6 December 2012

6 minute read

North America

Risk Management Term of the Week: - ARBITRAGE - Actions taken in response to an apparent profit opportunity due to market imbalances. An example would be buying in the cash market and delivering in the futures market because the futures market appears to be unusually high relative to the cash market.

Risk Management Principle of the week: Fundamental and technical analysis of the markets can be complimentary. The need is for understanding of the basic forces of supply and demand (fundamental analysis) and the related ability to anticipate the direction of price trends (technical or chart analysis). Highly sophisticated quantitative analysis is nice but NOT essential to developing a good marketing plan.

DAIRY CLASS III futures on the Chicago Mercantile Exchange (CME) closed down on Monday. The NOV’12DA contract closed at $20.78/cwt; down $0.02/cwt but $0.06/cwt higher than a week ago. DEC’12DA futures closed at $18.58/cwt; off $0.16/cwt and $0.50/cwt lower than last week. The MAR’13DA contract closed at $18.73/cwt; down $0.05/cwt but $0.26/cwt over last report. Federal Order prices are due out on Wednesday. Fundamental, technical, and seasonal signals indicate further price erosion. Current milk supply is sufficient with excess in some areas being moved to deficit ones. School holidays will slacken demand in the near-term. Cash cheese prices attracted some fluid supply. According to USDA cheese production is up 2.8 per cent over September and 3.2 per cent higher than this time last year. Butter production was slightly ahead of last year at this time placed at 146.00 m lbs. Cream supply should tighten amid continued churning. Seasonal demand is expected to be brisk during the holidays. Class III futures were: 3 months out = $19.32/cwt ($0.15/cwt lower than last report); 6 months out = $19.00/cwt ($0.03/cwt higher than a week ago); 9 months out = $18.89/cwt ($0.09/cwt higher than last Monday); and 12 months out = $18.79/cwt ($0.0910/cwt over last report). This week the variable cost of production for the average North Carolina conventional 200 cow dairy with a 23,000 lb average is $21.81/cwt; $3.64/cwt lower than last Monday. The price sensitivity table below illustrates different returns/cow relative to varying increases and decreases to both milk prices and inputs costs over total Variable Costs for the same NC farm.

LIVE CATTLE futures on the Chicago Mercantile Exchange (CME) closed up on Monday with the exception of the December 2013. DEC’12LC futures closed at $127.000/cwt; up $0.275/cwt but $1.400/cwt lower than last report. APR’13LC futures closed at $134.850/cwt; down $0.275/cwt and $1.000/cwt lower than a week ago. The AUG’13LC contract closed at $130.750/cwt; up $0.625/cwt but $0.9525/cwt lower than a week ago. Trading sources said Monday went against expectations for weakening beef demand after cash prices rose after noon. Most of last week prices weakened on declining wholesale prices. Fundamentally demand is stable but supply is shrinking, as evidenced by smaller-than-expected showlists. Technically signs were supportive. Profit-taking held prices in check. Packer margins were noted more negatively this week. According to HedgersEdge.com, the average packer margin was lowered $26.75/head to a negative $82.95/head based on the average buy of $127.50/cwt vs. the breakeven of $120.95/cwt. Monday afternoon USDA put the 5-area average at $125.85/cwt $1.59/cwt under last report. Please see graph:

Late Monday USDA put wholesale boxed beef at $195.32; up $0.29/cwt but $0.79/cwt lower than a week ago. Cash markets were quiet amid steady prices and are expected to remain that way all week.

FEEDER CATTLE at the CME finished mixed on Monday. JAN’13FC futures closed at $145.600/cwt; off $0.025 and $2.75/cwt lower than a week ago. APR’13FC futures closed at $149.825/cwt; down $0.10/cwt and $1.725/cwt lower than last week. The AUG’13FC contract closed at $156.600/cwt; up $0.600/cwt but $0.025/cwt lower than last report. Despite seasonal price pressures and volatile corn prices buyers were in the hunt on Monday. For Monday 12.04.12 estimated receipts at the closely watched Oklahoma City market were put at 10,000 head vs. last week’s 6,085 head and 7,577 head this time last year. Compared to last week feeder steers were $1.00/cwt higher and feeder heifers were $2.00/cwt higher. Calves were $4.00-$6.00 higher. Demand was light-to-moderate for calves. Quality was plain through attractive. Weather continues to be the major driver of demand.

This table shows the maximum price a producer could pay for feeder cattle and still break even, assuming the costs and conversion/performance factors listed above. Producers should remain aware that calculations are based on averages. Courtesy DTN.

The CME feeder cattle livestock index was placed at 145.60; down 0.64 but 0.92 over last report. Please see chart:

CORN futures on the Chicago Board of Trade (CBOT) closed up on Monday. The DEC’12 contract closed at $7.490/bu; up 1.0¢/bu and 1.75¢/bu higher than last Monday. MAR’13 corn futures closed at $7.546/bu; up 2.0¢/bu and 3.5¢/bu higher than a week ago. The DEC’13 contract closed at $6.396/bu; up 4.25¢/bu and 10.75¢/bu higher than last report. Corn trading was lackluster amid quiet volume. Some commercial selling was noted on spreading. Continued rainfall in Argentina threatening production was supportive. Exports should be considered bearish with USDA putting corn-inspected-for-export at 9.626 mb vs. estimates for 23-26 mb. This is well below the 23.8 mb needed this week to stay on pace with USDA’s demand projection of 1.15 bb. Please see chart:

Cash prices were steady with merchandisers reluctant to buy amid fears that Mississippi river levels will remain low or go even lower if dry conditions persist. On Monday the national average basis was -11.0¢/bu under CBOT December futures. It is a very good idea to think about pricing up to 15 per cent of 2013 production if you haven’t done so already.

SOYBEAN futures on the Chicago Board of Trade (CBOT) closed up on Monday. JAN’13 futures closed at $14.536/bu; up 15.0¢/bu and 29.0¢/bu over last report. The MAR’13 contract closed at $14.482/bu; up 15.75¢/bu and 26.0¢/bu higher than last week. NOV’13 futures closed at $13.172/bu; up 12.75¢/bu and 21.25¢/bu higher than last Monday. Rain continues to delay soybean planting in Argentina while good weather in the Mato Grosso area of Brazil looks to produce record yields. Fund buying and bullish chart signals were supportive. Exports were bullish with USDA putting soybeans-inspected-for-export at 51.082 mb vs. estimates of 55-62 mb. Even though exports did not meet expectations they are well ahead of the 19.9 mb needed to stay on pace with USDA’s demand projection of 1.345 bb. Please see chart:

Cash soybeans were firmer with the latest national average soybean basis being placed at -34.0¢/bu under the Chicago January 2013 futures contract. It might be a good idea to get to 15 per cent priced in the 2013 crop.

WHEAT futures in Chicago (CBOT) closed down on Monday. DEC’12 wheat futures finished at $8.420/bu; up 2.75¢/bu and 7.0¢/bu lower than a week ago. The JULY’13 contract closed at $8.686/bu; down 1.75¢/bu but 9.5¢/bu lower than last report. Wheat prices were pressured by fresh moisture and the promise of more in the US Southern Plains. However, support was noted on a lower US dollar. When the US dollar is lower US commodities are more attractive to foreign importers. Exports were bearish with USDA putting wheat-inspected-for-export at 14.186 mb vs. estimates for 17.21 mb. Soft Red Winter wheat basis index was steady-to-firm at -40.0¢/bu under CBOT March futures. Hard Red Winter Wheat basis index was placed at -56.0¢/bu under Kansas City March futures. Hard Red Spring Wheat average basis index was placed at -58.0¢/bu under the Minneapolis March futures contract. It is a good idea to price up to 15 per cent of the 2013 crop.