Margin Watch: November

December 3, 2010 by Chip Whalen

Hog
Margins continued to improve through the end of the month on a combination of both lower corn and soybean meal prices as well as higher hog values. Deferred margins in Q2 and Q3 of 2011 are now back to the 70th and 80th percentiles; respectively, of the past five years as the opposite move in relative prices between input costs and hog revenues has had a dramatic impact on producer profit margins. Feed costs appear to be in retreat as speculative liquidation has been evident since USDA’s November WASDE report was released. Although the figures were bullish, it seems as though the market had already factored it in. Meanwhile, China has taken measures to rein in domestic food prices such as releasing government stocks into the domestic market and raising lending rates. Hog prices have been supported by strong cutout values, particularly for hams, that have kept packer margins high and supported cash hog prices in the country…. Get the Complete Report »

Dairy
Dairy margins improved slightly since the middle of the month, although they unfortunately remain negative through Q3 of next year as milk prices did not change that much over the past two weeks to help augment the impact of lower feed costs. Both corn and soybean meal prices are down a bit from mid-November as the market appears to be in a correction phase following the latest USDA November WASDE report. While the fundamental outlook for both corn and the soybean complex remains bullish, it seems as though the market needs a new catalyst to continue moving higher and news may be sparse until the January report. Milk fundamentals meanwhile have turned more bearish… Get the Complete Report »

Beef
October milk Beef production margins were sharply higher over the past two weeks, particularly through Q2 2011, due to a rise in live cattle prices against what is now a fixed feeder cattle cost. Combined with the increased cattle price, corn costs have also declined since the middle of November as the market appears to have entered a consolidation phase. While the fundamental outlook remains bullish with tight U.S. and world corn stocks relative to projected use, it may take a new catalyst to cause the bullish trend to resume. Cattle prices are finding support from strong packer demand, as beef cutout prices appear to be firm from holiday orders. The latest USDA Cattle on Feed report showed cattle placed into feedlots during October at 11.487… Get the Complete Report »

Corn
Corn margins maintained mid-month levels, as the futures market’s slight decline was offset by an increase in basis bids. With domestic stocks/usage levels historically tight, South American weather has grabbed the market’s focus. Currently, meteorologists’ forecasts are for the strongest La Nina event in the last 60 years. Soil moisture levels at present support that projection, and the market continues to keep tabs on the developing crop. Both China and Russia have recently been reported as potential large buyers of Argentine corn (5 million metric tons and 3 million metric tons, respectively). Although firm commitments of such purchases have not been made known; if confirmed, they would represent nearly 50% of projected Argentine exports for the entire season. This would further reduce exportable… Get the Complete Report »

Soybean
Soybean margins deteriorated during the period, as a weaker futures market was partially offset by a stronger basis. Rhetoric out of China was the main driver behind lower futures prices, as hints of further interest rate hikes are likely to try and stem that country’s inflated food prices. China continues to purchase U.S. soybeans in record quantities though, accounting for over 65% of all export sales each week for this marketing year. China’s crushing margins remain at profitable levels, and China’s appetite for soybeans will likely continue until crushing margins fall into the red. South American crop progress is faring better; however, the La Nina weather pattern has many paying close… Get the Complete Report »

Wheat
Wheat margins maintained mid-month levels, as a strengthening basis more than offset a weaker futures market. NASS winter wheat crop conditions reported the crop at 47% good-to-excellent in its latest reading. This is one of the lowest on record heading into dormancy. Historically, conditions that are rated this poorly as the crop enters dormancy do not bode well for production, and typically result in below-trendline yields. Meanwhile, global demand for higher protein wheat remains stout. The U.S. will have the job of being the breadbasket to the world through the rest of the marketing year, as export quotas, export restrictions, and further global supply reductions are sending countries to the U.S. for wheat. The most recent crop issues are in Eastern Australia, where flooding rains are potentially destroying… Get the Complete Report »

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