Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
March 5, 2002
The cattle markets are marking time until some of the supply-side uncertainty in the complex gets reduced. About the only short-term fundamental consideration on the supply side that has not turned positive are the weights. We have beef production so far this year up about 5 percent compared to last year's levels, and that is happening even though we are now 3 percent below last year's levels in terms of cattle on feed. Weights are continuing to push the tonnage up. Boxed beef values for the Choice types had moved above $120 and then backed off significantly across the past 10 days. Now we have improvements anywhere from 88 cents per hundredweight on the lighter Choice categories at noon on Tuesday to $1.77 higher on the lighter weight Select boxes. If that continues, we will see the packers come back in and more nearly restore normal operating levels and quit trying to cut back on slaughter levels so they can protect their selling prices in the form of the boxed values. We will probably see more cattle move at $72 later in the week up from $71 last week. Cash hogs, on the other hand, are basically lower this week with most of the average live-based prices around $39.
April live cattle futures dropped down to about the $73.60 level last week and then rallied back above $75 again. We are seeing some pressure on this contract as hedge selling comes in, I think, in Monday's and Tuesday's session, and we are just above the $74 level on Tuesday. Don't be surprised if this contract settles on down toward $73 and finds some support there across the late December and early January lows. If you hedged cattle on this last little rally, let's watch for some signs of buying support down around $73 in the April and be aggressive in terms of buying back short hedges because, longer term, I think the trend in this market is up. Obviously, the February highs up around $76.50 are going to be a major target for hedge selling, and we have further resistance moving up toward $78 across the highs from last summer. I suspect that this contract is not going to get the weight problem solved quickly enough to take out those $76.50 highs in January, so I think that is going to be an excellent forward pricing opportunity if we do get a rally to that level.
The feeder cattle market is reflecting what we see in the live cattle and fed cattle market and is being hurt by the large losses on cattle coming out of the feedyards in recent weeks and months. We have lost a lot of equity in the feedlot complex. There is less money around to pay for these yearling cattle, and we still have not straightened out the weight problems in live cattle. Watch this feeder cattle market drift sideways and trade with the live cattle futures. I would certainly be interested in getting long hedges placed in this market in late spring and summer contracts. On that August, for example, it looks like we are finding buying support around $84. I think the August has substantial upside from that level if long hedges were placed to keep the cost down on light cattle you will need to buy in the late spring and summer months.
April lean hogs rallied up toward $63 in early February, drifted lower to $58.45, rallied back to $60.50, and now this market is correcting to the downside again. April is trading just below $59 in Tuesday's session, and I had suggested earlier we would see a dip down toward $57 and possibly challenge that chart gap in December that is centered around $57.30. Looking ahead, I think we are probably going to increasingly need to be prepared to do some short hedging on second half hogs because as we watch the numbers on the monthly reports with what looks like a larger than expected pig crop in the fall, we are going to see some pressure on this market late this year. But for this week, let's watch this futures complex come down and find some support around that $57-$57.50 level in April and be prepared to buy back any short hedges on clear signs of some support. Then, let's monitor opportunities to the upside to get those hedges back in place and maybe extend the short hedge protection out through the rest of the year.
In the grain and oilseeds, the wheat market continues to test our patience and discipline. After closing two consecutive days below the old contract low at $2.73 on the March contract, we now see a rally in Tuesday's session that is putting it back above $2.73. This is an instance in which we saw what would be considered to be a widely recognized sell signal, and the market is not going down on that news. Tuesday's little rally is clearly related to crop condition reports from Monday with more of the hard red winter wheat crop in the southwestern states in relatively poorer condition than we expected. If you placed short hedges on that second consecutive close in the March below contract lows (and I recognize those hedges would probably have been placed in the July with the sell signal coming off the active March contract), one approach might be to hold those short positions until we see a close above the downtrend line that I am showing on the chart this week. We may see some continued deterioration in terms of crop condition due to poor weather, and March is always a key month in terms of moisture and wind in the southwestern states. The next major signal we are likely to see in this wheat market, however, is going to be a buy signal when we see a close above the downtrend line on the March and May charts.
The soybean market is trying to rally, reflecting some economic uncertainty in Argentina as to exactly where that country is going to be this year in terms of competing in world markets. The March contract has resistance at about $4.55 across mid-February highs and more resistance just above that across the November highs. If we can get a rally to those levels, which is only a few cents above where we are in Tuesday's session, that should help drag the new-crop November contract up toward its mid-January high of $4.65 and the November has highs from late 2001 at about $4.67 or $4.68. I would think about selling old-crop soybeans that you are still holding in storage on rallies up against these highs. I don't see anything to indicate that this market is going to be able to push up through those highs and rather expect it to stay in this trading range, which has been from about $4.30 on the November up toward $4.70. In corn, the price discovery process in Chicago certainly seems to believe the privately forecasted increases of up to 3 million acres in corn. That March old-crop contract is incredibly weak, trading around $2 and trying to hold that psychological level. The new-crop December contract has moved down to the $2.30 level and closed at $2.31 in Tuesday's session. I would hold any short hedge positions in this market and look to lift those when we see a close above the rather obvious downtrend line on these charts. I would hook the late November and mid-January highs on that December contract, and as long as we stay below that downtrend line, look to hold short hedges. Users of corn who have partial coverage in place or are waiting for a clear signal to place long hedges should just stand back and let this market drift sideways to down. Be prepared to be aggressive in placing long hedges when we see a close above that downtrend line on the charts.
