22 December 2010

9 minute read

North America

DAIRY CLASS III futures on the Chicago Mercantile Exchange (CME) were mixed again on Monday. Nearbys were mostly down while April 2011 and beyond were slight gainers. DEC’10DA futures were up $0.01/cwt at $13.74/cwt but $0.08/cwt lower than last Monday. The MAR’11DA contract finished at $13.75/cwt; up $0.04/cwt but $0.02/cwt under last report. JULY’11DA futures finished at $15.10/cwt, even with last close but $0.11/cwt higher than last week at this time. Following two weeks of brisk at 78,616 trading barrels were up a penny while blocks remained unchanged. Butter and whey were steady. It looks like retailers’ holiday needs are filled. California cow numbers are up 4,000 for the last three months and milk production for the July-November period was up 5.1 per cent from this time last year. Production per cow was up 3.0 lbs at 63.3 lbs/day and 5+ per cent over last year’s rate. CWT okayed 17 bids for export assistance on 2.0 mi lbs of cheese. Next Monday pit trading of dairy options will be offered by the CME Group. USDA put first-quarter class III price range estimates at $13.20-$14.30/cwt. The graphs below show recent trends permeating the dairy industry. trading barrels were up a penny while blocks remained unchanged. Butter and whey were steady. It looks like retailers’ holiday needs are filled. California cow numbers are up 4,000 for the last three months and milk production for the July-November period was up 5.1 per cent from this time last year. Production per cow was up 3.0 lbs at 63.3 lbs/day and 5+ per cent over last year’s rate. CWT okayed 17 bids for export assistance on 2.0 mi lbs of cheese. Next Monday pit trading of dairy options will be offered by the CME Group. USDA put first-quarter class III price range estimates at $13.20-$14.30/cwt. The graphs below show recent trends permeating the dairy industry.

If milk price projections are right, dairy farmers will face the second-worst milk-feed price margins over the last decade. In the past, small, marginal producers were driven out of business when margins were too tight and production was cut out of the supply. Today, there are few such producers because of the last few years. Those who are left tend to be in two groups: 1) producers growing their own feed (including graziers) and who can cash flow their combined crop/dairy operations and 2) large producers whose debt is considered “too large to fail.” Banks can’t afford to lose these dairies. There is some hope for US milk if the developing drought in New Zealand holds and allows for more US export growth. Based on futures’ prices and despite higher milk price expectations for 2011 and early 2012, Milk Income Loss Contract payments near $0.35/cwt look like a given for the next 20 months beginning in January. This is based on increasing feed costs. It would be a very, very good idea to have a risk management plan in place … or at least a willingness to put one together and find the help to do so.

Costs rising as a percent of revenue

Source: PNW Dairy Monitor, University of Idaho

Source: Livestock Marketing Information Center

Source: Livestock Marketing Information Center

LIVE CATTLE futures on the Chicago Mercantile Exchange (CME) finished up on Monday. The DEC’10LC contract closed up $0.600/cwt at $102.775/cwt and $0.825/cwt over last report. The APR’11LC contract closed at $108.800/cwt, up $0.650/cwt and $0.700/cwt higher than a week ago. AUG’11LC futures closed at $107.300; up $0.750/cwt and $1.300/cwt higher than last Monday. Live cattle futures set a two-week high on Monday with fund buying a major factor. When February futures broke through $105.20/cwt automated technical fund buying picked up on set buy-orders. Hedgers actively covered short positions. Several floor sources said April/February spreading was a standard play and is likely to pick up in January as long positions are moved from the February contract to further deferreds. Traders are bullish on live cattle seeing decreasing US herd numbers even as USDA shows a 3 per cent increase in feedlot headcounts as of December 1, 2010. Two local traders said most traders think feedlot numbers will shrink once calves of the smaller breeding herd come in next year. However, several other sources said the market makes little sense since rising corn prices, a stronger US dollar, and slight weakness in equities markets often influence cattle futures lower. Additionally, they said end-of-year balance squaring and extended holidays often cause markets to go lower this time of year. Cash cattle traded $1/cwt lower in Kansas last week and at $101/cwt in Texas. USDA put the 5-area price at $99.13/cwt for Monday, December 20, 2010; $1.80/cwt lower than this time last week. USDA put the choice beef price at $160.54/cwt, down $1.17/cwt from Friday and $5.51/cwt lower than last week at this time. Restaurant data show people ARE buying prepared beef, but only in fast food establishments. It is a very good idea to price only short-term feed needs (unless you take a short position in futures) and forward price production at this time. According to HedgersEdge.com, the average packer margin rose $7.60/head to a positive $4.60/head based on the average buy of $100.50/cwt vs. the average breakeven of $100.86/cwt. Buying an out-of-the money PUT option on the next three months production would not be a bad idea.

FEEDER CATTLE at the CME finished up on Monday. The JAN’11FC contract finished at $120.725/cwt; up $1.700/cwt and $1.525/cwt over last report. APR’11FC futures finished at $122.500/cwt; up $2.025/cwt and $2.325/cwt higher than last week at this time. The AUG’11FC contract settled at $123.500/cwt, up $1.600/cwt and $2.375/cwt higher than a week ago. January feeders registered the highest price ever for a lead contract. Following live cattle, fund buyers were key factors in higher feeder prices. All contracts set fresh highs. Fundamentals show that there will be fewer feeders available for fattening next year. The US cattle herd has been shrinking for some time now and is the smallest it’s been in 50 years. The decline is due to years of poor net profits on cattle due to high feed costs and older producers retiring out of the business. USDA figures show 93.7 mi head on US farms and ranches, the lowest since 1959. The data also show there were 35.82 mi calves born in 2009, the lowest since 1949. Tight supplies are expected for another 18-24 months. The Oklahoma National Stockyards was closed on Monday and will resume on January 3, 2011. The CME feeder index was placed at 119.29 ¢/lb; up 0.06 ¢ /lb from last Friday and 1.2 ¢ /lb over last report.

CORN futures on the Chicago Board of Trade (CBOT) finished up on Monday. The MAR’11 contract closed at $5.994; up 3.0 ¢/bu and 11.0 ¢ /bu higher than last report. The DEC’11 contract closed at $5.426; up 1.25 ¢ /bu and 2.75 ¢ /bu over last Monday. Technical buying, hot weather in Argentina during key pollination time, global supply concerns, and a weak dollar during trading were supportive. Exports and strengthening dollar near the close held prices in check. Light volume was not supportive. Corn/wheat inter-market spreads corrected with corn gaining on wheat prices. Argentina is the world’s second-largest corn producer and a good crop is needed there to replenish global supply on the tail end of a not-up-to- scratch US corn crop. Corn acres will face competition from wheat and soybeans this year and traders are now saying that they don’t know if farmers will plant enough acres to replenish US supply. USDA put corn-inspected-for-export at 27.01 mi bu vs. expectations for 30-35 mi bu. China’s November import figures for US corn were less than half of October’s level. November corn imports for China were placed at 78,616 tonnes (4.7 mi bu) while Chinese imports of US corn for October were 251,934 tonnes (9.9 mi bu). Cash corn was steady-to-weak in the US Midwest amid slow farmer selling. Funds bought over 4,000 lots amid light volume. Since $6.00 corn is expected to be a major price-point for profit takers it would be a good idea to consider pricing another 10 per cent of the 2011 crop taking you to 70 per cent priced.

SOYBEAN futures on the Chicago Board of Trade (CBOT) finished up on Monday. JAN’11 futures closed at $13.152/bu, up 16.5 ¢/bu and 12.75¢ /bu over last report. The MAR’11 contract closed at $13.270/bu; up 16.5¢/bu and 15.0 ¢/bu higher than a week ago. NOV’11 soybean futures closed up 12.75 ¢ /bu at $12.424/bu and 20.0 ¢ /bu over last Monday’s close. Exports and concerns over the Argentinean soybean crop in the Buenos Aires province were supportive while good growing weather in Brazil offset some price optimism. Volume was vigorous at nearly 200,000 contracts. Late Monday USDA revised the soybeans-inspected-for-export report to 44.615 mi bu vs. expectations for 32-38 mi bu. Cash soybeans were steady-to-weaker in the US Midwest amid diffident farmer selling. Funds bought over 8,000 contracts. Soybeans prices are competing with high corn and cotton prices for acres. It would be a good idea to hold at 60 per cent of the 2011 crop priced.

WHEAT futures in Chicago (CBOT) finished up on Monday. The MAR’11 wheat contract closed at $7.694/bu; up 12.75 ¢ /bu. JULY’11 futures finished up 13.25 ¢ /bu at $8.076/bu but 7.0 ¢ /bu lower than a week ago. Quality concerns over the Australian wheat crop, talk of Russia extending its grain export ban, and good export demand for US wheat were supportive. Most Ukrainian 2011 winter grains are in good condition. USDA put wheat-inspected-for export at 23.026 mi bu vs. expectations for 18-24 mi bu. The wheat/corn inter-market spread corrected, reversing a two-week trend with corn making gains against wheat. According to floor sources a “weather premium” for a dry US Plains was factored into trading today. Since 75 per cent of the 2011 crop is priced good opportunities to speculate with the rest (like now) will keep cropping (no pun intended) up.

LEAN HOGS on the CME finished mixed on Monday with deferreds beginning with December 2011 and beyond slipping lower. The FEB’11LH contract closed up $0.125/cwt at $76.075/cwt but $0.025/cwt lower than this time last week. The APR’11LH contract closed at $80.550/cwt; up $0.075/cwt and $0.50/cwt over a week ago. AUG’11LH futures closed at $88.775/cwt; even with last Friday’s close. Hog futures rose after breaking through negative territory. Gains in electronic trading and live cattle momentum catalyzed buying in the pits. USDA put the average cash pork price at $78.47/cwt; down $0.85/cwt and $0.03/cwt under last report. The CME lean hog index was placed at 69.12 ¢ /lb; up 0.17 ¢ /lb and 0.48 ¢ /lb over last week at this time. According to HedgersEdge.com, the average packer margin was raised $1.00/hd to a positive $17.55/hd based on the average buy of $49.82/cwt vs. the average breakeven of $56.19/cwt.