in price recently. The forward price curve previously… Get the Complete Report »

Beef
Margins production margins improved sharply in Q3 and Q4 while improving only marginally in Q1 and Q2 2011. Nearby margins in Q3 improved as a function of rising live cattle prices against what are now completely fixed costs of both feeder cattle and corn. Q4 margins improved to a lesser extent as corn remains variable and has increased sharply with live cattle prices against a fixed feeder cattle expense. Deferred margins in 2011 incorporate completely variable elements, and generally the rise in live cattle as a revenue has been matched by increasing costs of both feeder cattle and corn. From a historical standpoint, margins are at or below average, and Q2 2011 margins remain negative. This should discourage feeder cattle purchases this fall, and thus limit the strength in October and November futures contracts unless this margin relationship… Get the Complete Report »

Corn
New-crop margins improved significantly over the past two weeks, as futures prices have surged following the June 30 reports from the USDA. The tighter balance sheet projected in the July WASDE was a direct function of lower acreage and tighter stocks reflected in those two reports, and renewed risk premium has been put back into the market as a result. Although growing conditions have remained favorable with 73% of the crop rated in good-excellent condition, the trade is on the alert for adverse weather that could potentially threaten yields. Several forecasts show the potential for a “La Niña” event to occur in the Midwest; that is, a period of warmer and drier than normal conditions. Yields are currently forecast at trendline levels, although this could change considerably based upon weather as the crop moves through pollination… Get the Complete Report »

Soybean
Crop margins have improved dramatically over the past two weeks, as a direct result of a much firmer basis and an extended rally in futures prices. Weather concerns have driven this market higher during the period. Old-crop tightness has traders worried about the weather and yield outlook for new-crop production, with reports of high pressure ridging bringing the potential for excessive heat across the Central U.S. General crop conditions are above average for this time of year, but do tend to decline heading through the pod-fill stage of development into harvest. If the excessive heat is realized and persists, that could stress the crop and diminish yields. USDA currently projects an increase in harvested acres from last year, with yields at 42.9 bushels per acre compared to 44 bushels per acre in 2009. The threat… Get the Complete Report »

Wheat
Crop margins have improved dramatically over the past two weeks, as a direct result of the futures rallying over a dollar per bushel basis the nearby contract. Supply disruptions have been the principal driver of this price advance. The worry is two-fold. Forecasts call for excessive rains to fall over Eastern Europe that will potentially cause quality concerns. Canada’s crop is also down sharply this past month due to excessive rainfall. At the same time, drought continues in Russia and Kazakhstan and the lack of rain in this region will continue to reduce their spring wheat crop estimates. This has caused world end users to secure additional U.S. wheat. Domestic fundamentals are not nearly as bullish. USDA revised ending stocks higher in the July WASDE due to a larger crop forecast based on higher harvested acreage and an increased yield, although an increased export forecast offset some of the impact of a larger supply… Get the Complete Report »

About the Author

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