Margin Watch: Mid-February

February 17, 2012 by Chip Whalen

Margins continued to improve since the end of January, particularly in the second half of 2012 with historically strong profitability being projected for Q3 and Q4 which are now around the 98th percentile of the past 5 years. The improvement stems mainly from an increase in deferred hog prices, with feed costs contained by an offsetting rise in meal and drop in corn over the past two weeks. December export data continue to show strong demand for pork, with the US Meat Export Federation reporting 2011 pork exports totaled 2.255 MMT valued at $6.11 billion, breaking the previous volume record of 2.052 MMT and shattering the value record of $4.88 billion—both established in 2008. Year-over-year, pork exports were up 18% in volume and 28% in value, and equated to 27.5% of total production when including both muscle cuts and variety meat. While this may be a tough act to follow in 2012, there is general optimism with improving economic indicators that demand will remain strong and pork competitively priced. February’s WASDE report tightened… Get the Complete Report »

Margins continued to erode since the end of January, deteriorating to around breakeven through the first half of 2012, while the second half of the year still offers marginal profitability. From a historical standpoint, current profit margins are well below average throughout the year as milk prices plummeted over the past month. Block and barrel spot cheddar prices remain depressed below $1.50/lb. while spot butter prices are down sharply from January and are trading below $1.40/lb. for the first time in nearly two years. Spot whey prices have also been under pressure, which has likewise contributed to the decline of Class III futures at the CME. USDA revised down their 2012 all milk price forecast due to higher production estimates. Milk production is forecast to increase by 1.1% this year to 199 billion pounds. Feed costs remain in check, although there is concern over old-crop corn supplies. USDA revised down ending stocks 45 million bushels in the February WASDE due to an increased export forecast, and the world supply/demand… Get the Complete Report »

Finishing margins continued to strengthen since the end of January as feed costs declined slightly while cattle prices have held relatively steady. On a relative basis, margins remain the strongest in nearby marketing periods where feeder cattle and feed costs have already been realized. The strong rally in live cattle futures over the past two months has added significantly to profit margins for feedlots where the revenue side of the margin equation is still open. While the rally has paused, there remains optimism that beef demand will stay strong in 2012 despite higher prices. The US Meat Export Federation reported beef exports finished the year at 1.287 MMT valued at $5.42 billion. This broke the 2003 volume record of 1.274 MMT and easily surpassed the 2010 value record of $4.08 billion. Export volume was 21% larger than in 2010, with value up 33%. USDA released their February WASDE report, highlighting a further cut in corn ending stocks to 801 million bushels representing 6.3% of annual usage. A 50-million bushel increase to the export forecast was the primary reason for the decline, as USDA cut… Get the Complete Report »

Margins have remained relatively flat since the beginning of February as both futures’ prices and basis levels have stayed range bound. The USDA recently estimated domestic corn ending stocks 45 million bushels lower than the January estimate at 801 million bushels. This came as a result of an increase in the export forecast of 50 million bushels to 1.7 billion bushels, and an increase in imports of 5 million bushels. The export forecast has been raised by 100 million bushels over the last few months, as both the sales pace and the shipping pace have remained strong relative to historical measures. Each year at the end of February, USDA publishes baseline projections for the following decade which include a snapshot of economist’s view of current and future expectations to domestic supply and demand. Although the number will be updated on the 24th of February, current acreage expectations in the baseline report estimate the U.S. will plant 94 million acres of corn for the 2012/13 crop year. If realized, that would be the largest seeded acreage since 1944. That said the first official acreage estimate will come… Get the Complete Report »

Both nearby as well as deferred soybean margins have increased moderately since the beginning of February, as both futures’ prices and basis values have risen. The USDA recently estimated domestic soybean ending stocks at 275 million bushels, unchanged from the January estimate. Spot crush margins improved over the period, as product values outpaced the gains in soybean prices. NOPA recently reported the January crush to be 142.8 million bushels which implies a total crush figure around 149 million bushels, as the NOPA figure includes roughly 95% of all crushing facilities. The cumulative crush stands at 710 million bushels for the crop year to date which is roughly 4% lower than last year’s level versus the USDA’s estimate of a slowing of 2%. Soybean oil stocks were reported to be 2.098 million pounds which came in higher than the trade estimate. This is the third consecutive month of higher soybean oil stocks. The increase has been attributed to a slowing in biodiesel demand. On the global front, USDA lowered both Argentina and Brazil’s soybean production estimates in the last WASDE… Get the Complete Report »

Margins have fallen since the beginning of February, as futures’ prices weakened. The USDA recently estimated domestic wheat ending stocks to be 845 million bushels, 25 million bushels lower than the January estimate. The reduction came from an increase in projected exports of 25 million bushels to 975 million bushels with strong sales and increased demand out of Mexico and South Korea. Domestic weather continues to be above-normal in relation to temperatures and below-normal with respect to precipitation. This still leaves the dormant crop at risk of winter-kill if temperatures move lower. On the global front, the Black Sea region continues to be aggressive competitors with respect to the export market. Russia has yet to announce any restrictions or duty on exports, which has kept prices at bay. ABARES recently estimated Australian production at 29.5 million tons, up… 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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