Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
March 26, 2002
The chaos continues in the livestock and meat markets. A cash fed cattle market that had traded at $73 several days back is now more nearly in the $70 area. When bids came off sharply last week, there were cattle carried forward to showlists this week. We have a four-day slaughter week, and the packers are interested in cutting back on the slaughter levels to get their margins in better shape. The limited trade on Monday and Tuesday in the direct trading regions looked like mostly $70, with an occasional pen of better grading heifers trading to $71. Across the past six business days, we have seen almost a $5 decline in the boxed beef cutout values on all of the categories except the heavier Select grades, and that category was down by more than $5 if you compare the action on the 25th to action on the 18th. The active April live cattle contract has declined over $6 per cwt. in the last 10 trading days, started and prompted by the unfounded rumor that we had seen some hoof-and-mouth problems in a Kansas location and then continued by the rollover of bargaining power from the feedyards back to the packers as the weights continue to be at or near record levels and the feedyards are less than "current." I had said earlier that I would encourage cattle owners to lift short hedges in the April if it dips toward the past low at $70, and even though we have seen prices somewhat below that, Tuesday's action looks like April is going to find support in and around that $70 area. That has the April contract, which will be the delivery contract by next week, about in line with where the cash market is going to be. This price plunge has brought the June down toward the $66 price level and to prices that I think are substantially below proper valuations for the June fed cattle market. I would be looking for signs of support and bottoming to lift short hedges. Anybody who is involved in slaughtering and processing these cattle ought to be looking at this oversold market to aggressively place long hedges on the spring and summer contracts. In the feeder cattle, I have been wrong. I didn't expect to see this type of weakness in the presence of a pending turn to herd building and the continued presence of very cheap corn. That August contract has traded into an old chart gap in the $81-$81.50 range, and I look for this market to find support and would encourage aggressive placement of long hedges in the August feeder cattle. If I am right, we will see a substantial rally back up into the $70s in the cash fed cattle market as we move into the spring months. We certainly have significant upside potential in this August feeder cattle with no serious resistance until we get to the early March highs around $85.50 and the early February highs above $86.
In hogs, we have seen a break in a magnitude that parallels or even exceeds what we have seen in the live cattle futures. That April contract has declined from above $61 in mid-February to below the $53 level last week and is pressing down toward the October lows just below $52. That is taking the June contract down toward October and November lows around $61, and I would certainly expect to see these actively traded contracts correct significantly off these lows back up toward the $64 level, for example, in the June. We need to be very alert to that rally because it may be the next best time to get some hedging done not only in the spring and summer months, but especially for late this year where it appears that we are in for a fairly sustained period of relatively heavy daily slaughter. The quarterly Hogs and Pigs report is coming out later this week, and general expectations are for about 1 percent below last year's levels in the breeding herd and 1 percent above last year's levels in total numbers. But we may already have in place a spring pig crop that will assure big slaughter levels next fall.
In the grain and oilseed markets, the corn prices continue to get punished, reeling from growing expectations of a significant increase in planted acreage this year. We have the possibility of something up toward 80 million acres being planted. That certainly raises the specter of a 10 billion bushel corn crop. The trend is decidedly down in both old-crop and new-crop corn, and we have pushed the December new-crop contract down to the $2.25 area. I would continue to hold any short hedges in this market and be prepared to lift them when you see a close above the rather obvious downtrend lines on any and all of those corn futures charts. Users of corn who have already placed some long hedges and are looking for additional protection to go out through the next year or two ought to wait until we see a close above those downtrend lines. You can key off that December contract, for example, with a downtrend line across the mid-January and the March highs that occurred around the 10th of the month. We will eventually see a break through and a close above that downtrend line, and that will be a buy signal to lift short hedges and to place more long hedges.
The wheat market is trying to establish an identity of its own and break loose from the pressures spilling over from corn. About 10 days back, we saw the July Chicago contract that I am showing this week make a new contract low and then not close down in that new low ground but rally with a strong close. I said last week that such a pattern sets up a possibility of a decent rally in this wheat market. Tuesday's close is above the downtrend line that you can sketch on this chart, and that is a buy signal. We don't expect a huge rally, but certainly something up toward the early March high around $2.93 is within reach and we may, depending on weather developments as we move on through the important yield determining weeks in this winter wheat crop, see a rally up toward the January highs above $3.00. If we can get something up around the $3.04-3.05 level, I really think the old-crop wheat needs to be cleared out and a substantial part of the new-crop wheat forward priced.
In soybeans, the prognosticators are less convinced as to what we will see in acreage. Some private sector advisory firms think soybean acreage will be down significantly with some of those acres being taken by corn. And I see the work of other analysts that suggests we might actually see a modest increase in soybeans even though corn acreage is expected to be up significantly. There have been a number of opportunities to lift short hedges in this market with an early January plunge down to $4.20 on the May and below the $4.30 level on November. Producers who missed that saw a subsequent early February dip down toward the $4.40 level in the November, where we spent about 10-15 trading days indicating that the market was finding buying support, and we rallied from there. I would watch this current correction to the downside on the November futures, for example, and when it gets through somewhere around $4.60 and starts to trade up again, you will be able to sketch in a trend line that hooks those early February lows around $4.40 with the lows we will see develop on this November future across the next 10 trading days. Then we will have this market hemmed in with a trend line under it and resistance across the March highs up around $4.80, and we will be able to monitor and see what it is going to do. You can forward price on rallies back up toward that $4.80 or wait and see if it can go up through that level, but keep that uptrend line under the market with a sell-stop order under it so you get protection in the event that the market turns unexpectedly lower.
