Margin Watch: August

September 1, 2011 by Chip Whalen

Hog
Margins continued to deteriorate over the past two weeks as an ongoing rally in the corn and soybean meal markets was combined with lower hog prices. With the exception of Q2 2012, forward hog production margins are projecting losses and are sitting at the bottom quartile of the past five years (see graphs). Since USDA lowered their yield outlooks for both the corn and soybean crops in the August WASDE, many private analysts have been hinting at further cuts in the September and October crop reports due to the ongoing deterioration of weekly crop conditions. Higher prices are now beginning the demand rationing process for the new-crop season, and livestock producers are clearly expected to share in this burden. Hog prices have been under pressure as the cutout is showing weakness with belly prices in particular down sharply. The drop in belly prices alone recently has been responsible for 80% of the fall in cutout value, even though bellies make up only 16% of the carcass. Concerns are that other primal cuts such as loins and ribs… Get the Complete Report »

Dairy
Margins deteriorated since the middle of August, as higher projected feed costs more than offset slightly higher milk prices in some periods. Generally speaking, forward margins remain favorable through year-end, but are below-average at breakeven or a slight loss through the first half of 2012. Following USDA’s August WASDE, weekly crop conditions have continued to deteriorate and many private analysts have reduced their yield and production estimates further for both the corn and soybean crops. The domestic livestock feed industry will be hit hard by lower feedgrain production, which will directly impact dairies already suffering from significantly reduced hay supplies and higher prices. Strong bids in the spot cheese market have helped to support Class III Milk futures recently, although softer international markets are weighing on the U.S. In addition, USDA’s Cold Storage report indicated a build in cheese stocks, with American Cheese supplies up 30.9 million pounds in July–the largest one-month increase in 7 years and… Get the Complete Report »

Beef
With the exception of far deferred periods against June and August marketings, beef production margins for feedlots deteriorated over the past two weeks primarily as a function of higher feed costs. While live cattle prices have declined since the middle of August, feeder cattle prices have also moved lower which helps to explain the slight margin improvement against the June and August marketing periods. Things remain pretty bleak however for the cattle industry as forward margins are projected to be negative against all but the April marketing period through the first half of 2012. Corn costs have crept higher due to expectations for lower production this season, with crop conditions continuing to decline since the beginning of August. Many private analysts have reduced their yield and production estimates below even the latest USDA forecast given the deterioration in both the Eastern and now Western Corn Belts. Beef prices have come under pressure with weaker consumer sentiment raising fears of a potential return to recession which would be particularly negative for demand heading into the holiday season. There is also… Get the Complete Report »

Corn
Margins have improved during the last half of August, as the futures market continued to move higher. The corn crop is maturing at a faster pace this year than anticipated, as many believed the late planting pace would push back harvest. Although harvest may end up being on time, and risks for killing freezes will diminish, yields continue to be the market’s focus. In a recent survey, the Pro Farmer Crop Tour put the national corn yield at 147.9 bushels per acre, 5.1 bushels per acre below the NASS survey results issued in the last WASDE report. The tour cited the hot July weather that affected the Illinois and Indiana crops adversely, with yields well below average. Test weights for those states were also estimated to come in on the low side. Crop conditions during the period have deteriorated, with the national crop estimated at 54% in good-to-excellent condition against a 5-year average of 58%. On the global front… Get the Complete Report »

Soybean
Margins have improved significantly since the middle of August, as the futures market has priced in deteriorating yields. Since NASS lowered their yield forecast in the August WASDE, nearby soybeans have rallied $1.70. August represents the time of year where soybean pods fill and yields are determined. Precipitation is important during this period as well as adequate soil moisture. August was hotter and drier than normal in a majority of regions. This has negatively impacted the crop, as the national rating at 57% good-to-excellent condition is on par with the 10-year average, but down significantly from the middle of July. The domestic crush continues to be slow amid ample meal stocks. Export sales and shipments are subdued, as China has remained largely absent from the U.S. export market for old-crop soybeans. New-crop export commitments are continuing to show up, but at a slower pace than last year… Get the Complete Report »

Wheat
Production margins improved somewhat since the middle of August, as stronger futures have overcome weaker basis levels. Spring wheat conditions have continued to deteriorate over the past two weeks, down 5% in the good-to-excellent category to 61%. There have also been indications of increased wheat feeding displacing corn in livestock rations, particularly in the Southeast. On the global front, Russia has continued to win global tenders, as their wheat prices are offered some $15-20 per metric ton below competing U.S. prices. Further, most wheat out of the Black Sea is priced lower than U.S. corn, and that has also put a cap on rallies. The world has ample wheat stocks at present, with the stocks to usage ratio at comfortable levels. Global weather is also favorable particularly for South America as well as Australia, so no production threats are on the horizon in the Southern Hemisphere. Nearby margins… Get the Complete Report »

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