Margin Watch: January

February 2, 2012 by Chip Whalen

Hog
Projected hog finishing margins posted strong gains since mid-January, with Q3 and Q4 in particular showing significant improvement from earlier in the month. Margins are now above the 90th percentile of the past 5 years throughout 2012, and are at or above the 80th percentile in the first half of 2013 as well. Prices generally have moved higher over the past two weeks, but hogs have advanced more than the cost of feed. The hog market continues to draw support from strong demand, with November export data from FAS reflecting pork muscle cut exports at a record 169,460 metric tons—up 23.2% from a year ago and the cumulative January-November total up 22% from 2010. On a value basis, the November total of $515.8 million was even more impressive—representing a 33.7% increase from a year ago with the year-to-date total at $4.822 billion up 30.1% from 2010. The corn and soybean meal markets continue to draw strength from lower crop forecasts in South America, although drought conditions have started to ease in both Argentina and Brazil with recent rainfall. This may help stabilize corn conditions and actually help to improve yield prospects for soybeans which are still going through their pod fill stage of development… Get the Complete Report »

Dairy
Margins deteriorated since the middle of January, due to a combination of lower milk values and higher feed costs. Recent reports have cast a shadow over the milk market. According to USDA’s Cold Storage report, American cheese stocks increased 16.7 million pounds in December, the most in six years and indicative of slowing demand. December 31 inventories of 600.7 million pounds were also 7.4% above the 5-year average. December milk production of 16.559 billion pounds was up 2.5% from 2010, and dairymen expanded during the month. Cow numbers totaled 9.221 million head, up 12,000 from November. In addition, production per cow of 57.9 lbs. per day was also up 0.9 lbs. or 1.6% from a year ago. Meanwhile, corn prices continue to advance on reduced crop forecasts out of South America, and basis values in the U.S. interior have been very strong with tight farmer holding. Also, the recent pace… Get the Complete Report »

Beef
Beef finishing margins improved over the past two weeks, particularly in nearby marketing periods where feeder cattle costs have already been realized. Cattle prices have been very strong since the middle of January, and the increased value has more than offset the higher cost of feed over the same period. Deferred margins also showed improvement though, where all three variables remain open to the profit margin equation. USDA’s January Cattle Inventory report reflected a reduced herd size, consistent with market expectations although the figures were a bit below pre-report estimates. In total, there were 90.769 million cattle and calves on U.S. farms as of January 1, down 2.1% from last year and 0.5% below the average of pre-report estimates. The beef cow herd though was 3.1% below last year when the market was anticipating only a 2.6% reduction on average. The year-over-year drop was the largest since 1986 when the herd declined 4.7%. The report continues to paint a bullish picture… Get the Complete Report »

Corn
Margins have improved moderately since the middle of January, as futures’ prices as well as nearby basis values have risen. U.S. exports over the period have remained strong, and the USDA seems justified in raising their forecast in the recent WASDE report. Based on the current pace of sales and shipments, exports appear to be on target to meet the USDA target of 1.65 billion bushels, particularly if South American yields come in worse than already feared. Interior basis values have risen sharply of late, particularly in the Eastern Corn Belt. Part of that is due to the strong export market, but also due to the fact that ethanol production margins have picked up recently. Currently, the USDA is targeting the use of 5 billion bushels of corn for ethanol, virtually unchanged from the 2010/11 usage. Based on weekly data, the current pace of usage is running roughly 3% ahead of last year. South American weather has improved of late, and could help the soybean crop going forward, but will do little to improve the damage to the corn crop… Get the Complete Report »

Soybean
Both nearby as well as deferred soybean margins have gained since the middle of January, as futures’ prices as well as nearby basis values have risen. U.S. exports have picked up over the last two weeks, but are still running roughly 20 million bushels behind the pace needed to meet the USDA estimate, as increased global competition has put a downward pressure on both sales and shipments. The current sales pace stands at 74.9% of projected exports versus 74.8% on average. On the global front, China has banned imports of oilmeal from India, saying they have found traces of a hazardous chemical in some shipments, which could bring demand of both meal and whole beans to the Americas. South American weather has improved of late, particularly for some major growing regions in Brazil, whose beans are in the pod-filling stage of development. Barring extreme heat going forward, yields appear to be stabilizing and improving due to the timely rains. However, early field reports show that drought damage has… Get the Complete Report »

Wheat
Margins have improved significantly since the middle of January, as both futures’ prices and basis values have strengthened. Despite the weather, domestic news has been slim. The U.S. is experiencing a much warmer-than-normal winter, and could have potentially negative effects if the temperatures return to seasonal norms. Of the areas that have snow cover, the protection that cover provides is slowly diminishing with the warmer temps. Domestic export sales and shipments continue to keep pace with the current USDA estimate of 950 million bushels. On the global front, bitter cold across Europe as well as in Russia is creating support in the market, as the trade begins to estimate what, if any, damage has occurred due to the potential of winterkill in the region. Russia is also in the process of deciding whether to impose some sort of duty on exports from April onward, as stockpiles have dwindled. Russia tends to slow the export pace during that period, however. Global demand appears to be shifting out… Get the Complete Report »

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