Margin Watch: Mid-October

October 17, 2011 by Chip Whalen

Hog
Margins dropped slightly from extremely strong values seen at the end of September, but remain at historically high levels of profitability for producers through all of 2012. While hog prices remain well-supported and have increased in price over the past two weeks, feed costs have unfortunately been stronger after bottoming at the beginning of the month. USDA released the October WASDE report this week which incorporated the 2010/11 ending stocks noted in the September 30 data. While corn ending stocks increased as a function of that report, yields were not raised as analysts had expected. Harvested area was also lowered in line with FSA data such that production declined 64 million bushels. The soybean balance sheet tightened as a function of lower yield, production and beginning stocks not completely being offset by a reduced export forecast. Similar to corn, soybean meal prices have also moved higher in the past two weeks. Hog prices are firm as demand continues to be very strong. Despite the fact that hog slaughter… Get the Complete Report »

Dairy
With the exception of nearby Q4, dairy margins deteriorated over the past two weeks as feed costs have risen faster than milk prices. Forward margins remain only average at best, but are nonetheless positive throughout 2012. USDA released the October WASDE this week, reflecting increased corn ending stocks in the 2011/12 marketing year. All of that increase was due to higher beginning stocks carried in from the previous crop year, which was already known in the September 30 report. Yield was left unchanged to the surprise of analysts expecting an increase, and harvested area was revised lower in line with FSA data. Soybean ending stocks were trimmed as lower yield, production and beginning stocks more than offset a reduced export forecast. China meanwhile has been a big buyer this week of both corn and soybeans, signaling to the market they perceive value at current price levels. After beginning the month on a firm note, milk prices have come under pressure recently as softness has been noted in the international market. Fonterra reported that… Get the Complete Report »

Beef
Margins held pretty steady since the end of September, as increases to feed costs and feeders were larger in line with increased fat cattle prices. Beef finishing margins remain exceptionally strong from a historical standpoint in nearby periods through marketings against the April contract, and steadily deteriorate in forward periods. USDA released the October WASDE which increased corn ending stocks from the September report, although all of this increase was already reflected in the September 30 stocks data. To the surprise of analysts expecting an increase, USDA left the corn yield unchanged at 148.1 bushels per acre, and lowered both planted and harvested acres in line with FSA data. Cattle prices meanwhile remain very firm, and have advanced to new contract highs in deferred months. The October WASDE cited stronger than expected demand for beef in supporting higher forecasted cattle prices in the remainder of 2011 and through 2012. Meanwhile, the bullish tone for the cattle complex was strengthened by this week’s announcement that a free trade agreement has been reached with South Korea that could significantly boost U.S. beef exports to that country next year. Many of our clients have made or considered tactical adjustments to their margin strategies recently to take advantage of sharply lower corn prices to convert… Get the Complete Report »

Corn
Margins improved moderately since the beginning of October, as both basis and futures have rebounded. USDA recently reported an increase in ending stocks to 866 million bushels, putting the stocks to usage ratio at 6.8% versus 5.3% last month. The increase was due to larger beginning stocks based off of the September 30 grain stocks reported by NASS, as slower usage during the fourth quarter boosted carryover. NASS reported harvested area to be down 452,000 acres to 83.9 million acres, reducing production by 64 million bushels. On the demand side, USDA reduced exports by 50 million bushels citing higher expected Black Sea production and exports increasing competition. As of Sunday, October 9, U.S. farmers harvested 33% of the corn crop, well behind last year’s swift pace of 50% complete; however, in-line with the 10-year average of 32%. On the global front, production for China, Ukraine and the Former Soviet Union was each raised significantly, with China now expecting a record 182 million metric ton crop. Both nearby margins and deferred… Get the Complete Report »

Soybean
Margins improved moderately since the beginning of October, as both futures and basis have rebounded. USDA recently reported a reduction in ending stocks to 160 million bushels, lowering the stocks to usage ratio to 5.1% from 5.2% last month. NASS reduced harvested area by 147,000 acres, and also lowered yield by 0.3 bushels per acre to 41.5 for the national average. The smaller crop was slightly offset by a decrease in export expectations of 40 million bushels, as the USDA cited the current slow pace of exports sales and strong early season export competition from South America. As of Sunday, October 9, U.S. farmers harvested 51% of the soybean crop, compared to 63% completed last year and 48% on a 10-year average. Weather conditions in South America have normalized some over the last week; however, some dry conditions persist in Argentina. Both nearby and deferred… Get the Complete Report »

Wheat
Margins improved slightly since the beginning of October, as both futures prices and basis have strengthened. USDA recently reported an increase in ending stocks of 76 million bushels to 837 million, with major adjustments to the balance sheet. On the supply side, NASS reduced planted and harvested area by 800,000 and 200,000 acres respectively. NASS also lowered the national yield estimate by 1.3 bushels per acre to 43.9, ultimately reducing overall production by 69 million bushels. USDA cut total demand however by 134 million bushels, as feed use and exports were both lowered. USDA cited that despite competitive wheat prices relative to corn for livestock, feed and residual usage during the final quarter was well below last year and feed demand was cut by 80 million bushels. Exports were reduced 50 million bushels, as tighter spring wheat supplies domestically will limit the exportable surplus, while at the same time increased competition is noted from Canada, Australia and Russia. Nearby margins continue to tread in negative territory, while deferred 2012 margins still present the opportunity to secure a slightly positive margin. Nearby margins are at the 45th percentile, and deferred… 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.