Margin Watch: Mid-April

April 15, 2011 by Chip Whalen

Hog
Margins were mixed over the past two weeks, deteriorating in nearby Q2 and Q3 while improving in Q4 and Q1 of 2012. Much of the reason for the weakening summer margins has to do with the USDA’s quarterly stocks report on March 31, signaling much lower corn stocks than the market was anticipating. While ending stocks failed to decline in the April WASDE, USDA seems to be indicating that there is no room to cut them further. This means demand rationing will have the chore of figuring out how to end up with 675 million bushels of corn on August 31. Needless to say, the market has moved to new highs as a result. Meal values have dropped as domestic demand remains weak, and hog prices have generally held firm since the end of March. Wholesale pork values have been a major contributor of higher lean hog futures prices… Get the Complete Report »

Dairy
Margins held relatively steady since the end of March, as slightly higher milk prices and feed costs were largely offsetting. From a historical standpoint, projected profitability remains only average through year-end, though still positive. Q1 margins in 2012 are still projecting a slight loss, though near breakeven. Feed costs continue to be a major concern heading forward through spring, as USDA kept their corn ending stock projection for the current crop year unchanged in the April WASDE at 675 million bushels. Despite expectations for a cut based on the March 1 stocks estimate, the government seems to be indicating that there is no room to cut it further and the market will need to figure out how to arrive at that number by August 31. On a positive note, lackluster domestic meal demand has weighed on both futures and basis, and milk prices generally have remained firm with deferred contracts moving to new highs over the past two weeks. Strong… Get the Complete Report »

Beef
Production margins dropped considerably over the past two weeks, as fed cattle prices have weakened at the same time that corn costs have increased. The formatting of our margin graphs has changed since the last report at the end of March to look at marketing periods based off of the individual live cattle contracts. While not directly comparable to the calendar year quarters in the March report, you will notice that fed margins have generally contracted around $5.00/cwt. over the past two weeks. Corn costs are higher as a result of futures responding to a perceived lack of demand rationing in old-crop supplies. The March 1 stocks would seem to indicate that we are using corn at a faster rate than what the USDA projects to have leftover at the end of the crop year. Meanwhile, cattle prices have succumbed to weakness as record-high… Get the Complete Report »

Corn
Margins have improved moderately since the end of March. USDA stated in its monthly supply and demand report that ending stocks for the 2010/11 crop year remained at their previous estimate of 675 million bushels. Ethanol usage was projected higher by 50 million bushels due to profitable margins leading to increased production through March. USDA reduced feed and residual usage 50 million bushels citing that soft red wheat would be incorporated in feed rations due to the parity in price between corn and wheat. USDA stated further that projections for an early harvest in the South could cause new-crop corn to enter the pipeline before September 1. These adjustments imply that corn ending stocks at present represent pipeline supplies, and the market has a rationing chore ahead. The market will shift… Get the Complete Report »

Soybean
Margins have deteriorated appreciably since the end of March, as the futures market has priced in a slowdown in Chinese demand. USDA stated in its monthly supply and demand report that ending stocks for the 2010/11 crop year remain at their previous estimate of 140 million bushels. USDA addressed the recent slowdown in the monthly crush pace and reduced that by 5 million bushels. They also reduced exports by 10 million bushels citing the slow pace of shipments through the period. Residual usage was raised, offsetting the decrease, which accounted for the large quarterly disappearance indicated in the March 31 stocks report. China has been virtually absent from the export market for weeks, as South American offers have been more competitive than U.S. soybeans, which has kept a lid on prices… Get the Complete Report »

Wheat
Margins have weakened slightly to begin April. USDA reported a lower ending stocks figure in this month’s supply and demand report. The 4 million bushel decrease was due to a higher seeding number from the Prospective Plantings report at the end of March. USDA stated in its verbatim text that given the price parity to corn, soft red wheat will likely enter feed rations for hog and poultry producers in Southern states. USDA recently began reporting winter wheat conditions as the crop has come out of dormancy. Current conditions are rated at 36% good-to-excellent, 9% higher than the worst on record. That compares to 65% a year ago and 50% on a 10-year average. Needless to say, the winter wheat crop needs ideal weather going forward to avoid disappointing yields and field abandonment. On the global front, Chinese… Get the Complete Report »

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.