Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
February 5, 2002
The supply side of the cattle markets is bringing a bullish shine to this sector. Cattle on feed numbers have finally slipped below last year's levels, and the recent inventory report shows herd liquidation for the 6th consecutive year. Not even the category "heifers held for the beef cow herd" was up, and this category almost has to show increases before the herd can be expanded. Cattle numbers in all classes are down and commercial beef production is virtually sure to decline in 2002 unless some outside calamity forces more herd liquidation. But on the demand side, worries persist. The demand index at www.aaec.vt.edu/rilp was up again in the 4 th quarter, but this index is built around prices for fresh beef. If demand in the institutional and export markets is slipping, and it appears to be, the index may not pick up all of that negative side of the picture. And we now know that exports to Japan were down a whopping 31 percent in the 4 th quarter compared to year earlier levels.
In the short term, the February live cattle futures are holding a premium to a cash market that was as high as $71.50 late last week. Choice boxed beef values are about $118 in Tuesday, well above recent levels. Packers' margins are reported to be negative, however, and they are reducing kill levels to try to push boxed beef values still higher and restore operating margins. These cattle markets will not just move straight up to higher prices, but higher pieces are in front of us. I would continue to hold long hedges in spring feeder cattle markets and wait until the markets work higher to place or replace short hedges. The April live cattle futures will run into resistance at the $77.50 to $78.50 congestion area from last summer's trade, and $77.50 is my first upside objective to consider hedging March and April fed cattle. Watch for topping action in live cattle to get an idea of where the feeder cattle will run into selling as that market gets ready to move to an even larger premium to the fed cattle market.
In the lean hogs, the April is around the $62 level. I would look at hedging or re-hedging the March and April hogs on a scale-up basis as more profits are offered or when we see a close below the uptrend line hooking the mid-October and early-December lows. This market continues to be in a strong uptrend as we move ahead with no clear and definitive signs of herd expansion that will prompt the next price cycle lows in hogs. This could be a profitable year in hogs, but it will be important to continue to anticipate expansion in the face of profits and cheap corn and be ready to get profitable prices established by short hedges. I would not pay put option premiums in this market since the futures would, from current levels, have to make new contract highs to cover the premium costs. There is not much opportunity to benefit from having the upside open by using put options rather than futures directly.
The March Chicago wheat is not holding in the $2.90 area as I had predicted, and has slipped to the $2.80 level. We will need to change expectations here and look for the market to find support across the lows near $2.80 or the relatively flat trend line shown on the chart this week. The contract lows on the March KC futures are near $2.80, and the market is close to those lows this week under pressure from improving weather on the winter wheat crop and concerns that a continued strong U.S. dollar will hurt export demand. Export inspections for last week were pegged at 14.96 million bushels, in line with expectations but not a robust number for this time of year. We will need to watch this market for any attempt to rally toward the recent highs near $3.14 as a selling opportunity. The earlier high at $3.20 now looks to be more nearly out of reach.
The corn market drifts lower with even the new-crop December 2002 making a new low recently around $2.32. Export inspections are not strong and there is talk of acreage coming out of cotton and into corn. The only strategies to be applying in this market are to buy back any short hedges and to continue to place long hedges to peg corn costs on price dips. The problems of the corn producer who has held corn in storage, often unpriced, to see prices make new lows are big opportunities for the dairy, poultry, and livestock programs who will need to buy corn in the coming months.
In the soybean complex, March meal has dipped below $150 recently but the post harvest lows around January 1 are closer to $142. On a dip toward $142, users of soybean meal as a protein supplement should buy this market aggressively to place long hedges, and look at the futures contracts out through the rest of 2002.
March soybean futures are trying to trade higher, reflecting periodic weather concerns in South America and a decent export number from last week. The March is around $4.35, and any rally to the recent highs on the March near $4.55 will deserve a look at the fundamentals and whether this market is likely to trade up through that resistance. We have the possibility of a head and shoulders bottom in this market, with the "neckline" on the November contract near $4.65. If we rally to that level, it will be time to bring closer scrutiny to the soybean complex in an effort to determine whether we are going to see $5.00 and higher prices before planting. We will watch this market across the next few weeks as we work out toward the important Prospective Plantings report on March 28.
