Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
January 22, 2002
On January 22, as we look forward to the 2002 crop year, it appears the grain and oilseeds are finally trying to establish bottoms and get past the low prices coming with harvest pressure in late 2001. I see the possibilities of a double bottom on the Chicago wheat charts on both the March and the July with the two lows I am referring to on the July around $2.80. We have seen the March rally above the late October highs just above $3.00, and that carried the July up to its late October high at about $3.07. We see corn at least a few cents a bushel off its December lows, and soybeans are $.30 to $.40 off their lows in the March and in the November as well. This doesn't mean that we are going to see any quick switch to bull markets. In the current environment, we will see big crops around the world and in the U.S. with no supply control policies in place. We already have private advisory firms projecting a 10 billion bushel corn crop.
I show the March wheat contract again this week, and I would expect to see both the March and the July in Chicago correct this last price surge by moving back down toward the $2.90 level. That would be about a 50 percent correction of the surge in price that we saw that ran from the early December price around $2.76 up toward the $3.14 level last week. This correction to the downside, if it gets completed across the next 2-3 weeks, will also change the appearance of our chart. If the market does hold around the $2.90 level and start to try to rally again, we will be able to hook the low we are expecting to see around $2.90 across the next several trading days and the December lows and sketch an uptrend line on this chart. We will then have the March in an ascending triangle with resistance across the January high up around $3.13 to $3.14, and we will see the same type of pattern on the July. With that type of chart pattern in place, we can let the market tell us whether it is going to show us a close below the uptrend line and suggest that short hedges be placed or whether it will be able to go through the resistance at the resistance planes and move to still higher levels. This is the market in the grain and oilseeds that I think requires some watching. The pattern on the Kansas City contracts does not look quite as positive, with prices almost $.20 below the major resistance that I think the March contract will encounter across the late October highs at $3.10.
Recent lows on March corn are around $2.08, and the new-crop December contract was around $2.33 when those lows were being put in place. Corn producers certainly do not need a 10 billion bushel corn crop during 2002, but there is a very real possibility we will see it. That is going to be really excellent news for corn users. I see nothing to be done in this market from the viewpoint of selling corn or forward pricing corn to be grown in 2002. The chart watchers who ought to be vigilant are the corn users who should be prepared to add to or place long hedges on corn out through the next two calendar years or so when and if that March corn futures dips to $2.10 and below.
I see the possibility of a head-and-shoulders bottom on the soybean charts. It is there on the nearby and active March, and it is also there on the new-crop November. I certainly expect to see these markets register the continued favorable crop conditions in South America and continued lack of aggressive movement in the export market and correct this last surge we have seen in prices. Look for these markets to correct to the downside across the next several days with the March possibly dipping back down toward the $4.35 level and the November soybeans down toward the $4.45 to $4.50 range. If these markets can then hold at those levels, we do have the possibility of a bottoming formation in place. It is going to be interesting to see how these markets trade and develop as we move through January, February, and toward the end of March when we get the Prospective Plantings report. But there is clearly sentiment that we will see large acreages in the absence of any farm policy supply management and very large crops in corn and soybeans this year, assuming anything approaching normal weather.
In the livestock and meat markets, we are hearing talk about $70 cattle again, but we haven't sold cattle at $70 yet. Late last week, and even as late as Friday, packers were paying up to $1.00 more and up to $68 to get cattle, and there is some hope and talk in the cattle feeding sector that we will see a $70 market this week. Boxed beef values improved $2.00 last week with lighter Choice categories back above $112. Last week's Cattle on Feed report continued the recent pattern with placements below year-ago levels, but they were not down as much as had been anticipated. But that negative news with regard to placements appears to have been offset with marketings during December higher than had been expected. There is some bullish sentiment coming back into this complex, and it will be interesting to see how quick the supply-side numbers can start to help push prices up.
I still see head-and-shoulders bottoms on the live cattle and feeder cattle charts. The February live cattle, even though the prices tend to generally be a bit lower on Tuesday, are holding above $71 at $71.17, and that suggests that traders think we will see a $70 cash market. We have had a slightly larger correction back to the downside than I had expected on the March feeder cattle, but I see the possibility of significant bottoming formations in both live cattle and feeder cattle and do expect we will work higher to better prices. I do not want to be forward pricing any additional cattle in the feedyards yet, but I would want to have long hedge positions in these spring feeder cattle. The dip we have seen across the past week that carried the March back down toward $83 is giving us another chance to get long.
In hogs, cash prices have looked better coming into this week's trade. The February contract has recorded a number of highs across the past six months between $57 and $58 and seems to be capped by that resistance with the market trading closer to $55 this week. But if you step out a bit and look at the April lean hog contract, we have seen prices well above $60. This is opening up the profit window again with excellent profit opportunities for hogs, and it is coming because the monthly reports had been saying that we had not seen any expansion, and the late December quarterly report confirmed that with numbers down 1 percent in virtually every category. We are going to see a fairly strong hog market, it appears, in the March-April period, where we normally expect to see the fall pig crop come to market and prices on a seasonal basis below those we might see in February. But it appears the cyclical side of this price picture is going to pop prices up this year. We certainly have an excellent pricing opportunity on the April. For those of you watching the hogs, hook the October lows on that spike down and the low that we had in December on that April contract and sketch in that relatively steep trend line. Be prepared to act, if you don't just price hogs on a profit margin basis before that, when we see a close below that trend line.
