Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
August 8, 2001
The market continues to try to register the right prices in the beef sector with conflicting short-term and long-term fundamentals continuing to emerge. The mid-year report showed no expansion in the cattle herd and recorded a 2 percent decline on a year-to-year basis in the heifers held for beef cow replacement. This continues to be a long liquidation phase and is moving the total numbers in the industry back down toward levels that will inevitably be bullish. Against that, however, we have a very large number of cattle on feed, and the outlook for the second half of the year for most analysts is switching from one with significant declines in beef production to even or up slightly in beef production. You can see this influence in the markets where we have pushed the futures back down in the low $70s, and cash, depending on how many Choice cattle are in the particular load, is either in the $69 plus area or slightly above $70. Recognizing there is something of a battle going on between those longer term and shorter term fundamentals, I do think we are seeing signs of a rally in the cattle complex this week.
The October live cattle futures show Monday's and Tuesday's lows plunging down into the rather large chart gap that was left back in mid-May. There is typically a nest of buying orders sitting around the top of that chart gap. The close on Tuesday was not particularly strong but Wednesday's prices are trading up to the $74 level and above, and I think we are ready for a correction of this price plunge from $76 down toward $73 on that October contract. On any dips toward the lows, as a selective hedger, I would be looking to buy those short positions back. I do think we will see at least a correction of this recent price dip and expect to see something up in the $74.75-$75 area as an opportunity to place or replace those hedges on that October contract. The October feeder cattle contract doesn't look quite as positive because corn is also a factor. This market has dropped from above $92 back in late June down toward $89. Anyone needing protection in this market or looking for an opportunity to take profits on long hedges should look for something up in the $90.50-$91 area as a reasonable rally to the upside in these fall feeder cattle.
In the pork sector, lean hog prices are holding up toward $70, and this market is benefiting from fundamentals that show no significant signs of expansion. We have seen, historically, years in which hogs were very profitable and expansion didn't occur even though corn was cheap. That happens usually after a difficult period and producers are paying down debt. I believe that is what is happening this year, and I don't think we will see any significant expansion until they and the bankers get the wrinkles worked out of the financial picture. That October hog contract last week ran above $60.50 and within a matter of 15 cents to 20 cents per hundredweight of the highs that were recorded after the June report. I love those opportunities to suggest selling and short hedging these markets on rallies toward the contract highs and always encourage you to back off a bit because there will be a nest of sell orders sitting right around that contract high. I would definitely hold short hedge positions now that were placed on that rally last week and let's monitor the steep uptrend line in this market and see if the market can hold these levels.
Fundamentals driven by the weather are at work in the grain and oilseed markets. December corn got a boost on Tuesday by crop conditions being less favorable than had been expected. The hot weather continues in the Midwest, and the weather fronts have moved through at least for the time being. But there is also a growing perception in many areas that corn development has moved to the point that it is not likely to deteriorate much further and the crop will still be large even though yields might drop back to trend or below this year. The soybean market benefited from similar news. Neither of these markets could close on Tuesday with all the strength they had started with and closed near the middle of the trading range. Weather from the tropical storm Barry that came up into the Delta states in the Southeast has some chance of boosting prospects for yields in those states, especially where beans had been planted after wheat and would still benefit from moisture.
I am showing the December corn chart again this week. There is clearly resistance across the late-July high at about $2.36, and my target is the July high up around $2.47. As I suggested last week, if we get any weather-related rally that gives us a rally toward those highs, I would be an aggressive seller. This is the time to place or replace short hedges. Users of corn who are holding long hedges and are willing to be a selective hedger ought to look at taking profits on the same rally. The pattern on the November soybeans is very similar. There is a set of July highs now at about $5.16 that will be the first resistance on any rally, and then we have that spike to about the $5.38 level that occurred in mid-July. I would sell this market on a rally toward $5.15, and if we are fortunate enough to see a rally toward that $5.38 high, sell it aggressively. Users of soybeans and soybean meal ought to key off this November contract and look at taking profits on those long hedge positions at the same time.
The wheat markets are starting to take on a different look with the Kansas City hard red winter wheat making new contract lows this week, dipping down toward the $3.11 level on Monday. The Chicago contract has made its low in late June just below the $2.70 level. I would expect the December Kansas City contract to try to find a bottom around this $3.10 level. That should bring some bottoming action in the high $2.70s on the December Chicago contract. Fundamentally, at the world level, there is reason to argue that prices should improve in this market. Just keep in mind that it will be difficult to do as long as we are seeing weakness in corn and soybeans as we move into the fall months. I would certainly think about lifting short hedges on wheat that you are holding in storage on a dip down toward that $3.10-$3.12 area that we recorded on Monday of this week. Be prepared to replace those short hedges if we see two consecutive closes at new contract lows, which I do not think will occur.
