Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
March 12, 2002
There are a number of developments in the livestock and meat sector, but whether the developments of the past few days are positive or negative depends on your vantage point. The light Choice boxed beef cutout values are up $2.05 in Tuesday morning's session, up to $124. On March 5, those same lighter Choice carcasses had cutout values at $118.20. We have some limited trade in cattle so far this week as high as $75.90, but that is a bit misleading because almost all of the volume in the direct steer trade is at $73. That is essentially consistent with where we ended last week, and last week the packers were busy trying to push boxed beef values up, and we see that continuing into early activity this week. At the same time, they were trying to buy cattle at prices that would give them some positive margins, and they simply didn't get it done. It appears that the packers came out of last week with margins in worse shape than they were at the beginning of the week, and we are set for another attempt this week to restrain volume and push boxed values up and at the same time try not to pay too much for the cattle.
In the futures pits, that April live cattle futures contract that had been up to $76.50 in early February backed off to the $73.60 level in late February, rallied by the end of the day on Tuesday to as high as $76, and is just trying to watch what is going on in the cash market and stay aligned with the emerging cash prices. You can hook a trend line on that April contract to the mid-December lows and lows in late February and early March and sketch it up and let this market move to the upside and not do any additional hedging or replacing of short hedges until you see a close below that uptrend line. The early February highs around $76.50 will be some resistance, and the highs in July and August in the $78-$78.75 range will be strong resistance. This is a bull market waiting to happen in the cattle complex, and I would be a bit inclined to just work the trend line on this chart in the event we see a close below the trend line and see how high this market can go.
The feeder cattle pattern looks similar but it is not nearly as positive as we see in the live cattle complex. That August contract that I am starting to watch now closed down a bit on the day on Tuesday, and we have some support in the $83.75-$84 range across the February lows. I am mostly interested in placing long hedges and I would tend to buy a dip in this market toward that $83.80-$83.90 level. Longer term, I expect to see sharply higher prices in this market as the fed cattle complex continues to register the bullish fundamentals in both the cycle and the short-term fundamentals where the only real "fly in the ointment" is the continued high average slaughter weights.
Cash hogs on a liveweight basis are around $39, with the lean based hogs somewhere in the low $50s. The April futures continued a move down in Tuesday's session, closing at $57.22. That essentially fills the chart gap back in December that I thought would be some support, and we may see this downward correction run to still lower prices. Out in the more distant contracts such as the October, we saw a new life of contract low recorded in Tuesday's session with prices as low as the $50.70 level. We are not seeing any substantial expansion in sow numbers in this country, but those numbers are up 7 percent-8 percent in Canada, and we are seeing increased farrowing rates and bigger pig crops from late 2001 than we would have expected. Pigs born in the fourth quarter of 2001 and the first quarter this year will make up much of the slaughter as we move into the late summer and fall months, and we have the very real possibility that we will see a substantial tonnage of pork. Unless demand continues to improve, we could see low prices again. Let's watch this market and not price on the lows we are seeing this week, but on rallies back to resistance points, we need to be prepared to get these hogs priced.
The grain and oilseed complex is caught between a bearish scenario in corn where most expectations see a substantial increase in corn acreage and a substantially more bullish scenario in soybeans where exports from the U.S. to date are at record levels and there appears to be good demand worldwide for fairly large stocks of soybeans. The May soybean futures have taken out the November and January highs and traded up to the $4.68 level on Monday. That carries the new-crop November up through its November and January highs, up to almost $4.80, and that gets up toward the little chart gap at the end of September that I have mentioned before. I expect these markets to falter along here, correct to the downside, and then try to trade up again. My orientation from primarily a producer's viewpoint, then, is to let this market run to the upside, let it correct to the downside, start up again, and then we can draw an uptrend line. Be prepared to connect the late February low with a low that is probably going to be coming across the next two weeks and get that trend line in place. That gives us an opportunity to let this market run up to $5 if it can, but we will be prepared with a willingness to sell and place short hedges on any close below the uptrend line.
The corn market looks no different than it has for weeks. It continues to drift to the downside and continues to make new contract lows. The pattern across the past 10 trading days looks like a bear flag on the May futures. Hold any short hedges you have in place until we see a close above the downtrend line that you can sketch by connecting the mid-January and mid-February highs. Those of you who still need to place long hedges to cover feed needs in corn, whether you are in the dairy, livestock, or poultry business, let this market drift lower if it is going to, but be prepared to place long hedges when you see a close above that same downtrend line that hooks the mid-January and mid-February highs.
The wheat market continues to languish in spite of the deteriorating crop conditions in the Monday reports. They badly need rain in the southwestern part of the U.S., but that is not helping prices very much because we don't see any strong signs of active world demand. The March Chicago contract has showed us two consecutive closes below the old contract low of $2.73. We had a close on the May futures in both Chicago and Kansas City on Monday below the old contract lows around $2.74 on the May Chicago and around $2.83 on the May Kansas City. I show that May Chicago chart this week, and it is encouraging that we see Tuesday's close back above the recent contract low. We need two consecutive closes in new low price ground before it is widely seen as a sell signal, so we may get at least a modest rally in this market. Any move back up toward last week's high around $2.87 on that May Chicago contract is probably going to get sold. Anything back up toward the $2.90 level is going to be a rather complete 50 percent correction on this last move down from $3.10 toward $2.70. I think that needs to be sold in terms of moving old-crop cash wheat you are still holding in storage and in getting some additional pricing protection on the new-crop July.
