November 10, 2009
Lots of Uncertainty in Corn Market ‘Til January = Lots of Opportunity
Summary: Tuesday’s USDA Crop Production report projected a decline in the U.S. corn crop vs. the October forecast. A smaller-than-normal percentage of the crop was harvested when the survey was done, however, raising uncertainty about the direction of output in January. Financial pressures are raising questions on corn feed use, but the next measure of the amount fed won’t be available until the USDA Grain Stocks report is released – also in January. So we’re left with a lot of uncertainty in both supply and demand the next 60 days. The good news is Advance Trading’s Risk Management program is designed to turn this type of uncertainty into opportunity. Your advisor is ready to help you design and execute strategies for both 2009 and expected 2010 corn production.
Is Corn Crop Size Set to Decline Further? Is Feed Usage Overstated?
On Tuesday, the USDA released its updated Crop Production report, which pegged corn production at 12.921 billion bushels (Bbu) with a record yield of 162.9 bushels per acre (bpa). Both of these forecasts represent a decline compared to the October estimates of 13.018Bbu and 164.2, respectively. It’s important to remember, however, that the survey for the report was conducted from October 24 through November 5, with a much smaller-than-normal percentage of the crop actually harvested. As a result, the USDA had limited new information on which to base its forecast, which is reflected in the fact that yield estimates were unchanged compared to last month for 6 of the top 10 producing states. This raises greater uncertainty regarding the direction of output in future reports. To cloud the picture a bit more, since the government does not conduct a survey for December, the next official crop size estimate will not be available until the Crop Production 2009 Summary is released on January 12.
Not only do we have a lack of information on supply, but there are also questions about demand. Given the financial pressures being confronted by nearly all feed users, there is a camp that believes that the USDA is overstating 2009/10 corn feed/residual disappearance in the balance sheet at 5.400Bbu vs. 5.254 last year. This is underscored by the fact that Grain Consuming Animal Units are down from a year ago. To calculate implied feed usage, we use data from the quarterly USDA Grain Stocks report. But the next release of that report won’t take place until January 12, the same day for the updated production estimates are unveiled.
Take Advance of Opportunities to Execute Risk Management Strategies for 2009 and 2010 Corn Production
So it’s the middle of November and we don’t have a solid grasp on (1) crop size; or (2) feed use, and it will be mid-January before the USDA is able to shed some light on these questions. Effectively, then, we’re left with a lot of uncertainty in both supply and demand over the next 60 days. The good news is Advance Trading’s Risk Management program is designed to turn this type of uncertainty into opportunity. Your advisor is ready to help you design and execute strategies for both 2009 and expected 2010 corn production.
LIVESTOCK/POULTRY
Summary: Poultry producers remain in the best financial shape and, with their short production cycle, could be the first to respond when demand for meat improves. If the economy does start to rebound in the not too distant future, we could see an increase in poultry feed use during the new crop year. However, almost all other feed users remain under financial pressure and are showing signs of slowing production and feed use. The USDA’s current feed and residual estimate for new crop (2009/10) corn is 5.400Bbu. We are lower, at 5.130Bbu, primarily due to the poor profit picture for most of the livestock Industry.
· Our estimates indicate a typical Kansas feedyard continued to experience losses on fat cattle sold last week. However, feeder cattle placed last week continue to pencil a profit. Kansas cash cattle traded last week at $87.23, up $0.18 from the previous week. At this price, a feedyard that was not hedging lost an estimated $23.35 to $83.74 per head depending on how feed was purchased. Cattle being placed into feedyards at this time project a small profit due to lower production costs and stronger steer prices. For 750-pound feeder steers being placed on feed this week. If steers cost $96.50/cwt and expected corn costs over the next several months are $3.67/bushel, we pencil a breakeven price of $87.68/cwt. With cash cattle in April projected to be $88.96/cwt, a feedyard could expect a small profit of $15.91 per head.
· Last week, the weekly average Iowa/So. Minnesota price firmed $1.22 from the week before to $39.71. At this price, our calculations indicate a typical Iowa hog producer with un-hedged hogs lost from $24.56 to $30.11 per head, depending on when the feed was purchased. Futures project losses for producers will remain large through the end of this calendar year. Seasonally tightening hog supplies should help cash prices rebound early next year and prices could be near break even by late April. With estimated corn costs at $3.37/bushel and soybean meal at $308.80/ton, a pig farrowed today is expected to cost about $47.25/cwt to raise to a live market weight in May. With cash hogs projected to be $51.87/cwt, a pork producer could expect a small profit of $11.57 per animal.
· Milk futures were firmer during the week and are above recent cash prices as producers slow production. As a result, small positive returns for producers are now expected. Our estimates indicate that during October, it cost a typical Upper Midwest dairy about $13.50 to produce 100 pounds of milk. This was above the October Class III milk price of $12.82/cwt, meaning producers lost around $0.68 for every 100 pounds of milk produced. However, production costs so far in November are near $13.47/cwt. With current November milk futures at $13.92/cwt, a profit of $0.45 per 100 pounds of milk produced is anticipated. Current futures prices indicate production cost in May will be near $13.10/cwt. With May milk futures at $15.40/cwt, a profit of $2.30/cwt is expected.
· Broiler egg set during the latest week (week ending October 31st) was down 2.3% from last year, was 12.0% less than two years ago and was the smallest weekly egg set since mid October 2003. Over the last four weeks, egg set has averaged 2.0% below a year ago and 9.3% below two years ago. Chick placements during the latest week were down 0.8% from a year ago and were off 8.0% from two years ago.
ENERGY/ETHANOL
· Spot ethanol margins were up $0.01 this week to $0.28 c/g, which is sharply above last year’s ($0.07).
· The USDA reduced its estimate of corn used to produce ethanol in 2008/09 by 23 million bushels to 3.677 billion bushels in Tuesday’s USDA World Agricultural Supply and Demand Estimates report.
Brian Basting
This data is provided for information purposes only and is not intended to be used for specific trading strategies without consulting Advance Trading, Inc. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Past results are no indication of future performance. All information is based upon data that is believed to be reliable, but its accuracy is not guaranteed. Please click here <http://www.advance-trading.com/disclaimer/> for full disclaimer.
******************************************************************************************************************************************
