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CME: Livestock Demand and Ethanol Margins

by 5m Editor
9 October 2008, at 12:00pm

US - CME's Daily Livestock Report for 8 October 2008.

There is no denying that the past week has provided enough excitement to last us for a while. One tends to get thoroughly distracted between the “Superman Ride of Steel” drop in world equity markets, the sight of Paulson and Bernake riding to battle on top of trucks full of cash, and the sudden explosion in derivatives talk.

We have not heard so much “geek speak” since the last bubble erased two thirds of the value in the Nasdaq. Sometimes lost in all the excitement is the fact that agricultural commodities in the end have to reflect the realities of tangible assets on the ground, assets that remain vulnerable to factors outside of our control, such as disease and weather. Yes, there is plenty of uncertainty about domestic livestock demand, ethanol margins and export sales, and one can see the uneasiness in the precipitous decline in grain and soybean prices. But one need not lose sight of the fact that going into next year the grain and livestock industry will continue to face significant challenges, challenges that have not been removed by the latest financial crisis. Grain stocks are tight, corn and soybeans production still face high input costs and ethanol plants will not suddenly disappear.

USDA will release its latest estimates of the corn and soybean crop supplies and the report should provide a better measure of the new corn and soybean crops now that actual harvesting is underway. According to a survey of analysts conducted by Reuters, the average trade guess currently pegs corn yields at 152.2 bu./acre, almost unchanged from the September USDA estimates. There are some indications that early yields are somewhat disappointing. Corn harvest is behind schedule although generally positive weather has so far limited any notable damage.

For week ending October 5, just 14% of the corn crop had been harvested, compared to 39% a year ago and 30% for the five year average. It is not expected that USDA will make any significant changes to estimated use, maybe lower exports somewhat given the sharp rise in the value of the US dollar and a slowdown in the global economy. As for domestic demand, some analysts believe we could see lower ethanol use and an increase in the amount going into feed. However, we suspect an increase in feed usage may be premature, especially considering the sharp decline in livestock futures prices and the troubles in the poultry industry.

5m Editor