Livestock Margins Improve

Published on: 17:13PM Feb 05, 2010


Market Watch with Alan Brugler

February 5, 2010


Livestock Margins Improve


To compound the bearish attitudes triggered by the January USDA report data, the US dollar has been rallying rather smartly against the euro and some other developed world currencies. That increase in the dollar continued this week, with a failed debt auction in Portugal and a sharp increase in the CDS premiums for Greek government debt driving a sharp drop in the euro because of perceived default risk. The effect on the ag commodities was rather uneven, however, due to other competing themes such as the slide in crude oil and the EPA’s announcement of the RFS2 standards for biofuels.


Consistent with our headline, both cattle and hog futures were higher for the week, while the main input costs (corn and soybean meal and feeder cattle) were all lower. That meant a nice improvement in feeding margins, at least in the front end. Cattle crush margins also moved into the black for the March crush, the first time in months that it has been possible to lock in feeders, corn and the selling price at profitable futures prices simultaneously. Cattle futures rose on higher cash cattle prices, with cash trading in Nebraska at $136-137 on Thursday.


Hogs were also higher for the week despite mid-week weakness in the pork cutout. In the end, the products same back, losing only 4 cents in the cutout for the week despite weakness in loins, picnics and bellies. Traders were worried about pricing pressure from poultry, with Russia refusing entry to US chicken processed with chlorine rinses and China announcing a stiff tariff on imports of US poultry as a retaliatory measure for the earlier US hike in the tariff on Chinese tires.


Cotton won the contest for worst price performance, losing 3.49% for the week despite booking the strongest weekly export sales of the year the week before, at higher prices. The stronger dollar doesn’t affect sales to China, because the Yuan is pegged to the dollar. It does threaten sales to Europe, which saw the euro sinking and concerns about economic growth. Traders are looking for USDA to slightly increase projected exports in Tuesday’s report, dropping ending stocks below last month’s 4.3 million bale projection.


Soybeans were down a single penny per bushel for the week despite increased production estimates for South America from several sources and an average trade estimate for world ending stocks above 60 MMT in 2010/11. Soybean oil was firm on the potential for biodiesel demand yet in 2010 following the EPA announcement of the combined 2009-2010 mandate for 1.15 billion gallons. It’s not clear who is going to manufacture the fuel yet, since Congress hasn’t moved to reinstate the blend credit that expired on December 31. However, Brazil has also hiked biodiesel use for 2010 and the spread traders like the long oil/short meal idea. Speaking of short meal, the March meal contract was down 1% for the week. The drop in corn and the large meal supplies made available from a record crush pace mean pressure to cut prices and move inventory.


Below is a table showing the net weekly changes and 4 week history of selected agricultural futures:


Market Watch












% Change

March Corn







March CBOT Wheat







March KCBT Wheat







March MGEX Wheat







March Soybeans







March Soybean Meal







March Soybean Oil







February Live Cattle







March Feeder Cattle







February Lean Hogs







March Cotton







March Oats







March Rice








Corn prices continued to grind lower, losing another 5 cents for the week. Export commitments are still 17% above year ago at this time, but rising Argentine and Brazilian corn crop estimates threaten to eat into US fourth quarter export sales if those crops make it past frost and other harvest risks and get into the export pipeline. On the other hand, the EPA mandate keeps the 12 billion gallon requirement for corn based ethanol use in 2010, and US prices are still sufficiently below Brazilian values to make US produced ethanol attractive in the world export market. On the other hand, the slide in crude oil and gasoline prices this week pinched the spread with ethanol and made discretionary blending less attractive.


Wheat futures posted small losses of 1 and 3 cents in Chicago and KC respectively, while MPLS March futures were actually up 2 cents for the week. The latter got a boost from Stats Canada, which reported that December 31 wheat stocks in Canada were smaller than the trade had expected. Since most of the Canadian production is spring wheat, the Minneapolis spring wheat contract benefitted from the paper reduction in competition. Obviously it wasn’t a big benefit, since the world is still staring at a 9 year high in projected wheat stocks/use ratio.


Market Watch:  The main event this week is USDA’s WASDE (World Agricultural Supply Demand Estimate) report on Tuesday morning. The main interest will be in USDA adjustments to corn and soybean ending stocks, if any, and underlying changes in the world S&D estimates. Obviously there will also be keen interest in the value of the US dollar and whether the European situation stabilizes. The routine reports will include Export Inspections on Monday and Export Sales on Thursday. Friday will be the last trading day for February hogs. February cattle options and March cotton options expired this past Friday, and could mean a few folks have “surprise” positions to adjust on Monday.


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