Margin Watch: Mid-September

September 16, 2011 by Chip Whalen

Hog
Margins improved significantly since the end of August, owing to a combination of higher hog prices and a sharp selloff in both corn and especially soybean meal. While forward profitability has recovered for hog producers over the past two weeks, margins remain below the levels seen earlier this summer. The hog market continues to be supported by strong demand, with renewed interest from China in particular helping exports. July export shipments of 386.2 million pounds were up 17.9% from last year with year-to-date exports reaching 2.837 billion pounds, up 15.6% from 2010. Meanwhile, following the release of USDA’s September WASDE report, the feed market has been in decline. NASS raised the soybean yield forecast 0.4 bushels per acre from August to 41.8 bushels per acre, surprising most analysts expecting a decline based on lower crop condition ratings throughout the month of August. While the corn yield projection was in line with trade estimates, higher prices appear to be rationing demand for both corn and soybeans, and this may be contributing to the recent selloff. Wit… Get the Complete Report »

Dairy
Margins improved since the end of August, due mainly to a sharp decline in feed costs. Milk prices held relatively steady in nearby periods, although deferred milk futures in 2012 posted gains over the past two weeks, helping to support Q3 margins which we just began tracking in this report. 2012 margins are all at or below average levels from a historical basis, but are nonetheless positive. The sharp selloff in corn and soybean meal in particular seems to have accelerated since the release of USDA’s September WASDE report. To the surprise of analysts, soybean yields were increased when the market was expecting a decline. While the corn figures were in line with trade expectations, USDA noted a sharp reduction in demand and it does appear that higher prices may already be accomplishing this demand-rationing chore. Milk prices are holding steady, although further strength may be limited by signs of increased competition. Cheese exports slipped from peak levels earlier this year as U.S. cheese prices moved above Oceania prices for the first time since the fall of 2009. Many of our clients with current… Get the Complete Report »

Beef
Margins improved for all marketing periods over the past two weeks, due primarily to a sharp decline in corn costs. Feeder cattle prices actually gained on live cattle prices since the end of August, but this was more than made up by a significant drop in corn prices. USDA’s September WASDE reported corn yield in line with expectations at 148.1 bushels per acre, with production dropping 417 million bushels to 12.497 billion. As a result, demand was likewise cut sharply by 400 million bushels, with half of that coming from lower feed demand and the other half split between lower exports and ethanol usage. While there was nothing particularly bearish about the report, traders seem to be focusing on the demand side of the equation, and high prices already appear to be accomplishing this demand rationing chore. Beef prices remain supported by strong export demand, with July shipments recorded at 272.1 million pounds–up 33.3% from last year. Year-to-date beef exports are now 27% higher than 2010, with every major market showing increases with the exception of Mexico and… Get the Complete Report »

Corn
Margins deteriorated moderately since the beginning of September, as slightly stronger basis values did not keep pace with weakening futures prices. USDA reported ending stocks 42 million bushels below the August estimate at 672 million bushels–pipeline levels. NASS lowered the national yield estimate 4.9 bushels per acre to 148.1, as crop conditions continued to deteriorate into September. This resulted in a reduction in supply of 417 million bushels. USDA in turn reduced overall demand by 400 million bushels, cutting feed usage 200 million bushels, corn for ethanol usage by 100 million bushels and exports by 100 million bushels. As a result of the adjustments, the stocks-to-usage ratio continues to hover near all-time lows at 5.3%. On the global front, Argentina’s production was raised by 1 million metric tons, while Brazil’s production was raised by 4 million metric tons; making up for roughly half of what was lost domestically. U.S. corn faces competition from South… Get the Complete Report »

Soybean
Margins deteriorated significantly since the beginning of September, as futures prices have plunged nearly $1 from the recent highs. In the latest monthly WASDE, USDA raised ending stocks 10 million bushels to 165 million bushels. This resulted mainly from an increase in NASS’ national yield estimate by 0.4 bushels per acre to 41.8. USDA raised exports by 15 million bushels, making up for some of the production increase. As a result, the stocks-to-usage ratio rose to 5.2% from 4.9% in August. USDA adjusted soybean oil demand down this month. Usage for methyl ester production was raised by 100 million pounds due to the profitable margins; however, food usage was lowered a significant 400 million pounds. The soybean meal balance sheet was unchanged, as beginning stocks were raised and production was lowered, offsetting one another. On the global front, USDA made very few adjustments to the balance sheets. South America will continue to provide strong competition in the export market, as surpluses there continue to be priced competitively. Both nearby as well as deferred 2012 margins are at the 90th percentile, and continue… Get the Complete Report »

Wheat
Margins have fallen sharply since the beginning of September, as futures and basis values have both deteriorated precipitously. In the latest WASDE report, USDA raised ending stocks by 90 million bushels to 761 million bushels. This was a direct result of lower demand forecasts, particularly for exports. USDA reduced exports by 75 million bushels, citing larger supplies and exports for both Canada and the E.U. It was also reported that ending stocks of the higher quality wheat, Hard Red Winter and Hard Red Spring, rose from August which furthered the bearish momentum. By class, Hard Spring wheat continues to have the tightest balance sheet comparatively, although supplies remain adequate from a historical perspective. The global situation loosened a bit as well, as global production was estimated 6 million metric tons higher than last month, with only a modest increase in demand. The current global stocks-to-usage ratio is now 28.75%, on the higher end of the last 5 years. Nearby margins are now in the red at the 58th percentile. Deferred 2012 margins are slightly positive, at the 66th percentile. Some of our clients… Get the Complete Report »

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