Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
January 8, 2002
The grain and oilseed complex came into the week with more volatile prices than we have seen for some time. Soybeans led the way with a substantial move up early in the futures pits. There was talk about dry weather in Brazil, and expected rain over the weekend did not materialize. This also looks very much like some short covering buying by speculative shorts. There was some technical buying early as the market took out some resistance planes across recent daily highs. Then there is the crop report coming out Friday with some hedgers and speculators trying to even up positions in expectation of that report. All in all, not much of the gain that was recorded on Monday was maintained with the close near the middle of the trading range on the nearby contracts and below the middle of the trading range on the distant new-crop November 2002 futures. There was some profit taking going on, but that suggests nervousness in a market when there is a tendency to take profits instead of expecting the market to sustain its upside move. Small gains came back in on Tuesday, and that does help.
The corn market was less volatile than soybeans, with corn getting some spillover help from the attempted rally in soybeans. But the afternoon brought news that export inspections last week were below expectations in corn. Wheat tried to move up, reflecting the better fundamentals in wheat than we are seeing in soybeans and corn. The March contract in Chicago that I show this week gives a clear indication that a major downtrend line in this market was taken out late last week, and that opens up the possibility for higher prices. Note, however, that this market is still stretching trying to sustain gains. There have been better price moves in the Chicago market across the past three to four daily sessions than in Kansas City, but this entire complex is still hurt by the lagging corn and soybean markets. Monday's close was down compared to Friday's strong close in wheat, and Tuesday's market was flat. All this suggests we will correct back down toward that old trend line before this market tries to rally again.
Any price rallies will continue to be sold in the soybean complex and in the corn market. I continue to like the strategy that has been there for some time, and that involves covering short hedges on dips toward recent lows and placing or replacing long hedges to cover corn, soybean, and soybean meal needs out through 2002 and possibly even further into 2003. We are trading at or near historic lows in these markets, especially in soybeans, and this is a particularly attractive long hedging opportunity in both soybeans and soybean meal, with January soybeans near $4.30 and January meal near $150 per ton.
In wheat, we need to see some sustained rallies in this market to give better chances to sell old-crop product and start to think about pricing new-crop wheat. The recent rally up toward $3.10 on the March Chicago contract carried the July up toward $3. I think we can get better rallies than that as we move through this growing season, even though there are some early private estimates that wheat acreage will be up this year. I would like to see this market at least challenge the major resistance across the high at $3.20 that occurred back in July on this March Chicago futures. At that point in time, we should see something up around $3.10 or better in the July contract, and that might be a sufficient to justify starting a small incremental program of forward pricing in the 2002 crop. We will continue to watch this market closely because we are likely to see signals for action in wheat sooner than in corn or soybeans.
In the livestock and meat complex, I continue to see a head-and-shoulders bottom on both the live cattle and the feeder cattle futures. This market came into the week on a slightly stronger note even though there was some decrease Monday for Choice beef cutout. Slight gains on Tuesday made that picture look better. There is talk about numbers tightening as we move through this quarter, and that is almost assured given the steady to reduced placements we have seen into the feedyards since July 2001. It also appears that packers are going to need to buy cattle this week even though they are going to be hesitant to bid them up very much because they are not sure that they can pass the impact of these higher procurement prices up through the consumer channels. We see trade this week as high as $69 in the direct trade zones, with most movement so far $66 to $67. Look for this market to continue to try to climb higher, honoring that head-and-shoulders bottom that I see on the charts. I think we will see better prices in both the live cattle futures and in the feeder cattle futures to do short hedging. As you will recall, I have been advocating long hedges on the spring feeder cattle for some time, and I would surely continue to hold those positions.
The late December Hogs and Pigs report came in with market hogs, total number, and the breeding herd down about 1 percent, essentially aligned with pre-report expectations. The nearby February contract traded up toward the summer and early fall highs in the $57-$58 area, giving excellent hedging opportunities before backing off across the past several days. Futures contracts out into the second half of the year failed to rally accordingly suggesting that traders continue to think that in the presence of profitable finishing margins for slaughter hogs and what appears to be cheap corn possibly across the next few years, we will see expansion in this market. It appears that to date producers have been busy taking profit streams and paying down debt associated with those record high corn costs in 1996 and the record low hog prices in late 1998. I see no reason for a major break in this market, and I would look for that February contract to challenge the high late last week around $57.30 and possibly even up to the highs just under $58 in June or July before replacing short hedges or adding to short hedge positions in this complex.
