Margin Watch: Mid-March

March 16, 2012 by Chip Whalen

Hog
Margins continued to deteriorate since the end of February as hog prices dropped while meal moved higher and corn stayed relatively flat over the past two weeks. From a historical perspective, profit margins remain strong–at or above the 80th percentile of the past five years with the exception of nearby Q2. Despite this, forward margins are now $2.00-$4.00/cwt. lower than where they were a couple weeks ago. On the feed side of the equation, USDA’s March WASDE report held few surprises for the market which now appears to be in a waiting mode for the acreage figures due at the end of the month. USDA did confirm lower estimates for South American soybean production, supporting soybean meal. Corn’s balance sheet was left unchanged from February, keeping a neutral tone in that market. Hog prices meanwhile have been under pressure lately as concerns mount about deteriorating packer margins and what this portends for hog demand moving into spring. With hog weights rising counter-seasonally and cutout values falling, hog prices may have to follow suit. Many of our clients who have added coverage recently given the very strong historical margin opportunities are now assessing those strategies for adjustments ahead of the quarterly Hogs and Pigs and grain stocks reports at the end of the month, along with the Prospective Plantings from the USDA. Adding flexibility back into tactical strategies given the recent break in hog prices as well as t… Get the Complete Report »

Dairy
Margins improved since the end of February, particularly in deferred periods where milk prices have experienced a rebound over the past two weeks. Feed costs remain very high, and soybean meal prices in particular have continued to appreciate following the USDA’s March WASDE report which confirmed lower soybean production in South America. Both Argentina’s and Brazil’s soybean crops were reduced by 1.5 million tons and 3.5 million tons, respectively, from last month. Class III Milk futures meanwhile have rebounded sharply off of recent lows as export data for January was quite strong. Cheddar cheese exports increased 27% or 2.4 million pounds year-over-year to 10.8 million pounds, with exports to Mexico up sharply and accounting for 21% of total exports during the month. The strong exports were confirmed by January stocks data showing American cheese stocks down by 4% from 2011 despite the fact that American cheese production during… Get the Complete Report »

Beef
Finishing margins generally deteriorated over the past two weeks, as fat cattle futures dropped sharply while feeder cattle futures fell more modestly and corn futures remained relatively flat since the end of February. USDA’s March WASDE report was relatively neutral for corn, with no changes to the domestic balance sheet other than a 10-cent narrowing in the average price forecast. Only minor changes were noted on the global balance sheet, leaving the market in a waiting mode until the much-anticipated Prospective Plantings report due out at the end of the month. While feeder cattle supplies remain tight, beef finishing margins are squeezing feedlots and affecting their ability to bid up for yearlings to place on feed. Moreover, beef packer margins have been under pressure with cutout values not allowing packers much incentive to pay up for fat cattle. While fewer cattle are coming to market, they are showing up… Get the Complete Report »

Corn
Margins have deteriorated back to the levels of early October, as futures prices have fallen. Domestic news during the period has been slim, as harvest is now complete and demand prospects are all that is left for the market to follow. Export sales over the last few weeks have been relatively disappointing as compared to historical standards for this time of year; however, cumulative sales stand at 53% of the USDA estimate compared to 42% on average for this week of the marketing year. Export shipments have picked up in recent weeks, but are still slightly behind the weekly pace needed to meet the USDA forecast of 1.6 billion bushels. Regarding ethanol production, weekly data shows a consistent usage of corn over the last 7 weeks ranging from 95 to 97 million bushels. Production of ethanol is on pace to meet the current USDA projection of 5 billion bushels of usage. On the global front, South American weather continues to be non-threatening and generally ideal for the remaining fields left to be planted. U.S. corn continues to find further competition in the export market, particularly out of the Black Sea region, where values for feed grains are more competitive. Both nearby margins as well as deferred 2012 margins continue to maintain at… Get the Complete Report »

Soybean
Margins deteriorated moderately since the middle of November, as futures prices have continued to decline. Domestic news during the period has been slim, as harvest wraps up in the Midwest. Export sales currently stand at 57% of the USDA estimate compared to 54% on average for this week of the marketing year. The sales pace has slowed considerably over the last 6 weeks, reflecting increased competition–particularly out of South America. Export shipments have been waning as well of late and are currently 30 million bushels below the pace needed to meet the USDA forecast of 1.325 billion bushels. On the global front, Chinese crush margins remain weak, creating a slight disincentive to import soybeans. However, the Chinese government is starting to stockpile reserves once again to replace what they sold out a few months ago. The Chinese government is also offering farmers the equivalent of $17 per bushel for domestic soybeans, slightly below current levels, which is acting as a price support for the near term. Both nearby and deferred 2012 margins have lost ground recently, with nearby margins now at the 61st… Get the Complete Report »

Wheat
Nearby wheat margins have deteriorated since the middle of November, as strengthening basis levels did little to offset the decline in futures prices. The latest crop progress report shows winter wheat in relatively good condition overall. The crop was rated 52% in good to excellent condition, up 2 points from last week; while the poor to very poor came in at 12%, down 4 points from last week. The winter wheat crop was also estimated to be 92% emerged. This has certain implications going forward, namely the fact that there is very little snow cover at present. Snow cover protects the winter crop from hard killing freezes through the winter. The unusually warm weather thus far has kept the crop from damage. Snow cover is needed however, as the cold weather will inevitably arrive. Global wheat prices continue to remain competitively priced, and mostly better than U.S. offers. Continued competition from the Black Sea region is expected, as prices there remain below U.S. offers. Nearby margins continue to tread in negative territory, while deferred 2012 margins still present the opportunity to secure a slightly positive margin. Nearby margins are at the 38th percentile, and deferred 2012 margins are at the 49th percentile. Some of our clients that considered protection strategies that provided for a range… Get the Complete Report »

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