Margin Watch: Mid-August

August 15, 2011 by Chip Whalen

Hog
Margins deteriorated sharply since the end of July, following a combination of higher corn costs and lower hog prices over the past two weeks that eroded profitability for hog producers. Projected profit margins for Q4 are now negative vs. an indicative $7.00/cwt. profit less than one month ago. Other margins through the first half of 2012 are now only slightly above average after flirting with the 90th percentile of the past five years. While cash hog prices remain at all time highs supported by a strong export market and Chinese demand in particular, there is growing concern over the possibility of a double-dip recession and slowing global demand that has weighed on deferred hog prices following the recent downgrade of U.S. sovereign debt and the associated volatility in outside markets. Meanwhile, corn prices reached new contract highs after USDA lowered their yield forecast for this year’s crop to 153 bushels per acre, down 5.7 bushels from July due to extremely hot temperatures and below-normal precipitation throughout much of the Corn Belt during July. Acreage was also reduced and production was forecast down 556 million bushels… Get the Complete Report »

Dairy
Margins deteriorated since the end of July, as milk prices declined while feed costs increased. While nearby Q3 margins are still near the 90th percentile of the past five years, deferred margins in the first half of 2012 are below-average and barely above breakeven. Following a surge in price to all-time highs, Class III milk futures have dropped significantly through the first half of August. Aggressive offers on barrels last week caused the September contract to drop by the exchange limit of 75 cents, and growing indications of weakness in outside markets following the last few Fonterra auctions as well as higher production in both Australia and New Zealand has put pressure on prices. Although export demand remains strong, there is growing concern over the possibility of a renewed global recession following the U.S. debt downgrade and the ongoing debt issues in the EU. Feed costs continue to surge with corn making new contract highs following the release of USDA’s August crop report, which forecast a sharp drop in projected… Get the Complete Report »

Beef
Margins improved over the past two weeks as cattle prices generally increased more than corn costs since the end of July. To be sure, the feed outlook does not look promising for fall cattle placements as USDA sharply reduced their projected corn yield in the August WASDE report. At 153 bushels per acre, the yield is forecast down 5.7 bushels from last month due to abnormally hot weather across the Corn Belt through the month of July, accompanied by below-normal precipitation. Acreage was also reduced in the re-survey that was conducted such that total production is forecast down 556 million bushels from last month. The adjustment takes the corn stocks/use ratio back down to a historically tight 5.4% for the new marketing year. Cattle prices remain supported by strong beef exports, with weekly data showing exports of fresh/frozen beef cuts up 44% from a year ago during the four full weeks of July. For the year, USDA forecasts… Get the Complete Report »

Corn
Margins have improved significantly since the beginning of August, as the futures market has continued to show strength. The corn crop dealt with extreme heat during July, when silking and pollination occurred. As of August 7, 93% of the corn crop had been through the silking phase of development which is the primary yield determining stage. As a result of the extreme weather, NASS reported a reduction in projected yield to 153.0 bushels per acre, down from 158.7 last month. The reduction in yield coupled with a reduction of 500,000 harvested acres puts the estimated domestic crop at 12.914 billion bushels. If realized, production would be the third largest on record; however, demand for the new crop is projected at 13.160 billion bushels –85 million bushels less than last year–and the second highest on record which produces a stocksto- usage ratio of only 5.4%. China has continued its effort to stymie food inflation by incentivizing its pork producers. As a result, corn and other feed ingredients shipped to China have continued at a steady pace from all origins. Both nearby as well as deferred 2012 margins are now at the highest observed… Get the Complete Report »

Soybean
Margins have deteriorated slightly since the beginning of August, as lower basis values have represented the majority of the decline. August represents the time of year where pods fill and yields are determined. The extreme heat in July has abated thus far in August; however, precipitation is important during this period as well as adequate soil moisture. A shift to a hot/dry weather pattern could have a negative impact on yields. Due to the wet spring and unfavorable July weather, NASS reduced domestic yields to 41.4 bushels per acre, down from 43.4 last month. In the recent monthly WASDE report, USDA adjusted projected 2011-12 exports and crush lower. The exports were lowered addressing increased competition from South America, namely Brazil, with larger production available for export. The domestic crush is projected to be the slowest since the 2003-04 crop year, as increased DDG usage in feed rations has kept meal supplies at higher levels. On the global front, China has allowed edible oil prices to rise by 5%, and Chinese crushers are again profitable on imported soybeans. Nearby margins are now back to the 85th percentile, and deferred… Get the Complete Report »

Wheat
Nearby wheat margins have increased moderately, while the deferred 2012 wheat margins have increased only slightly since the beginning of August, as weaker basis values have been more than offset by higher futures prices. In the recent monthly WASDE report, NASS reduced planted and harvested acreage, likely addressing abandonment from the Northern Plains spring wheat production region. The world balance sheet was the main focus of the August crop report, as large increases in world production and exports were reported. The FSU nations of Russia and Ukraine are forecast to export 58.21 million metric tons, 11 million tons higher than the previous month’s estimate and these supplies will compete directly with U.S. soft red wheat. USDA also noted that wheat is competitively priced relative to corn for feed use in both the U.S. as well as in world markets. Nearby margins are now back to the 65th percentile and deferred 2012 margins are now near the 73rd percentile. Some of our clients continue to consider protection strategies that… Get the Complete Report »

About the Author

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