Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
March 19, 2002
The livestock and meat markets are in a mess. We have had price plunges in this complex across the past few trading days that few had expected. We have moved from having a substantial premium in the now nearby April contract to a scenario where $73-74 cash cattle this week may be at a premium to the nearby April, which closed Tuesday down $.92 at $71.22. We expected in last Fridayıs Cattle on Feed report to see February placements up about 6% compared to last year and they came in up 16%, so we have reversed that six month long pattern of reduced placements compared to year-ago levels. The big problem in all this, however, has been the excessively high weights. The number of cattle has not been big enough to push tonnage to the upside compared to year-ago levels, but when you add in the record high weights, we do in fact see more beef moving into the marketplace than last year. Boxed beef values have basically been strong across the past few days, and the cash market has moved up toward the hoped-for $75 market and a more likely $73-74 market this week. The one really positive that I see that has occurred across the past few days has been this reversal of the premium in the April contract to the cash market. With those April futures now trading down to $72 and lower, we should see a surge in interest in getting cattle marketed while the cash-futures basis is still favorable for closing out short hedges. That is an encouraging sign because we really do need to cut into this problem of excessive weights to start getting this entire complex back on something more of an even keel and back where it will get prepared to move up over time, especially in the beef sector.
I would be looking to lift short hedges on these price dips in the April live cattle, for example, down around the $70 level. The December lows at $70 should provide support for an already oversold market. This rapidly deteriorating situation in the live cattle futures pit has brought feeder cattle off sharply and fundamentally speaking, with the cheap corn we are seeing, that plunge was less nearly expected than the plunge we have seen in live cattle prices. This has put the spring feeder cattle futures back below $80, and I certainly didnıt expect to see prices this low on the spring contracts. The contract low on the May is near $77, and this price plunge has brought the August contract back down around the $82 level. I would be quick to establish long hedges in that August feeder cattle contract or in the April and May if the April and May dip toward $77. I think we will see sharply higher prices in the light cattle across the next several weeks, and the upside is going to be constrained primarily by the fact that the feedyard complex has lost lots of equity and is not necessarily going to have the cash flow to bid these light cattle up. But keep in mind that we will have the people who are looking for light cattle for grazing purposes now coming into the market, and sometimes feeder cattle prices get bid to levels that donıt allow desired breakevens in the feedlot complex.
The hog market has traded down sharply. We are down with weighted average lean hog prices in the Iowa-Southern Minnesota area somewhere in the $46-47 range this week, and that puts the live-based hog prices down in the mid-to-high $30s. Wholesale values have not been good here, and it has been difficult to maintain cutout levels as this complex continues to offer more pork than we had expected given our inventory reports across the past several months. I would be looking to lift short hedges in this market if the April dips to the $51-52 range. Watch for rallies back up to, say, $56 in the April, and that would carry the summer futures like July back up to around $62 to replace short hedges. I think any rally that we have in the short-term will tend to be an upside correction in a bearishly construed market and not necessarily a new long-term trend higher. I am particularly interested in finding more respectable prices than we are seeing this week on those distant lean hog contracts and getting protection out in the fourth quarter of this year. On that October, for example, you might watch for a rally to a price somewhere up around $52.40 across the old resistance and be prepared to replace short hedges.
In the grain and oilseeds, we have an interesting pattern in the old-crop versus new-crop corn and soybean prices. May corn futures are around $2.06 with the new-crop December around $2.27, some $.21 higher. When you look at soybeans, however, the May is at $4.63, and the November is at about $4.70, only about $.07 higher. There seem to be strong perceptions that we will see a very bearish soybean market this year with the South American production coming on and the prospects for another large acreage and a large crop here. It is unusual to see old-crop and new-crop soybeans that close together. Comparable levels there would be at least $.30-.40 per bushel difference as compared to the $.20 difference we see in the corn complex. Both of these markets need to be monitored for dips to lows and long hedges should be placed and any short hedges you might be holding lifted. We are likely to see some rally in this market as we move out toward the March 28 Prospective Plantings report and, if not by then, as we move toward the planting period. It is not clear what that March 28 report is going to bring, but there are some expectations that we might see as much as a 3-million acre increase in corn. Keep in mind that it takes soybean prices about 2.4 times corn prices over time to make these two crops equally profitable on a per-acre basis. Current trading levels on new-crop soybeans would make that crop substantially less profitable than corn given the prices we are seeing this week, so more corn acreage and some reduction in soybean acreage makes sense. But the better loan rate in soybeans might hold acreage, and both crops then look very bearish.
On the upside, I would want to see significant rallies in old-crop and new-crop corn, perhaps carrying that December contract back up toward the highs at $2.42, before I would want to add to or replace short hedges. In soybeans, I would like to see the November contract go back and challenge the recent highs around $4.80 to do additional pricing here. We may have some chance of seeing that November contract back above $5.00, but it has major resistance at $4.80 before it can get to that $5.00 level.
The wheat market, as we moved into early March, had shown us two consecutive closes in new low price ground, and we didnıt see any follow-through to the downside as we move out to the May and other contracts. Fundamentally speaking, we are down toward the bottom end of any reasonable price range for the year, and when the market generates a chart signal and then doesnıt do what it is supposed to do, especially when that is a sell signal, we sometimes get a nice rally. If we look at the July wheat chart that I am showing this week, we certainly havenıt seen any rally that we would call respectable, and I want to see better prices than we are seeing before I do any new-crop wheat pricing. But the threat of still lower prices appears to be gone for the moment. Letıs monitor this market and look for a rally on that July back up toward $3.05 across the resistance there at the January highs, and think about getting up to at least 40-50% forward priced in this crop or replacing any short hedges you removed on the recent price dip.
