Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
August 28, 2001
In the grains and oilseeds in Monday's trade, soybeans seemed to be the focus of attention. There continues to be some weather-related developments with rains last week suggesting, for many analysts, that we will still have a 2.8 billion bushel soybean crop or bigger. A crop of that size was somewhat in question several days back as the market on the November futures contract rallied as high as $5.20 on weather news. But the close last Friday below the support planes that I identified on the chart in last week's letter suggests that we may have some more downside to come, and that is especially going to be the case if Monday afternoon's reports show the expected improvement in crop conditions. Corn is not reacting very much to weather because that crop has advanced to the point that, barring an extremely dry scenario, we are not going to impact yields very much as kernel size and test weights now become the important considerations. We have seen no move out of the triangle that is developing on that December corn chart to date. December wheat rallied nationally late last week and then turned and closed lower on Friday. There is continued optimism on wheat with regard to expanded export activity as the U.S. dollar weakens in the world financial markets. News that suggests the Canadian wheat crop will be lower than expected is providing some support to wheat.
It would appear that the November soybeans contract is now going to make a full 62 percent correction of the last run up in prices from about $4.28 up toward $5.38. That was a price climb of about $1.10, and if we take 62 percent of that move and subtract it from the high, we get a price target of around $4.70. We may see those levels as trade continues during the week, but Monday's close was back above the support plane. I would hold short hedges and look for signs of bottoming action and an attempt to rally back up toward that gap around $4.95, which is now my first upside target, as a chance to replace short hedges at better prices. Hold short hedges in December corn with that market trading in the high $2.20s to $2.30. We may not see much movement here until we start harvest and start getting some early reflections of yield. Obviously, there is major resistance around $2.38 across the early August highs and even more formidable resistance up around $2.47 across the early July highs. On rallies to those levels if they should occur, we need to place or replace short hedges, and users of corn should be taking profits on the long hedges if they are following a selective hedging strategy.
We will see better wheat prices when we stop seeing the pressure coming over from corn and soybeans and we move on into the fall months. Last week's rally was a reasonable correction of the most recent price break on the December Chicago contract from $3.10 back in mid-July down toward the $2.78 level in early August. I think we will see a rally up toward the $3.10 level on the December futures, and I would be patient and watch for that to happen before pricing wheat you are holding in storage, selling wheat in the cash market, or thinking about taking profits on any long futures or call option positions that you might be holding after selling the cash wheat. As I often remind, if you lose money speculating in futures or options, it is probably not going to be tax deductible. Talk to your accountant.
In cattle, somewhat weaker cash prices last week have hurt the complex, and we have seen the October live cattle futures decline below what I consider to be significant support levels. If we do move on down from here, there is further major support across the May lows at about $72, and that should be the extent of the downside on that October contract. But just 10 days back, we were at $75, and we saw back in early June prices as high as $76.50. We have boxed beef cutouts a bit weaker coming into this week, below $120 on some of the Choice carcasses. We have not seen any improvement in that important indicator to give the packers some relief, and there appears to be some pressure on their margins. On the other side of the issue, if cash prices can hold the $69-$71 range that we saw last week, generally depending on how many Choice cattle were in the pen, we will need to see cash move up toward the futures as we get into October and look at what could be some of the heaviest slaughter levels of the year. Hold short hedges in live cattle if you still have them. If you lifted them on dips to that support plane at $73, I would watch for a rally back up toward $74 on the October, a reasonable correction of this last price dip, to replace them.
Feeder cattle are holding up a bit better than the live cattle contract, and that is attributable to some continued weakness in corn and relatively low priced corn. As the October feeder cattle futures fall below the early August low around $88.60, we will see a move on down toward the $88 level or so, but I see no major downside in this market. Again, hold short hedges. My first objective to the upside in terms of replacing any short hedges you might have lifted on price dips would be in the $90 range and across the early-August highs, which extend up to about $90.15.
The pork market broke hard but received some help with continued talk about good demand and weights lighter than we might reasonably have expected. The October contract dipped down toward the $58 level and tried to regain some of its losses. My first upside objective in this market would be the chart gap that was left about 6-8 trading days back that starts around $60.50. If we get a rally back up toward that level, I would certainly be placing any short hedges you might have lifted and/or adding to short hedge protection on out through the December contract. After Monday's big losses, a rally is not imminent. Hold short hedges until we see whether the support across the July low near $57 will stop this latest price plunge. A close below $57 on the October will suggest still lower prices.
