Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
January 16, 2001
The grain and oilseed markets came into last Thursday's U.S. Department of Agriculture reports expecting some positive news. Some combination of a still smaller crop estimate in corn, better export projections, smaller than expected wheat crop with the weather problems in the Southwest, or reduced ending stocks in any or all of the commodities seemed to be expected as we approached the report day. The report delivered essentially none of that, and the combination of what we see in terms of crop size, ending stocks estimates, estimates in wheat, etc., has prompted fairly substantial down days in the grain and oilseeds in both Friday's and Tuesday's sessions. During Tuesday's session, we find that an expected purchase of wheat from Egypt is going to another country, and the markets again get hit with what seems to be disappointing news. Tuesday's prices are generally down on the day with the closes ranging anywhere from 3 to 8 cents lower, depending on which commodity we look at.
The December 2001 corn chart is shown again this week. Last week, I had anticipated that we might see some further rallies up toward the April, May, and June highs to give us a better chance to do some pricing, but we see a close below the rather obvious uptrend line on the chart coming first. Expect this market to correct back down to try to find support across the December low just above $2.46 or possibly the October 31 low, which is down around $2.43. It is a bit of an ominous sign that there is a chart gap down around the $2.37-$2.39 level that occurs back in September, and it is very possible that we will see this market work lower and try to challenge even that support zone. Hedges that were placed with a sell-stop under this trend line somewhere around $2.53 need to be held until we see signs of a bottom. It is the case that nitrogen fertilizer is very expensive and the soybean national marketing loan rate is sitting there at $5.27. That is probably going to drive some acreage to soybeans, but it is difficult to conceive of acreage not getting planted with no production controls in place. Farmers will find a way to finance getting the seed in the ground even if fertilization levels lag a bit. I am especially concerned about the longer term outlook for soybeans and would not rule out the possibility that we will see pressures on this December 2001 corn futures that make it very difficult for it to go above the highs we recorded last week around $2.62.
November 2001 soybean futures are being pushed back down toward the $4.90 level, making new lows since the January 11 USDA report. This reminds us a great deal of the pattern we saw last year as the November contract continued to be pushed down by the prospects of record acreage and record crops. With the marketing loan favoring planting some acreage to soybeans instead of corn, I can't anticipate anything other than a huge crop this year. Any short hedges that you have in place on new-crop soybeans should be held until we see some signs of bottoms. I recognize that not many people have priced these beans yet because the opportunities haven't been very attractive, and we certainly want to see some rallies from these new contract low levels before forward pricing soybeans. We will continue to watch this market across the coming weeks.
In front of the report, the July Kansas City wheat futures had traded above $3.50 reflecting the possible weather damage on the hard red winter crop in the Southwest. The July Chicago futures had rallied above the October high around $3.14 and recorded a high above $3.16 last Thursday, the report day. We now have two past highs across this market in that $3.14-$3.16 level, and I certainly think it will be appropriate to move up to 50 percent priced on the 2001 crop if you are not already there on a rally back up to those levels. The prospects for this crop continue to be impacted by weather possibilities, but if the snow storm that is coming through the Southern Plains gives a cover to this crop this week and next, we are likely to see some continued moves downward in price.
The live cattle futures are clearly the stars of the commodity complex at the moment. The February rallied last week above $80 and then traded to limit-up levels in Tuesday's session as the forecast for a snowstorm through the Southern Plains swept through the news networks. Boxed beef values are still above $132 for the lighter Choice carcasses, and we see every sign that the packers are anticipating reduced supplies of cattle as we move deeper into 2001. We are starting to reap the benefits of the reduced placements that occurred during the fall and winter months. This is an old story of placing your way out of price difficulty, and eventually the lower placements will reduce the on-feed population and take some pressure off fed cattle prices. With the supply side cycle helping at the same time demand continues to hold strong, fed cattle prices show a prospect of seeing an $80 market much sooner than I had anticipated. I would back off in these fed cattle market and feeder cattle markets and not sell until we see some signs of topping action, and we certainly don't see it through the Tuesday session this week. Long hedgers, especially in feeder cattle, as this market runs to the high side and runs to levels that I didn't expect we would see this soon, can think about taking profits at any time. I see nothing to suggest these cattle markets are going to break in the short term, however.
The lean hog complex continues to try to rally with the cattle, but it faces its own supply-demand scenario that is not quite as bullish as the situation we see in cattle. On the February contract, that high that occurred back on December 11 at $59.92 and is very close to that magical $60 level, continues to be my first upside pricing target. We have had another high recorded at $57.75 on January 5 since then, but the market seems to be finding support above the bottom of that old November chart gap, which is down around $54.75. If this market can rally, as we move into February and see daily slaughter levels drop slightly, back up toward that $59.95-$60 level, I would certainly think about getting first quarter hogs forward priced. We might want to take a look further out now that we have the December Hogs and Pigs report under our belts and look at the possibilities in the late spring and summer months at the same time.
