Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
April 2, 2002
The roller coaster ride in the livestock and meat markets continues. Boxed beef values Tuesday morning are down over $2 per cwt. on most of the categories from week-earlier levels, and early last week we had lost around $5 per cwt. on the Choice boxes across the prior week. We have gone from a market on those Choice boxes well up into the $120's to something down around the $115 level on the Choice boxes. In the meantime, we have seen the apparent bargaining power pendulum swing to producers who were looking for $75 cattle two weeks ago to packers who ended up buying cattle last week at $70 and coming into this week at $70 and $71. It takes good pens of cattle with lots of Choice in the pen, and you have to be in the northern part of the feeding zone early this week to get anything up around $72 and $72.50. On Monday, there was a clear change in sentiment in the futures complex, with the nearby April trading up the limit on the day and dragging the feeder cattle higher. There is little or no follow-through in Tuesday's session, but there is increasing sentiment that we will see demand improve again. We will see smaller numbers as we move out through the next several weeks. The "fly in the ointment" is the huge weights, which are running way above last year's levels.
The very interesting question, of course, is whether this rally will turn out to be a correction in a bear market that has still lower prices to come or whether or not we are switching the direction of price trends. I subscribe to the latter possibility and believe we will turn the price trend up unless the weights continue to be so negative and so ominous that it creates major problems in the fed cattle complex. But it will not be clear sailing to higher prices. After limit-up moves in April yesterday and the June live cattle futures closing up $1.22, those markets are trading lower in Tuesday's session. Essentially the same thing is happening in feeder cattle, where August traded up $1.15 on Monday and is losing ground in Tuesday's session. Give these markets time to get the outlook picture a little bit clearer as we continue to monitor what is happening on the demand side and anticipate moving into a building phase of the supply-side cycle. Give demand a bit of time to come back, especially after we move out past the Easter holiday. I look to see substantially higher prices in these markets and would be buying any dips in the April live cattle back down toward $71 that is in the middle of a big chart gap from Monday's session. I would also be interested in buying dips on the August feeder cattle on anything back down toward the $82 level.
The pork complex is showing some pressure this week from the March 28 quarterly Hogs and Pigs report that showed both total numbers and the breeding herd somewhat larger than expectations. The numbers were not huge and I have seen much bigger surprises in the Hogs and Pigs report. Nonetheless, we see the April trading below $50 in Tuesday's session and some of those more distant lean hog futures like the October are trading in the $47.50-$48 range. Keep in mind that a $48 lean hog contract translates to something around $35-$36 on the traditional live hog basis. We have been in a downtrend in the pork market for some two months, and all of the technical indicators are solidly negative and bearish. I would continue to hold any short hedges that you have in place until we see some signs of buying support. Then, and only then, would I lift short hedges and look for a correction that might carry back up toward $56, for example, on the April, and possibly back up toward the $50-$51 range on that distant October contract.
The grain and oilseed markets are spending time reacting to the March 28 Prospective Plantings report. The immediate post-report reactions were for somewhat lower prices in corn, slightly lower prices in wheat, and higher prices in soybeans. The corn acreage came in within the range of expectations, up 4 percent, but up a bit more than the average guess at 79.1 million acres. Soybeans, on the other hand, came in below the average pre-report expectations. In wheat, the acreage is the smallest we have had in decades in terms of total wheat acreage, and that was initially seen as positive. But the stocks report that came out at the same time was a bit negative and substantially above the average pre-report expectation. In Tuesday's session, both corn and wheat are about steady to 1 cent higher, and soybeans are trading down about 2 cents and losing some of the little spike up to higher prices that we saw as an immediate reaction to the report.
In corn, the old and new-crop charts are showing the same thing. We have a long and sustained downtrend in this market that has lasted for months. It is fairly easy to sketch downtrend lines across the mid-January and mid-February highs. The message is to hold short hedge positions and hold off on doing any additional forward pricing on new-crop or starting to forward price new-crop until we see a close above those downtrend lines and see a rally. This huge acreage, assuming something approaching normal weather, assures a large crop and a rebuilding of excess stocks, but we will get uncertainty in this market as we approach planting time. It is a matter of watching and being prepared to take action when we get anything approaching a meaningful correction, and we will need to watch this market closely in the coming weeks. Users of corn who still need to place long hedge protection should just let this market drift to the downside and then be prepared to be aggressive in covering corn needs for 2002 and even out into 2003 when we see a close above the downtrend line on the May corn futures, for example. I show that chart this week to indicate a clear opportunity in this market.
We still have the July wheat trading above the downtrend line that I have shown on that chart in several of the recent weekly reports. We have a high that was recorded on a nice move up the day before the report and then a high the day of the report up around $2.98. That gives us an upside objective in wheat to think about cleaning out any old-crop wheat and adding to some price protection on new-crop. If we can take out that recent high and move up into the resistance across the January high up around $3.06-$3.07 on the July Chicago, I would definitely want to be 60 percent-70 percent forward priced in this market.
In soybeans, I see some more upside in this market. This is a good opportunity for soybean producers to hook the late February and late March lows on the old-crop May futures contract and monitor that trend line. Let this market run to the upside, but when we see a close below that trend line, look to finish moving out old-crop soybeans and at the same time be aggressive in getting some price protection established in the new-crop November, perhaps up to 50 percent or even more if you are comfortable being a selective hedger in this market.
