Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
January 29, 2002
The cattle market is looking at a battle for bargaining position. It appears we are finally seeing tightening of the market-ready numbers of cattle, and that is coming in the face of negative margins for the packers. There is clear hope in the cattle feeding sector that we will see cash prices before the week is out well above $70. The past six months have seen reduced placements compared to year-earlier levels, and we are finally 2 percent below year-ago levels in terms of number of cattle on feed. Boxed beef values came into the week on a stronger note, up as much as $1.37 on the lighter Choice category at the end of the day on Monday and up over $1 again on Tuesday morning. The nearby February live cattle contract is trading above $73 and is showing very little concern about the $3-$4 premium to the cash market. I suspect, as we move ahead, that we will see some softening in that February futures contract and some increase in the cash, and we may find convergence somewhere around $71-$72. At this point, I would want to see the February move up toward the older trading range from last September in the $75-$76 area to do any additional forward pricing and hedging. You can sketch an uptrend line on that chart and protect yourself against downside risk if the market does turn and close below that uptrend line. In feeder cattle, I would not want to be forward pricing any of the spring and summer cattle at this point. I continue to suggest long hedges and using any dip in the market to place and add to long hedges as an appropriate posture in the feeder cattle market.
In the pork complex, some of the more distant lean hog futures are making new highs this week. The recent monthly Hogs and Pigs report suggested some start of expansion with a bigger than expected pig crop, but there are still some traders who are not giving these monthly reports a great deal of credibility. I think the market will discount for and trade these reports, however, so my strategy would be to watch that nearby February and on any rally up to the highs around $57.50, you might want to think about forward pricing out through the first and into the second quarter of 2002. Again, you can sketch a trend line across the December lows and the low a few days back in mid-January and protect yourself in this market by being ready to place short hedges on a close below that uptrend line. That way, if it can take out the highs and go up, you are in a position to benefit from the rising cash market and the forward pricing opportunities will be better than they are today.
We saw a fairly hard down day in the wheat market on Monday. But there has not been much follow-through to the downside in Tuesday's session. This weakness is coming, it appears, partly from long liquidation and partly from export activity that continues to not measure up in terms of some of the bullish expectations. With the March Chicago wheat now closing around the $2.90 level, we have essentially a full 62 percent correction of the last move up from the low down around $2.77, up to the mid-January high around $3.13. As I mentioned in last week's letter, I expect this market to hold here once it completes a correction to the downside and try to trade up again, and we will then be able to sketch an uptrend line across that December low and the low that is recorded this week if this market can turn back up and sustain a rally. Then we have resistance across the high around $3.13 and support underneath the market with the trend line. One approach is to let this market move out toward the apex of that big triangle and show us whether it is going to give a sell signal below the trend line or be able to trade up through the resistance at $3.13 and go to higher levels. As we watch this, it is going to be important that we be prepared to not only move old-crop wheat that you still own but also to get some pricing done on new-crop wheat when this market gives us a signal. I do not want to forward price new-crop wheat here because I think the fundamentals in this market are strong enough to justify a price rally.
Some of the late spring and summer corn contracts made new lows on Monday; we are again pressing down across both contract lows and longer term historic lows. I see this as an opportunity to buy back any short hedges that you are holding in place and for users to go out through this full calendar year and possibly into 2002 placing long hedges and protecting against rising corn costs. The July contract, for example, had a low on Tuesday of just below $2.20, and the opportunity to buy the July around $2.20 or lower is an excellent opportunity to peg feed costs for dairy, poultry, and livestock programs. As I have said on a number of occasions, it is important that we not miss this opportunity. It is unlikely that we will get weather problems sufficient to bring a huge increase in corn prices during this coming year, but that possibility is always there and should not be ignored when you can peg costs about as low as we have seen them in many years.
The soybean market is holding above its late December lows. This market is getting some occasional boost from reports of weather problems in South America. The March contract on Monday was up only slightly on the day, but it closed near the top of the trading range and had found some support around $4.25. The contract low there occurred in late December and is about 10-cents below that $4.25 level that we saw in Monday's session. If you move out through the spring and summer contracts and look at the November, we see a similar pattern. That new-crop November closed on Monday around $4.44, at $4.435 on Tuesday, and it is trying to hold above the late December lows. We may see a completion of the correction of the last move up in this market and the start of another rally to give us a chance to sketch in an uptrend line in a fashion similar to that we discussed in wheat. There is a chart gap centered around the $4.38 level on the November futures, and the market appears to be finding buying support when it dips to the top of that gap, and this may be what will prompt at least a modest rally to the upside and allow us to sketch in the trend line. It is too early to be forward pricing soybeans, at least at these relatively low levels, and I would primarily be thinking about lifting any short hedges that are being held and holding long hedge protection in soybeans and soybean meal until we get a price rally. Then we will be able to think about producers placing short hedges and the users taking profits on a selective basis on long hedges in both soybeans and soybean meal.
