Margin Watch: June

July 2, 2012 by Chip Whalen

Hog
Margins deteriorated sharply over the past two weeks primarily due to soaring feed costs. Margins would actually have been even worse if not for a late month recovery in hog prices, particularly in nearby contracts. Projected hog finishing margins are now well below average as well as negative in both Q4 and Q1 following readings near or above the 90th percentile earlier this year. A searing heat wave accompanied by drought has dimmed what earlier were bright hopes for this season’s corn and soybean crops especially in the Eastern Corn Belt. Crop conditions have declined steadily over the past few weeks and are now record low for this point in the growing season. USDA released their June acreage and quarterly stocks reports this morning, which pegged June 1 corn stocks at 3.15 billion bushels and final acreage at 96.405 million, up 541,000 from the March Planting Intentions. Soybean acreage was revised up 2.178 million from March to 76.08 million acres, with June 1 soybean stocks at 667 million bushels. All eyes are on weather though, and rainfall over the next two weeks will be critically important to stem a further decline in corn yield prospects. USDA’s… Get the Complete Report »

Dairy
Margins were mixed over the past two weeks, holding steady in Q3 but weakening in deferred periods as strength in milk was more focused on nearby contracts and only partially helped to offset surging feed costs. The second half of June featured a blistering corn rally brought on by sharply deteriorating crop conditions due to expanding drought across the Midwest. The situation is particularly acute in the Eastern Corn Belt States of Illinois and Indiana where a third of the nation’s crop is produced. Without a widespread, soaking rain over the next week or two, many crops may be completely lost as the pollination period gets underway and determines yield. USDA did increase corn area slightly by 541,000 acres in this morning’s report to 96.405 million, although harvested area was revised down to 88.9 million acres from the June WASDE estimate of 89.1 million. Soybean acreage increased 2.178 million from the March Planting Intentions to 76.080 million acres, although lower yields may ultimately negate the impact of the larger acreage base. USDA’s Cold Storage report showed… Get the Complete Report »

Beef
Beef margins were mixed over the past two weeks, weakening in some marketing periods while strengthening in others. The last half of June was marked by a sharp advance in corn due to expanding drought conditions across the Midwest which crushed the feeder cattle market. Live cattle prices moved higher during the second half of the month. Margins remain severely depressed through the December marketing period, with February 2013 the only period even above average from a historical perspective. USDA revised their acreage figures this morning, pegging corn at 96.405 million – up 541,000 from the March Planting Intentions. June 1 stocks were pegged at 3.15 billion bushels, just slightly under the average of pre-report estimates. The focus of the market though is clearly on weather, and it is critically important that the Eastern Midwest receive soaking… Get the Complete Report »

Corn
Nearby corn margins have deteriorated since the beginning of April while deferred 2012 margins are relatively flat for the period. USDA recently estimated ending stocks to be unchanged from February at 801 million bushels. Based off the accelerated pace of disappearance revealed in the NASS Quarterly Stocks report, the market had expected the USDA to reduce the ending stocks in the latest WASDE report. A few things were offered as reasons behind the status quo estimate. Firstly, wheat feeding had been picking up displacing corn in livestock rations both domestically as well as globally. Secondly, it was noted that due to the early planting pace this year, the USDA expects new crop corn to be harvested prior to September 1 and thus be counted as old crop corn. Currently it is estimated that 7% of the intended corn crop has been planted versus 3% last year and 2% on average. USDA also adjusted Argentine and Mexican production lower, in line with market expectations. China’s beginning… Get the Complete Report »

Soybean
Both nearby as well as deferred soybean margins have continued to gain since the beginning of April, as cash and futures’ prices have moved higher. USDA recently estimated ending stocks down 25 million bushels from March to 250 million bushels, reducing the stocks/usage ratio to 8.2%. The U.S. export forecast was raised 15 million bushels to 1.29 billion bushels based off of lower expected production out of South America. The crush rate was also raised due to the exceptional pace of domestic soybean meal usage. These demand increases were partially offset by a combined reduction of seed and residual usage of 5 million bushels. The USDA also reduced the estimated size of both Argentina and Brazil’s production to 45 million metric tons and 66 million metric tons respectively—in line with private forecasts. With increased demand prospects, domestic weather this spring and summer will be vital for the soybean market going forward, particularly because of the reduced expectation for planted acreage. Nearby margins are now at the 95th percentile, and deferred 2012 margins are at… Get the Complete Report »

Wheat
Wheat margins have deteriorated marginally since the beginning of April, as the slight increase in basis values have done little to offset the lower futures’ prices. USDA recently reported ending stocks lower by 32 million bushels from March to 793 million bushels, reducing the stocks/usage ratio to 36.2%. Based off the Quarterly Grain Stocks report, Q3 disappearance was faster than usual and implied greater feeding during the period. As such, USDA raised feed usage by 35 million bushels but lowered seed usage by 3 million bushels addressing the smaller planted acreage estimate. Throughout the verbatim text, USDA refers to slower corn use due to increased wheat feeding, not only in the U.S. but also on a global scale—particularly in China. U.S. ending stocks are considered to be ample at present, but have steadily decreased over the last three years. By class, SRW saw the largest drop in its stocks/usage ratio now at 46.8% compared to 58.4% last month, but are still the most ample supply of wheat on a relative basis with HRW stocks/usage projected at 43.0% and HRS stocks/usage projected at 30.0%. Current conditions of winter wheat show that 61% of the crop is in good-excellent condition and has put added pressure on prices. Spring plantings are also well ahead of schedule due… 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.