Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
January 15, 2002
The cattle markets are moving higher. February live cattle futures closed up $.97 at $71.65, largely ignoring the continued premium of the nearby futures to cash prices. But cash prices are also higher, with cattle selling above $66 and growing sentiment that we will see a reduction in the number of cattle ready to go to slaughter across the next several weeks. Early expectations of the upcoming Cattle on Feed report are also positive. Boxed beef in the lighter Choice categories was up over $2.00 per cwt. in Monday's session and up again Tuesday morning, and that is giving some room for these markets to rally. Feeder cattle are not quite as strong, and part of what is happening is that the live cattle market is trying to restore some sort of reasonable feeding margin relative to where feeder cattle will have to be bought. The March feeder cattle contract closed at $84.32, which was up $.25 on the day.
In hogs, cash prices are higher and there is growing talk of a seasonal decline in hog supplies. That decline should come to be as we move out toward February where daily slaughter levels usually decline significantly compared to November and December levels.
I believe these markets will trade higher. I see head-and-shoulders bottom formations on the live cattle and on the feeder cattle. I am not sure that February cattle is going to reach the substantial projection out of that bottom formation, but I would not be surprised to see it challenge the October highs around $74. If that can be cleared, and I don't think that is an impossible rally, there will be resistance up toward $76 as we run into a chart gap and a congestion area in that $76 to $78 range that was put in place via trade during June, July, and August. Obviously, I would not be quick to place short hedges here and would give this market a chance to see if it can rally to the upside. In feeder cattle, of course, I have been urging the placement of long hedges on that March contract for some time. I see the head-and-shoulders bottom as completed some 10 to 12 trading days back, moving up through the neckline on that formation. It does, in fact, suggest that we could see a rally into the high $80s or possibly toward $90 on this March feeder cattle contract, so I would hold off on forward pricing cattle that you will have to sell in the spring months and make sure you have long hedges in place. Obviously, those who bought the actual cash cattle in the uncertain October-November-December period are long in this market in their cash cattle programs, and I believe that is going to work as we move toward the spring months.
Hog markets continue to try to trade higher. After the Hogs and Pigs report showed no significant expansion, the February contract rallied to the past highs up around $57.50. The June contract took out the most recent highs and moved up toward price levels that we have not seen back in August. Above $66 on that June and up around $58 and slightly better on the February, there will be major resistance as these markets are running up toward important highs. Producers might want to look at establishing short positions on that type of rally. We will probably see a correction to the downside as the market butts heads with that resistance and gives us a chance to buy those short hedges back at lower prices and generate some profits in a selective hedging program.
In the grain and oilseed markets, we have seen wheat try to take the lead. The recent USDA report showed winter wheat acreage down a bit and most analysts had expected it to be up slightly. That report also reduced the size of the corn and soybean crop slightly, and most expectations were for continued increases. The July Chicago wheat rallied this week up to the resistance around $3.06 across the late October high and, for the moment at least, has been turned lower. I do expect this market to rally again. If you watch the March Chicago contract, you will see resistance across the July high up around $3.20, and that is likely to stop any related advances in the July contract, so you might want to take a look at moving up toward 25 percent or so forward priced on the 2002 crop on that type of rally. In Kansas City we are looking at the July trying to rally toward the October highs, which are just under $3.20, and that would be a rally comparable to the one we might see in Chicago wheat. As I note in the chart again this week, we are up and out above that trend line in this wheat market, so it will have a chance to sustain a rally across the next few weeks.
The market is paying close attention to crop prospects in South America in the soybean market and has rallied at least partly because of the help from the USDA report. This market has moved up significantly across the past several trading days. March soybean futures ran into selling just below the November highs, which are in the $4.50s. That turned both the nearby and the new-crop November crop back, but I think we will see this market try to rally through that resistance. My next upside objective would be around $4.75 on the March at a chart gap, which ought to carry the November up toward $4.80 or better. That is still not an attractive pricing opportunity, but if you are aggressive and willing to operate on a selective hedging basis, we might want to think about shorting the market there in anticipation of a correction to the downside. The uncertainty in that type of strategy, of course, would come from whatever uncertainty we get in terms of the weather picture in South America.
Rallies in corn have been more modest and more difficult to sustain, and we see essentially no change in the corn market at the close in Tuesday's session. The March futures will run into difficulties in the low $2.20s across the late November, early December highs. Moving out and looking at the new crop December 2002 contract, those highs and that resistance is in the high $2.40s. Basically, I would continue to want to hold long hedge positions in this market and on any dip, add to long hedge protection and lift any short hedges that you hold on old-crop corn. We need to see a rally at least up to that $2.45-2.50 level in the December 2002 corn to start any forward pricing program on this year's corn crop and/or think about taking profits on long hedges in a selective hedging program there.
