Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
January 30, 2001
Tuesday's session in the livestock and meats turned into a volatile one. There was expectation for stronger prices in the pork complex with winter storms curtailing movement and limiting kill levels. But any prospects for substantially stronger hog futures were washed out by a cattle complex that traded limit-down quickly in the session. It is not just that boxed beef values that had been $132 for the Choice grades and higher are back to $126 levels. The emotional part of the market is coming from concerns about BSE or mad cow disease and what appears to be substantial liquidating of long positions by trading funds. Live cattle futures and feeder cattle futures were pushed limit-down during the session, and the hog complex could not do better than steady to mixed in the futures pits in the presence of those problems in cattle. Cash cattle prices backed off from the $80 level late last week, and most of the cattle moved at $78 with some at $78.50 on Friday. In the presence of the uncertainty we are seeing, we are likely to see still lower prices in the cash market this week.
This plunge is going to carry the February live cattle futures close to the uptrend line on the chart. The first line of support becomes the January 9 low at $76.05 if this trend line is taken out. There is a small chart gap that would still be relevant back on December 6 just below the $75.87 level, and then there is a low on December 1 at $73.75. I am not expecting to see this market reach those lower support zones, but the possibility of uncertainty surrounding the continued coverage of BSE encourages producers to have protection in place. If you have short hedges in this market, I would certainly hold those short positions until we get some of the uncertainty washed out of this market and back in a mode where the supply-demand fundamentals are more nearly having an impact. March feeder cattle closed below $87 on Monday and limit-down levels move it down to about $85.37. That is actually below the last support zone that we saw back in early September at $85.50. As the prospects for the feedyard complex start to dim because of the live cattle futures, this feeder cattle market is getting hit even harder because it has been bid to a point that required breakeven prices substantially above those that we are likely to see across the next several weeks. I would definitely hold short hedges in this feeder cattle market. We had a break of an uptrend line and a clear sell signal back in mid-January in this complex, and there is significant downside risk here.
The dip down to a low of $54.10 on January 24 on the February hog futures essentially filled the early November chart gap. This market then turned higher and has tried to challenge the chart gap left on January 23 when the market traded significantly lower. So we have support just above $54 and the first lines of resistance across the mid-January highs around $57.50 with major resistance anything up toward the contract high at $59.52 that occurred on December 11. Any rally back above the $57.50 level ought to be seen as a forward pricing opportunity in this market. With all the uncertainty in the meats complex, we may be headed for a period in which any rally in this market is sold, and we have already had substantial sell signals in this market and evidence that the bull market that started last August has run its course. Hold short positions here, and I would add to those positions on any respectable rally in this market.
In the grain and oilseed markets, corn, wheat, and soybeans closed slightly higher in Tuesday's session, but there was nothing impressive about the gains. It is being called a technical bounce in soybeans and wheat and a technical bounce plus some faint hope for improved export demand in corn. None of these commodities showed anything by way of a breakout in the session, and it appears to be primarily a technical and perhaps even short covering bounce off the lows, especially in a market like soybeans. The December corn futures have dropped through the December 7 low around $2.47 and are challenging support across the October 31 low at $2.43. I rather expect this to be the end of the correction in this market, and I am showing that chart again this week. Once we saw a break of the trend line, there are two or three obvious possible levels of support, and there is obvious interest in how big this correction will be. On anything at or slightly below current levels, I would think users of corn ought to be thinking about replacing long hedges for corn out through 2001 in the various futures contracts. Producers of corn should hold short hedges that might be in place until we see more specific signs of a bottom. I certainly would not want to be doing any forward pricing on the 2001 corn crop at these relatively poor levels.
The November soybean contract continues to make new lows, and in comparison to the contract low of about $4.93 that we had back in July of last year, we have now traded down into the $4.70 price area. There is every reason to expect that in spite of the relatively bearish fundamental outlook, this market will correct at least part of this mid-November to late January price decline. Hold short hedges you have in place until we see signs of a bottom and then think about lifting them on a selective basis. Obviously, I am not suggesting any forward pricing here. If you have no price protection to date, we need something back above the $5 level at least and a decent correction of the last price plunge before we want to think about adding to or replacing short hedge protection.
The wheat market is trying to hold a few cents above the December lows in the $2.86 to $2.92 price range. After this precipitous drop across the past few days, I think this is just a technical bounce, and I would expect to see this market go back down to and test those lows around the $2.90 level. At that point, short hedges in this July contract that have been placed at substantially better prices levels might be lifted to secure some profits in the futures account. We ought to get some sort of weather related or export information bounce in this market and allow those same hedges to be replaced back up toward $3 or better as we move through February and March and watch this crop progress.
