Margin Watch: October

November 1, 2011 by Chip Whalen

Hog
Margins dropped slightly since the middle of the month as hog prices weakened while feed costs held relatively steady. Most of this weakness was evident in nearby periods, with deferred margins only down slightly from two weeks ago, and overall profitability through the first half of 2012 remains very strong above the 90th percentile of the past five years. Even the second half of 2012 is projecting margins above the 80th percentile of the past five years. Hog prices have begun to slip as it appears cutout values are coming under pressure. Cutout prices late last week were down around 2% from the week before, and are beginning to reflect back to cash hog prices which likewise have declined. As of Thursday, the Iowa/Southern Minnesota lean carcass price was quoted at $86.05/cwt., down $6.20/cwt. or 7.2% from the week before. Feed costs meanwhile have stabilized as crop producers are deciding to store rather than sell newly harvested bushels off the combine. Basis levels are firming as a result, although demand remains… Get the Complete Report »

Dairy
Margins generally improved since the middle of October as milk prices recovered while feed costs have held relatively steady. 2012 margins remain about average from a historical perspective, though still projecting profitability for dairymen as of right now. As harvest wraps up across the Midwest, most producers are putting corn and soybeans into storage with the exception of those supplies pre-contracted earlier in the season to deliver at harvest time. Consequently, basis levels have been strengthening with minimal new-crop supply moving. Milk prices meanwhile although strengthening of late may be vulnerable to pressure. July milk deliveries in the EU were up 3% from a year ago, while shipments through the first seven months of the year are up 3.9 billion pounds or 2.2% from last year. Most of this production has gone to skim milk powder. Production also remains heavy out of both Argentina and New Zealand, with output up 14.7% and 12.7% respectively through the first seven months of the year. At the same time, demand from China has dropped significantly with WMP imports in the June-September period down 43% from a year ago. Our… Get the Complete Report »

Beef
Finishing margins deteriorated since the middle of October as cattle prices declined while feed costs held steady. This was especially true in nearby periods where live cattle remains the open variable in the margin equation, although in deferred periods where feeder cattle prices are open as well, weakness there helped to preserve margins. A main catalyst of the recent weakness was USDA’s October Cattle on Feed report, which showed cattle inventories much higher than market expectations. Cattle on feedlots with 1,000 head or more October 1 totaled 11.312 million head, up 4.9% from last year when the market was only expecting a 3.9% increase. Moreover, cattle placed on feed during September totaled 2.469 million head, essentially equal to September 2010 placements when the market was anticipating a 3.5% reduction from last year. While supplies are expected to tighten over next spring into summer, it appears beef production will continue to be close to last year as the market works through current supplies… Get the Complete Report »

Corn
Margins have gone sideways since the middle of October, as futures’ prices have traded in a choppy fashion. Price trends during the period have been quite volatile, as the market has gotten mixed inputs. Helping firm cash prices has been the slow pace of domestic harvest as compared to last year. Harvest was reported as 78% complete versus 90% last year, and 62% on a 10-year average. Also supporting price has been the pace of corn export sales. Currently, cumulative sales for the 2011-12 marketing year rest just above 50% of the current USDA forecast with 46 weeks remaining in the marketing year. This is the fastest the crop has reached the 50% sold mark in the last 20 years. However, export shipments for the marketing year are running approximately 25 million bushels behind the average pace. Shipments do, however, have a tendency to pick up in the next few weeks. Also keeping a lid on price has been the volatility and uncertainty with the currency markets. Late last week, the U.S. dollar was approximately 6.50% lower on the month, as it appeared as though the European sovereign crisis had been averted. Both nearby margins as well as deferred 2012 margins continue to maintain historically strong levels. Nearby margins… Get the Complete Report »

Soybean
Margins have declined moderately since the middle of October, as futures’ prices have fallen. Exports during the period have been substantial, as China has loaded out over 1.50 million metric tons for delivery. Some private forecasters are looking for China to import upwards of 58.50 to 60 million metric tons of soybeans this year. That compares to the current USDA estimate of 56.50 million tons. However, business sourced from the U.S. is projected to be slightly lower for this marketing year at 24.50 million tons versus 24.98 million tons last year. The increased import pace is understandable, as China’s crush industry is expected to reach 125 million metric tons by the end of 2012, up 12.50 million tons from last year. Domestically, harvest is nearly complete, with the latest reports showing 87% of the soybean crop harvested compared to 83% last year and 95% on a 10-year average. Currently, domestic crushers are having trouble producing hi-protein meal causing some Midwest basis values to rise, as the late summer heat stressed the crop and reduced protein content in the soybeans while increasing oil content to a historic high. Both nearby and deferred 2012 margins have lost ground recently, with nearby margins at the… Get the Complete Report »

Wheat
Margins have improved slightly since the middle of October, as firmer basis levels have accounted for most of the increase in margins. The domestic winter crop was reported to be 89% planted and 68% emerged, both around average for the last 10 years. Planting delays, however, are noted for the Eastern Belt, specifically for Ohio which is reported to be 67% planted versus 91% on a 10-year average. Initial crop conditions for the winter crop are near the lowest levels on record. Continued drought in the Southern Plains is harming the newly seeded winter crop. The entire crop is rated at 46% in good-to-excellent condition, matching last year’s record low reading, as the states of Kansas and Oklahoma have gotten off to a terrible start. Global wheat prices remain more competitively priced than U.S. offers, with Ukraine receiving the majority of the export business of late. Continued competition from the Black Sea region is expected, as prices remain below U.S. offers. Nearby margins continue to tread in negative territory, while deferred 2012 margins still present the opportunity to secure a slightly positive margin. Nearby… 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.