Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
February 27, 2002
The grain and oilseed markets appear to be listening to the on-going discussions in Washington about a new farm bill. None of those discussions have any provisions that call for any supply of management or production control, and while there are many reasons to argue against that type of governmental interference in the marketplace, there are some very predictable outcomes or results from a policy that subsidizes and does not place any constraints on production. The acreage will be planted, and the equipment will get used so long as the farmers' price anticipations are sufficient to cover the variable cost of producing and harvesting. That raises the very real possibility that we will continue to see prices pressed down toward the cost of a low-cost producer somewhere in the world in corn, soybeans, and wheat. No where is this more apparent this week than in the corn market, where the March futures have dipped below $2.00. It has been a long time since we have seen that type of depressed price picture in late February when we still have not seen the March 28 Prospective Plantings report and we still have no idea what the planting period and growing period weather will be. If weather is normal this year and the expected big acreage planted, this looks like it can be one of those years that you don't want to remember in terms of pricing possibilities in corn. I suspect we will see something very similar in soybeans as the year wears on, and certainly the current picture in wheat is not very attractive.
The soybean market appears to be in a trading range with the March futures oscillating between about $4.15 and $4.55. That translates to a range of some $4.30-4.65 on November futures, and we need to see this market out of those trading ranges to the upside before old-crop product should be sold and new-crop soybeans forward priced. It will be a matter of watching this market and looking for decent pricing opportunities. On any dip, of course, users of soybeans or soybean meal should be looking to get long hedges established. In corn, with March plunging below $2.00, we now have the new-crop December contract in the high $2.20s. This market looks very weak fundamentally and technically with large crop expectations, continued relatively anemic movement in the export markets with the strong U.S. dollar of recent days, and new contract lows on the charts. Look for still lower prices before we find some fundamentally based support. On dips, of course, users of corn in the livestock, dairy, and poultry programs will continue to want to place long hedges and get costs for this year and even out into next year established at something approaching historic lows.
The wheat market has the best chance in this complex of some price rally. The March Chicago contract is drifting down toward its contract low at $2.73, and the March Kansas City is doing the same thing along the $2.80 price level. If we can bounce off this important support and make a correction of the last price move down, selling and pricing opportunities should improve. Look for the March to hold at this $2.73 level and try to correct this last price break from about $3.13 down toward $2.75, and that would put us back into the $2.90-2.95 range if we can get a 50 percent correction. This crop should be sold and new-crop July futures used to forward price wheat on that type of rally. As the chart shows this week, if this market does not hold along the $2.73 contract low in the March, we need to be careful because we are headed for lower prices. If we see two consecutive closes below $2.73, any old-crop product that has still not been sold needs to be sold or forward priced, and certainly we need to step up and forward price a substantial part of the new-crop in the July futures. You can never say never in these markets, and given what is going on in the world arena and the willingness of other countries to sell wheat at prices below prices we want to see, we could see substantial downside from these levels if those important support zones are violated.
The tug-of-war in the cattle market is being won by the bears at least for the time being. If you go back a few weeks, packers' margins were in bad shape, largely negative, and they were trying to boost boxed beef values to improve those margins given that cattle were selling as high as $72 two weeks back and mostly $71 last week. But the light Choice boxes dropped from $122.45 on February 19 to $117.43 on February 25 before they stabilized a bit and were up slightly on the 26th. In the presence of that weakness on the selling side of the packers' operations, the February futures that had been trying to hold up around the $73-74 level looked too high and looked high relative to the cash prices that we might now see. February futures have broken hard across the past week, down from around the $74 level toward $70 on the low in Tuesday's session, and it appears we are going to get convergence between cash and the nearby futures more nearly by the February coming down toward a cash that is probably going to also move down toward $69-70 before this is all over. Added pressure to this market comes from the fairly large number of deliveries that we have seen against the February futures suggesting that cattle feeders who hold short hedges are better off to deliver the cattle than to buy back futures positions. That always puts pressure on the futures market and tends to bring it down. More distant live cattle futures like the April should have been sold up around the $75-76 level on a close below the obvious uptrend line on that chart, and I would hold those short hedge positions until we see some signs of stabilization in this market. Generally the same thing is going on in the feeder cattle complex where we have seen the markets come to levels lower than I had expected, but when this market finds some support as the fed cattle market starts to get cleaned up, we will have excellent long hedging opportunities. This is especially true in the August contract, which looks like it could trade down into the low $80s before it turns back to higher levels again.
The hog market is getting some fundamental news that suggests the pig crop for the fall is somewhat bigger than we had expected, and that is going to put some pressure on the first and second quarter hog market. That April lean hog contract, which had traded up close to $63 in early February, is now down around $58.50 and gave a clear sell signal when it violated the trend line sketched across the October and the early December lows. Hold short hedges here. I wouldn't be surprised to see this April correct on down toward the $57 level and possibly try to fill that chart gap that was left in late December before it attempts to rally again. We probably also have to lower our expectations a bit for hog prices out into the summer months and into the second half of this year because it appears pork production is going to be higher than had been anticipated. For the moment, I would hold short hedges already in place using that trend line sell signal, and those short hedges should be held until we see this correction to the downside run its course and the market find some buying support.
