Margin Watch: August

September 5, 2012 by Chip Whalen

Margins continued to deteriorate over the second half of August, with both spot Q3 and Q4 profitability now at the lowest levels in over twenty years. A combination of higher feed costs and lower hog prices both contributed to the weaker margins over the past two weeks. Results from the annual Pro Farmer crop tour confirm dire yield and production prospects for this year’s corn and soybean crops, with final tour results both below recent USDA estimates in the August WASDE. Pro Farmer pegged national corn yield at 120.25 bushels per acre and production at 10.478 billion bushels, down about 300 million bushels from the current USDA forecast. Soybean yield was pegged at 34.8 bushels per acre with production estimated at 2.6 billion bushels, down 92 million bushels from the USDA. Expectations are now … Get the Complete Report »

Dairy margins improved slightly since the middle of August, with historically strong margins evident from Q4 forward into 2013. Even spot Q3 has turned positive over the past two weeks, offering dairy farmers a respite from high feed bills. Unlike their contemporaries in the beef cattle and hog industries, dairies have been fortunate to see the price of milk keep up with rising feed costs. Soybean meal in particular has experienced sharply higher prices over the past few weeks as concerns grow over declining old-crop soybean supplies coupled with uncertainty over new-crop production. Recent rainfall has come too late to add much in the way of yield to the crop, and last week’s Pro Farmer crop tour results showed a yield and production forecast for soybeans below the current USDA estimate. Milk prices meanwhile have … Get the Complete Report »

Beef margins continued their August trend since the middle of the month, improving in nearby periods and weakening in further deferred 2013 marketing periods. Although they remain highly volatile, corn prices appear to have stabilized recently as most of the new-crop supply damage is now known while it is clear that high prices have both curbed export demand and slowed the ethanol grind. As a result however, feeder cattle prices are beginning to strengthen which is weakening forward margins where feeder costs remain a variable to open market beef finishing margins. The fat cattle market has been supported by strength in boxed beef prices through the month, with the choice cutout up $15.58/cwt. since the beginning of August to $193.47/cwt. which is 3.3% higher than last year and 6.6% above the 3-year average. While total beef in cold storage declined from June to 455.7 million pounds, stocks remain 10% above last year. Pro Farmer meanwhile finished their annual crop tour, and pegged the final corn yield at 120.25 bushels per acre with production at 10.478 billion bushels – 300 million below the current USDA estimate. Expectations are growing that … Get the Complete Report »

Nearby corn margins have increased substantially since the beginning of July, as both futures’ prices and basis levels have risen. USDA recently slashed ending stocks for the 2012/13 crop by 698 million bushels to 1.183 billion bushels. The estimated reduction in supplies came mainly from a sharp reduction in supplies. Crop condition ratings have been in free fall since the beginning of the growing season, with the current conditions reporting that 40% of the domestic crop is in good-to-excellent condition due to the record heat and drought conditions during development. As a result, USDA lowered yield forecasts from 166 bushels per acre to 146 which resulted in the production side of the balance sheet being reduced 1.82 billion bushels. USDA dropped demand estimates as well citing that record high prices would curb demand. Feed and residual usage was … Get the Complete Report »

Both nearby and deferred soybean margins have rebounded sharply since the beginning of July, as both futures’ prices and basis levels have risen. USDA recently reported ending stocks for the 2012/13 crop to be 10 million bushels lower than June’s estimate at 130 million bushels. The reduction in ending stocks came from adjustments on both sides of the balance sheet. Crop condition ratings have been poor for the entire growing season, with the current conditions reporting that 40% of the domestic crop is in good-to-excellent condition due to the record heat and extreme drought conditions. As a result, USDA lowered yield forecasts from 43.9 bushels per acre to 40.5 which lowered production 155 million bushels. USDA cut demand estimates to address the sharp reduction in supply forecasts. The crush was lowered 35 million bushels reflecting the impact of higher soybean meal prices on meal exports and domestic disappearance. Exports were lowered by 115 million bushels as expected competition from South America will weigh on the U.S. market. However… Get the Complete Report »

Nearby as well as deferred 2012 wheat margins have moved sharply higher since the beginning of July, as futures’ prices have more than offset weaker basis levels. USDA recently reported ending stocks for the 2012/13 crop to be 664 million bushels, at the lower end of market expectations. USDA lowered harvested acres 400,000 from last month, which affected the production figure with yield slightly higher versus June. Exports were raised 50 million bushels from last month, as USDA noted sharp production losses out of the FSU, with exports from the region reduced 5.5 million metric tons. China’s production was also lowered by 2 million metric tons. Recent news also reported a developing El Nino pattern in the second half of this year will focus attention on the Australian crop as that event has historically led to … 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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