Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
February 19, 2002
A new economic reality is becoming more apparent each week in the grain and oilseed sectors. In the absence of supply control, supplies tend to increase and drive price down toward the costs of the low-cost producers. In the presence of NAFTA and GATT with fewer restraints to trade, that low-cost producer may not be in the United States. The issue is currently very alive with talk about poultry firms and other soybean meal users in the Southeast bringing in meal from Brazil. And wheat prices continue to slide lower even though the fundamental supply-demand picture would appear to support better prices. With big acreages and perhaps record crops looking at us in the U. S. as farm policy discussions do not include any talk about supply management, we will need to be more aggressive this year in looking for price protection.
Last Friday's session brought lower wheat prices before the three-day weekend. Export activity is not good, and the price dips uncovered sell stops. The March Chicago wheat chart I show again this week shows the damage, and sets up what could be an important scenario this week. If we see two consecutive closes below the contract low support plane on the chart, we need to consider being short in this market both to cover old-crop wheat in storage and new-crop wheat in the July. The Kansas City March matched its contract low at $2.80 on Friday, and the July contract was about 1 cent above its low of $2.915 at the close. If weather in the Southwest does not turn bad, we could see lower prices, so watch for those two consecutive closes in new low price ground and be prepared to get short hedge protection. This wheat market is not behaving nearly as well as I had expected and shows no sign of any "weather premium" to date.
In corn, this year is starting differently from most of the years in the 1990s. Often, in past years, we came into the year with decent prices being offered but not so this year. The March is at $2.05 and just above contract lows, and the new-crop December is near $2.33 and only slightly above its contract low. We are likely to see a rally by the December within its fundamental supply-demand range early in the year, perhaps back up to the highs from November in the high $2.40s. There should be some chance during the year to see a rally up toward $2.60, but if we get no weather scare and no positive surprise in the March 28 Prospective Plantings report, I would take a look at short hedges on any rally up toward $2.50 on the December contract. Corn users should be aggressive at current prices in taking long hedge positions up toward full corn use out through 2002. Take a look at soybean meal at the time you buy the corn futures. There are early-January lows in the $142 area on both the nearby March and the October new-crop meal futures, and long hedges should be placed aggressively on dips to those price levels.
Soybean prices are off their lows, and a bit more inclined to bounce higher than are the corn and wheat markets. Late week prices were influenced by higher palm oil prices in the world market, and there continues to be interest in the South American weather. March futures are around $4.37 with the contract low near $4.16, and the new-crop November is showing current prices near $4.54 with a low of $4.285. I see a trading range on that new-crop contract from $4.30 to $4.65-$4.70, and would sell the November on rallies into the high $4.60s. With a big crop in South America and the relatively high market loan price pulling acreage into soybeans, this could be the weakest link in the grain oilseed complex. Across the past month, the November has found support around $4.40 at the top of an early-January chart gap, and if we can rally up toward $4.65 in the short run, this market will get sold aggressively. Put your sell orders at about $4.63 on a GTC (good til cancelled) basis and sell this market on a rally.
March feeder cattle have shown less strength than I expected. It may take some time for the feedlots to absorb recent losses and find new financing before the cyclical strength can fully hit the feeder cattle market. I would sell rallies in the March to offset your long hedges and to place short hedges if the market gets back up toward $86. On dips, I will want to look at long hedges in the August, especially if that contract dips to $83 and below. We will see higher calf and yearling prices this year unless weather brings higher priced corn. The April live cattle futures, with slightly lower prices last week, closed on the steep uptrend line on the chart. Look for a brief correction to the downside here, but be alert because I do not expect any significant decline. Last week's Cattle on Feed report showed placements 3 percent below last year's big January placements and the on-fed count is now 3 percent below last year. Both the short run and longer term supply-side numbers are positive, and if demand can recover some of the fourth quarter losses, especially in the export arena, we will be poised for very strong cattle prices this year. Active sales last Friday at $72 and light Choice boxes above $122, though down a bit at week's end, are suggesting better prices to come. The big percentage of large yearlings going into the feedlots will take some of the bullish bloom off the April contract, but it will rally again.
Lean hog prices in the cash market were averaging above $51, down from last week by $1 or more. The April lean hog futures gave a sell signal with a Friday close below the steep uptrend line hooking the October and December lows. Look for this market to make about a 50 percent correction of the move from below $52 up to nearly $63, and then find buying support around the top of the chart gap just below $57.50. Friday's close was $59.125, so it will not take long to complete this downward correction. I then expect to see this market rally again so watch for signs of buying support near that gap as a sign to lift short hedges on first and second quarter hogs.
