Source:  Rita Jane Gabbett, MEATINGPLACE.COM, 1/12/11

USDA has lowered its forecasts of corn and soybean production and stocks and raised its corn and soybean price forecasts, making it more important than ever that protein companies are hedged against escalating feed costs.

In its World Agricultural Supply and Demand Estimates report, USDA’s forecasts were below market analysts’ expectations, pushing corn and soybean futures prices sharply higher in morning trade on the Chicago Board of Trade.

Corn
USDA reduced its corn production estimate by 93 million bushels. It lowered its feed and residual use forecast by 100 million bushels, but raised its ethanol use forecast by 100 million bushels. Corn ending stocks were projected 87 million bushels lower at 745 million bushels, putting the stock-to-use ratio at just 5.5 percent, the lowest since the 1995-96 marketing year.

USDA raised its average corn price forecast for the year ending in September by 10 cents per bushel on each end of the range to $4.90 to $5.70.

Soybeans
Similarly, USDA lowered its U.S. soybean production forecast by 46 million bushels and lowered its ending stocks forecast by 25 million bushels to 140 million bushels --well below analysts’ expectations.
USDA also lowered its Argentine soybean crop forecast due to dry weather.

USDA raised its average soybean price range by 50 cents on the lower end of the range to $11.20 to $12.20 per bushel. It raised its soybean meal price forecast by $10 per ton on both ends of the range to $320 to $360 per ton.

Protein companies
Wall Street analysts saw the new data as negative for protein company stocks, particularly chicken producers in the near term, but noted the effect depends on how well each company has hedged its grain purchase needs.

“Perversely, while higher grain prices likely will pressure protein stocks, particularly chicken producers, higher grain prices likely will eventually drive an improvement in chicken fundamentals as the severity of the losses should drive producers to ration production levels,” said BMO Capital Markets analyst Kenneth Zaslow in a note to investors.

Stephens Inc. analyst Farha Aslam noted that Tyson Foods has some feed input hedges in place through March and that Hormel Foods is likely significantly hedged through October.

Smithfield Foods has hedges in place through the fall, Aslam said in a note to investors, adding, that with hog prices rallying, “the USDA reports will likely have a more limited impact on the company’s earnings.”
"We believe SAFM remains unhedged and thus, carries downside risk at the current time," wrote BB&T Capital Markets analyst Heather Jones.

Sanderson Farms and Tyson Foods shares were trading down at midday on the New York Stock Exchange, while shares of Smithfield Foods and Hormel Foods traded higher.  

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