Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
February 20, 2001
The grain and oilseed markets are trying to climb in Tuesday trade. Analysts saw the Friday declines as overdone in wheat. There is only limited selling in corn and the slow pace of China's exports is helping support corn. Soybeans gapped higher early in the day on talk of a hot and dry Argentina, but prices faltered later in the session. None of these crops showed any substantial changes at the close, so the strategies of recent days and even recent weeks are still looking correct.
In wheat, the old-crop March Chicago contract has made new contract lows in recent weeks, but the July chart has not. I show that chart this week because it is important to the pricing strategies on 2001 wheat. The January run up to the October high around $3.15 gave the last decent pricing opportunity. At these levels across the contract lows, I would be looking at taking profits on short hedges and placing long hedges if you are processing wheat. On a 50 percent correction of the recent decline, which would carry us up to the $3 area, I would replace short hedges and take profits on long hedges. If we see two consecutive closes below the current contract low at $2.835, put short hedges back in place and cover the long hedges. We could see a substantial decline if we start to make new lows as we head through the important part of the production period.
December corn is trying to hold across the early November low around $2.43. If this market rallies, it will be important to see if it will fail at a 50 percent correction or try to challenge the January high above $2.60. On a rally to $2.60 and better, I would move to 40 percent priced in this corn market if you are not there. Add price protection and move up to 65 percent to 70 percent priced if the market is able to challenge the contract high at $2.75. Long hedgers should take profits on any rally toward $2.75. We can then watch the market to see if it can show us two consecutive closes in new higher price ground, a signal to stay off short hedges, and to get back on long hedges on corn needs through the coming year.
Soybeans are feeling the weight of a huge crop in South America, the prospects for record acreage, and a possible record crop in the U.S. With November drifting toward $4.50, we are looking at new-crop soybean price offers below $4 in some parts of the Midwest. We saw that last summer before the late season rally due to weather. Hold short hedges in this market. I see no signs of a bottom to date. The weak close on Tuesday suggests this is the correct perspective. Hook a downtrend line across the highs in December and early February and lift those hedges or place long hedges only when we see a close above the trend line.
The livestock markets are shaking off any bearish reactions to last Friday's Cattle on Feed Report. Placements were higher than expected, up 2 percent form last year and that pushed cattle on feed 3 percent above February 1 of last year. This report came in the presence of a market that had moved well off its highs on BSE talk and general nervousness on the demand side, but it apparently was ready and willing to trade higher. Talk of stormy weather helped on Tuesday, but boxed beef values for the Choice carcasses are up to $130 to $131, and the limited cash sales this week look higher than last week's primarily $78 to $78.50.
Based on Tuesday's performance, I would look at lifting short hedges on spring live cattle and feeder cattle. These contracts appear to be headed higher. In the August feeder cattle, it may be too late to place long hedges if they were not in before February 20. Tuesday's close is within $1 of the contract highs just below $90. On a move up toward that high, I would take profits on long hedges and producers should look at short hedges. Holding stocker and feeder cattle through the growing season in corn and in the presence of the continued talk about BSE is too risky, and I would want protection against declining prices.
The expiring February lean hogs contract is closing lower, moving down to convergence with a cash market that is still largely below $40 on a live hog basis. The more distant contracts, including the June, are making new contract highs with Tuesday's strong close pushing up toward $67 on a lean weight basis. One approach here is to hook a trend line to the late August and recent lows, and let this market run to the upside until we see a close below the line and evidence the market has topped. Any short hedges placed on the recent run to the old high above $65 by the June will still work. Some producers will answer margin calls on the way up and others will have lifted the short hedges on the second consecutive close in new high price ground with that second close coming last Friday. This market has some upside in it, tends to benefit from any BSE concerns in cattle, and we will see decent pricing opportunities.
