Margin Watch: Mid-March

March 15, 2011 by Chip Whalen

Hog
Margins continued to decline since the end of February, as a sharp selloff in the hog market has more than offset the savings from a similar decline in feed costs. The markets generally have been in retreat, particularly within the past week as traders and analysts determine the short and long-term impact of the epic earthquake in Japan. Damage continues to be assessed; however, it is clear that the condition of ports, roads and transportation infrastructure will cause disruptions in export shipments to the country. Given they are a major consumer of U.S. corn and pork, those markets understandably have come under heavy selling pressure. In response to the crisis, the Bank of Japan has injected over $220 billion of liquidity into domestic money markets, and longer term, this should be stimulative to food demand as the country… Get the Complete Report »

Dairy
Margins were mixed over the past two weeks. Nearby Q2 dropped $0.90/cwt. since the end of February from projecting a 75-cent profit to now anticipating a 15-cent loss, while deferred margins reflected offsetting losses and gains of around 10 cents in Q3 and Q4, respectively. We also began tracking margins in Q1 2012, which is projecting a slight profit at current levels. Nearby milk futures experienced sharp losses since the beginning of the month, as block cheese prices have dropped significantly in the past few sessions. According to USDA’s Dairy Products report, cheese production in January rose 5% from the year before to 883.4 million pounds; however, dairy product exports in January were up 53% from a year ago. International prices reflect strong demand, with milk powder prices up more than 30% since the end of 2010… Get the Complete Report »

Beef
Production margins improved since the end of February as lower feed costs more than offset a loss in cattle values. In particular, nearby margins in Q2 and Q3 improved the most, as feeder costs are already fixed relative to a sharp decline in corn prices while fed cattle values have held up. The markets generally have been in decline with the epic earthquake in Japan raising concern over nearby demand for corn and beef from a major U.S. customer. While significant damage to ports, roads and transportation infrastructure will no doubt compromise export shipments, rebuilding efforts will be huge and necessitate a sharp increase in food supplies to the country over the longer term. Beef prices remain supported meanwhile by sharply reduced imports through the first two months of the year, and carcass weights of slaughtered cattle appear to be getting lighter with more dairy cows in the mix. USDA’s March WASDE left the corn balance sheet unchanged, although the market… Get the Complete Report »

Corn
Margins have deteriorated sharply since the end of February, as futures have lost nearly $1.00 per bushel. USDA reported an unchanged balance sheet in its recent supply and demand report; however, they did adjust world numbers. The surprise came from South America where Brazilian production was increased 2 million metric tons and Argentine production was left unchanged. The market had expected a more neutral to bullish report. Adding to the negative tone has been the unspeakable tragedy that has occurred in Japan. As of the latest reports, two of roughly a dozen of Japan’s ports are impassable and imports have ceased at those locations. Japan imports roughly 15 million tons of U.S. corn annually, and there have been reports that at least 1 million tons of shipments will be delayed. It is unknown the amount of damage caused in Northern Japan to the extent of livestock as well as grain loss. Further, nuclear reactors are now unstable and emitting radiation in the immediate area… Get the Complete Report »

Soybean
Nearby soybean margins have deteriorated significantly since the end of February, as the futures market has removed premium. USDA reported an unchanged ending stocks figure in its recent supply and demand report. USDA adjusted residual usage down 3 million bushels, and adjusted seed usage up 3 million bushels, potentially implying more soybean acres. The world figures came in as a bit of bearish news, as USDA estimated Brazilian production up 1.5 million tons to a record, 70 million tons. USDA also estimated Chinese soybean production up 0.8 million tons. These increased production figures were a bearish shock to the market, and have helped the world ending stocks from slipping for now. Adding to the negative tone has been the devastation and destruction in Japan. The situation there remains unstable, as radiation is being emitted to the area. Current estimates from… Get the Complete Report »

Wheat
Margins deteriorated significantly since the end of February, with futures down over $1.50 and basis weakening 40-cents. USDA raised its estimate for domestic ending stocks to 843 million bushels, up 25 million bushels from February’s estimate. USDA noted the adjustment was due to a reduction of exports, with increased world supplies of high quality wheat, particularly in Australia, and a slower-than-expected pace of U.S. shipments. The conflict in the Mid-East continues, and has kept the market in a volatile state. The most recent conflict has now spread to Saudi Arabia. The unrest has energy markets on edge, and has kept a premium bid on corn, as over 35% of the domestic U.S. crop is used for ethanol, and has continued to pushed the spot wheat/corn relationship to multi-year lows. If this trend continues, the market may begin to price in some switch in feed demand from corn to wheat. The U.S. plains have received beneficial moisture recently, and crop conditions will be monitored closely as the winter crop comes out of dormancy. It is important to note that this year’s crop entered dormancy at one of the lowest ratings in recent years, which puts… 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.