Margin Watch: Mid-July

July 18, 2011 by Chip Whalen

Margins were mixed over the past two weeks, improving in nearby Q3 and Q4, but deteriorating slightly in the first half of 2012. Overall, profit margins remain historically strong, resting above the 80th percentile of the past five years through Q1 2012, and above the 70th percentile of Q2 2012. Hog prices have been quite firm in nearby periods, helping to explain the margin improvement through the remainder of 2011, as it appears that China has booked a substantial tonnage of U.S. pork to quell rising domestic prices and inflationary pressures. Hog weights are seasonally declining, which is also limiting pork production and supporting cutout prices. USDA’s July WASDE report indicated higher corn ending stocks as expected by the market, although the increase was not as strong as analysts were forecasting given the June 1 stocks recently reported by NASS. Meanwhile, very hot weather is moving into the heart of the Corn Belt as the crop enters pollination, which has put some risk premium back into the market. The July WASDE also confirmed lower new-crop soybean acreage and production, which is likewise supporting the soybean meal market… Get the Complete Report »

Margins were relatively flat over the past 2 weeks in nearby Q3 and Q4, as increasing milk prices and feed costs were largely offsetting. Margins deteriorated through the first half of 2012 however, as milk futures were steadier in deferred contracts against rising new-crop corn and meal futures. The strength in nearby milk futures continues to be supported by cheese prices which have traded above $2.00 in blocks for 29 straight days, the third longest stretch on record. Offers are beginning to pressure cash cheese however, and cheese production increased in May over April on a per-day basis for the first time since 2005. Also, prices softened in Fonterra’s recent Global Dairy Trade auction, with SMP prices averaging $3,704/ton, down 15% from the June 1 price and the lowest since January. Similar weakness was likewise noted in the WMP and AMF auctions. In addition, Rabobank is expecting a strong flush from Oceania this fall, which may further pressure dairy prices. Feed costs meanwhile continue to rise as risk premium has come back into both the corn and soybean meal markets. Recent heat moving through the Midwest is hitting the corn crop right at pollination while the July WASDE reduced soybean production due to lower acreage… Get the Complete Report »

Margins were mixed since the end of June — deteriorating against the August, October and December marketing periods, due to declining fat cattle values against rising corn costs, although strengthening in both the February and April marketing periods where declining feeder cattle prices on open positions there improved the overall crush margin. Cattle prices have begun to weaken after showing significant strength since the beginning of June. Beef cow slaughter has surged over the past two weeks due to the massive La Nina-inspired drought that has devastated the Southern Plains states of Oklahoma and Texas. The drought itself is affecting a broad area from Arizona in the West all the way through the Southeast and up the Mid-Atlantic to Maryland. Pasture conditions have declined significantly and the affected states represent almost half of the beef cow herd based on the January inventory report. Meanwhile, reduced hay availability and a recent increase in corn prices have spiked feed costs. USDA increased corn ending stocks in the July WASDE as expected, although the increase was much lower than analysts had forecast. In addition, very hot… Get the Complete Report »

Margins have improved since the beginning of July, as the futures market recovered nearly all of the price declines seen in June. The largest factor for the recovery was the monthly WASDE ending stocks figure. The USDA reported 2011/12 ending stocks up 175 million bushels to 870 million bushels, roughly 130 million below the pre-report estimate. Based off of the larger-than-expected June 1 corn stocks figure, the trade had expected feed/residual usage to be reported lower than the 5 billion bushel figure the USDA reported. It would appear as though the USDA is reluctant to reduce feed usage much below current figures given the profitability in the livestock sector. USDA raised total demand for the 2011/12 crop year to 13.5 billion bushels, 30 million bushels above projected production. This will continue to keep the focus on domestic weather, with trendline yields and large harvested acreage required to ensure adequate ending stocks. Extreme heat is forecasted for the coming week, which could put stress on pollinating plants with short soil moisture. On the global front, China has purchased large sums of U.S. corn and is rumored… Get the Complete Report »

Margins have improved moderately since the beginning of July, as the futures market is now back to the May highs. Several factors contributed to the rise in price, namely the June 30 acreage report in which NASS reduced planted and harvested acres. USDA lowered its ending stock forecast for the 2011/12 crop year by 15 million bushels to 175 million bushels to account for the reduced acreage figure which lowered production 60 million bushels. Domestic usage continues to lag year-ago levels, and crush seasonally declines through the remainder of the crop year. Further aiding the price recovery was the reemergence of China on the U.S. export sales reports. Chinese pork producers are now seeing record profits, as the government has issued subsidies to producers. Meal prices there have rallied nearly $40 per metric ton since May. Chinese crush margins that were negative for the majority of this year, are now moderately positive. Nearby margins are back to the 92nd percentile, and deferred 2012 margins are now above… Get the Complete Report »

Margins have improved since the beginning of July, as the futures market has seen gains. The main factor contributing to the rise in price was the reaction to the June 30 acreage report stating that planted acreage would be lower than initially intended. NASS will re-survey some states to confirm planted area and would report any discrepancy as early as the August WASDE report. Weather has also played a central role to price movement, as the southern plains continue to see extreme drought conditions. USDA lowered its ending stock forecast for the 2011/12 crop year by 17 million bushels to 670 million bushels. The export estimate was increased 100 million bushels to 1.15 billion bushels to account for increased sales projections due to the poor Canadian wheat conditions. This increase in demand was offset by larger carry-in stocks and larger projected production. On the global front, the expiration of the Russian ban on exports has yet to drum up much business to that region. Nearby margins are now back to the 64th percentile and deferred 2012 margins are now near the 74th percentile. Some of our clients continue to consider… Get the Complete Report »

About the Author

Chip Whalen, CIH

Chip Whalen

Chip is one of our resident educators with over fifteen years of teaching, trading, and senior risk management experience.

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.

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