Margin Watch: Mid-February

February 16, 2011 by Chip Whalen

Hog
Margins ere mixed over the past two weeks, deteriorating in nearby Q1 and Q2 though strengthening in the second half of the year. The hog market experienced a correction to start the month of February, and this was concentrated in nearby futures months where most of the strength had been during the second half of January given the strong cash market. Deferred contracts in summer and fall months continued to move higher though, with renewed optimism that demand will be very strong this year–particularly in the export market due to the weak dollar and economic expansion in developing markets. Feed costs have also increased since the end of January, as the USDA surprised… Get the Complete Report »

Dairy
Margins continued to improve since the end of January, as the sharp rally in milk futures accelerated over the past two weeks. Dairy product prices remain quite firm, and there is increased optimism that demand will stay very strong through 2011 supporting the Class III and Class IV markets. To be sure, USDA raised their Class III and Class IV price forecasts in the February WASDE to reflect higher product prices forecast from strong export demand and improving domestic demand. Unfortunately, feed costs are also expected to remain high as USDA revised corn ending stocks lower in the February WASDE. Corn demand for ethanol was forecast up 50 million bushels from January, which combined with higher food demand of 20 million bushels reduced ending stocks by 70 million bushels. As a result, the stocks/use ratio is now forecast… Get the Complete Report »

Beef
Production margins margins were generally flat to slightly stronger over the past two weeks, as rising cattle prices helped offset higher costs measured by corn and feeder cattle. Corn prices continued moving higher since the end of January, as USDA’s February WASDE report highlighted lower ending stocks and a tighter supply/demand balance than what the market was anticipating. Corn used for ethanol was projected up 50 million bushels from January, with food use also increased by 20 million bushels. The resulting 70 million bushel drop in ending stocks lowers the stocks/use ratio down to 5.0%, the tightest in modern history matching the 1995/96 crop year. While beef production was forecast higher by the USDA in 2011 based on large recent placements of cattle into feedlots, the cattle price forecast was also raised to reflect continued strong demand for relatively tight supplies of cattle according to the USDA. In addition, beef exports were raised from January, while the import forecast was lowered… Get the Complete Report »

Corn
Margins improved moderately from the beginning of February, as the futures market accounted for the gain. The February 9 WASDE report propelled the market higher, as an even tighter domestic balance sheet was reported. Ending stocks were estimated to be 675 million bushels, the lowest since the 1995/96 marketing year. Domestic demand was adjusted higher, with corn used for ethanol increasing by 50 million bushels to 4.95 billion bushels. Food use was also revised higher by 20 million bushels. These adjustments put the current domestic stocks-to-usage ratio at 5.0%, tying the previous record low seen in the 1995/96 marketing year. The global situation also tightened, with global stocks-to-use at 14.64%, the lowest since the mid-1970s. Given the historically tight supply/demand balance, 2011 planting intentions will become the main focus. Meanwhile, South American weather… Get the Complete Report »

Soybean
Nearby margins weakened slightly since the end of January, while deferred 2011 margins strengthened. The February 9 WASDE report has thus far represented the high-water-mark for price, as the USDA estimated ending stocks to be 140 million bushels, roughly the level of the last two years, and entirely unchanged from its January report. This keeps the current stocks-to-usage ratio near a 45-year low at 4.2%. Competition from both corn and cotton for acres this spring will be the driving force over the next few months. The global situation did tighten slightly, with a stocks-to-usage ratio at 22.8%. Further, South American weather has abated a bit, as timely rains have kept the Argentine crop from deteriorating further, and has aided the pod-filling Brazilian crop. Weather in Brazil has been ideal for the majority of the growing season, and private forecasts are for a record crop of 70.3 million tons. USDA upped its forecast for Brazil to 68.5 million tons on February 9, following private analysts… Get the Complete Report »

Wheat
Margins have improved significantly since the end of January, as futures strengthened. The February 9 WASDE report left ending stocks unchanged at 818 million bushels; however, the report did note an increase in exports of hard red winter wheat and a reduction in exports for hard red spring wheat. The major mover during the period continues to be a global surge in demand. Russia’s suspension of its wheat exports until the end of June continues to keep the market supported. Civil unrest in the Middle East likewise has kept the market on edge, as governments are keen to contain domestic food inflation. The conflict in Egypt has been settled with Hosni Mubarak stepping down and ceding control to the military. Traders remain concerned though that the unrest may spread to other countries, notably Iran. The U.S. Plains did receive… Get the Complete Report »

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