Margin Watch: July

August 3, 2012 by Chip Whalen

Margins continued to weaken over the second half of July as feed costs moved steadily higher while hog prices failed to keep pace. One exception to that trend though has been in far deferred periods of 2013, where traders may be anticipating a more significant herd reduction due to the likelihood that sharply higher feed costs will stick in the new crop year. Forward margins remain at or below the 10th percentile through Q1 2013, and only about average from a historical perspective beyond that. Crop conditions have been declining all summer, and now both corn and soybean condition rating indices are below 1988 for this point in the season. Analysts expect USDA to make another significant cut to their yield and production forecasts in the August WASDE report, with corn below 130 bushels per acre and soybeans under 40. Rainfall may still help to preserve soybean yield potential, and the next two weeks are seen as critical with the crop now moving through its pod-setting stage of development. The hog market has been weak… Get the Complete Report »

With the exception of Q2 2013, margins deteriorated since the middle of July mainly due to soaring feed costs, although weakness in milk has also contributed to lower margins in nearby Q3 which are now negative and near the 10th percentile on a historical basis. Nearby margins remain under pressure as soaring feed costs due to the worsening drought are juxtaposed against softening milk and dairy product prices. USDA’s latest Cold Storage report showed American Cheese stocks at the end of June totaled 629.9 million pounds, up 9.9 million from May and 10.7 million above last year. The June stocks figure also represented a new 10-year high. At the same time U.S. stocks are growing, world dairy product prices remain soft and are weighing on U.S. values. This pressure can be seen in recent softness of August Class III futures, although strength in deferred contracts has also been noted recently. Through the middle of July, dairy cow slaughter is running 9.8% ahead of the same period last year while weekly… Get the Complete Report »

Beef margins improved slightly since the middle of July, but remain extremely depressed in nearby marketing periods through the end of the year. By contrast, margins are now quite strong in early 2013 marketing periods, existing at the 80th to 90th percentile from a historical basis in February and April. A sharp drop in feeder cattle prices since the middle of June in response to soaring feed costs has gone a long way to restore forward beef cattle finishing margins where all three variables remain open. Feed costs remain the biggest concern for cattle finishers as this summer’s historic drought continues. Crop condition indices for both corn and soybeans are now below 1988 for this point in the season, and the market expects a sharp drop in yield and production forecasts to be revealed by USDA’s August WASDE. USDA released their semi-annual cattle inventory data along with the monthly Cattle on Feed report, which portend future reductions in beef production. Total cattle inventory on July 1 was pegged at 97.8 million head, down 2.2% from last year and 0.8% lower than the average trade guess. Of that total, 12.3 million head represented cattle on feed, only 0.8% higher than last year but almost 2% below… Get the Complete Report »

Nearby corn margins have increased sharply, particularly for nearby margins as both futures’ prices and basis levels have risen. Crop conditions continued to deteriorate throughout the remainder of July as hot and dry conditions continued to plague the crop. Rainfall was near-zero during pollination with many areas receiving only spotty coverage. Crop conditions were recently reported to be 24% in good to excellent condition, down from 77% to begin the growing season. Worse yet, 48% of the crop is in poor to very poor condition, matching the drought stricken 1988 crop conditions for that category. With deteriorating conditions, private forecasters have lowered yield and total production forecasts dramatically. Yield forecasts range from 122 bushels per acre to 130.8, well below the current USDA forecast of 146 bushels per acre. Total production forecasts range from 11.2 billion bushels to 11.8 billion bushels, also well below the current USDA forecast of 12.97 billion bushels. The drought has no doubt… Get the Complete Report »

Nearby soybean margins have moved higher while deferred 2013 margins lost value from the middle of July as the drought-stricken crop has supported nearby prices, while the prospects for record large South American supplies in 2013 have kept those prices somewhat at bay. Crop conditions continued to deteriorate throughout July as the lack of rainfall and record temperatures has stressed the crop. As a result, crop condition ratings recently show that 29% of the crop is in good to excellent condition, down from 65% to begin the growing season. As conditions continued to deteriorate, private forecasters have lowered yield projections and total production. Currently, forecasters estimate yields ranging from 35.7 bushels per acre to 39.5 bushels per acre compared to USDA’s current estimate of 40.5 bushels per acre. Total production estimates have also been lowered, ranging from 2.7 billion bushels to 2.9 billion bushels versus the USDA’s estimate of 3.05 billion bushels. Aiding margins further has been the record pace of export sales for delivery in the new crop year. Exporters have sold… Get the Complete Report »

Nearby wheat margins have risen over the last two weeks while deferred 2013 margins have lost some ground. Weather has been the main fundamental concern for the marketplace. The Southern Plains continue to see searing temperatures and drought conditions, stressing the crop. Harvest in the Northern Plains has come along as the lack of rain has allowed progress to continue. Currently, 28% of the crop has been harvested, with initial yield results showing up near trend. Domestically, wheat has moved higher with corn prices, as substitution as a feed ingredient is still somewhat viable. On the global front, weather too remains the major concern particularly in Russia. The Russian government recently estimated the wheat crop to be 45 million metric tons, 4 million tons lower than the current USDA estimate. Yields have been reported to be down 28% year over year as severe drought damaged the crop. The slack in supply has shown up in Russian flour prices which are up nearly 30% just in the… 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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