Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
April 9, 2002
The train wreck in the livestock and meat markets continues. It doesn't change what we see, but it is useful to stop and reflect on what is happening in this important complex. Generally around the country, analysts are perplexed and puzzled as to what we are seeing. There are several possible reasons.
First, the break in the pork complex has been even more extensive than the break seen in cattle. The April lean hog futures have moved from almost $63 in early February down to $42.525 today (Tuesday). That is a $20 break in the nearby hog futures, and it is going to be difficult to hold April live cattle futures in the presence of that tremendous decline. Across the same time period, we have seen April live cattle futures as high as $76 in mid-March, and that market has traded all the way down below $67 in early-week sessions. Not surprisingly, feeder cattle have gone down accordingly. We have seen the August contract that I have been watching go from just below $84 down toward $74 across the same time period. The break in the pork complex, then, is one big factor.
A second factor influencing all of these markets is the uncertainty surrounding the continuing fallout from 9-11, the possibility of a terrorist attack on food supplies, and the unfounded rumor from several days back that foot-and-mouth disease (FMD) has been spotted in a Kansas cattle market. In the face of all these threats (and some of these are unique to food sectors), traders are reluctant to be long in cattle and hog futures, and paralleling that in the cash sector, banks are reluctant to lend money and effectively be long in the cattle business.
All of those uncertainties and concerns seem to be overwhelming the tendency for the boxed beef values to hold at fairly decent levels and to show some positives in recovering from the $11 per cwt. loss that we saw across the past few weeks. The very legitimate concern continues to be extremely high weights and the tonnage that those weights are adding to the supply side of the market. Feedlots are not as current as they need to be.
Having reflected on all that, producers who have been patient enough and persistent enough to stay short in this hog market should definitely wait and see where it is going to bottom. Don't pick a bottom. I expected April hog futures to hold across its all-time low between $50 and $51, but when we see a break down through a contract low and closes below that level, it is a strong sell signal. This market has come down $6 per cwt. since then. The April live cattle contract traded down from $76 to just below $70 and made about a 50 percent correction carrying back up to the $72.50 level last week before this market turned down again, and it is threatening the November lows just above $67. I expect to see the April hold across that level because we are now at a substantial discount to the last cash trade, even though we are probably going to see the packers try to buy cattle this week down around $68 instead of the $71-$72 that we saw as recently as last week. The nearby May feeder cattle futures contract has made new lows, and that is a negative sign. If you do have short positions in the August feeder cattle, for example, on that rally back up toward $83 that occurred recently or the earlier March rally that carried back above $85, hold them until we see some signs of bottoming. Longer term, I still want to see long hedges in this market, but there is certainly no reason to be in a rush getting the long positions established with all of the uncertainty we see in this complex.
In the hog market, which seems to be the source of some of the bearish considerations in this complex, we apparently seriously underestimated the possibilities in terms of slaughter levels from improved pig crops across recent calendar quarters. The monthly reports that we are now getting were not necessarily alerting us to these problems. Most analysts still expect to see daily slaughter levels decline as we move into May, but the April contract is down around $43 and is pricing hogs on a live weight basis down in the $33-$34 range. That is actually above the current price being offered by the more distant contracts, such as the October, which is still trying to hold at $45 and above. This is especially perplexing given that we saw in the fourth quarter of last year and also in the first quarter of this year increased pork exports to countries such as Japan, where BSE has curtailed interest in beef, and pork is replacing part of that volume. The markets will eventually rally, but I see nothing that indicates that they are ready to turn yet and nothing that indicates that any buyers who have been forced out on margin liquidation are either willing to come back in or have the capital to allow them to come back in.
The price picture in the grain and oilseed markets is not substantially better. Corn, in particular, continues to look like it is stuck in a rut of downward prices. With large stocks coming out of last year's crop and the prospects for a 10 billion-bushel corn crop this year on a big 79.0 million acres to be planted, this market has plenty of bearish news to go around. I would continue to monitor that trend line that I showed on the May corn last week and I am repeating this week. Eventually, this market is going to show us a close above that downtrend line and give us a buy signal. The pattern on the December looks very similar except as the May gets pressed down toward $2, the December is being pressed down toward $2.20. I would hold short hedges and lift them only on a close above that downtrend line. Users of corn should establish long hedge positions on the same buy signal.
The post-harvest and early-year rally in soybeans was helped along by the March 28 report that showed some 73 million acres to be planted to soybeans. Clearly, the market is expecting that acreage to end up bigger than 73 million acres, and price thrusts that had carried the May up to $4.80 in late March and pushed the new-crop November up to $4.85 are now serious resistance planes as the market drifts lower. We are still above the uptrend line that can be drawn on the May futures by hooking the early January and early February lows. We have a flat resistance plane at $4.80 across the top and an ascending trend line under the market. Eventually, it will have to go out of that one way or the other. I would replace short hedges only when we see a close below that trend line or a rally to that $4.80 resistance, if that comes first. I always prefer to sell rallies to the recent highs because I think it usually gets better prices than waiting for a close below the uptrend line.
The wheat market had been trying to find a reason to rally. The hard red winter wheat crop in the southwestern part of the U.S. is generally rated in poor condition, but there have been some recent rains. The contract low on the July Chicago contract is the early March low around $2.75. We have resistance across the highs that were recorded about 10 days back on a little weather scare rally that ran up toward $2.98 in the Chicago market. That high plus a early January high up around $3.07 will now be resistance, and I would move up to 60 percent-65 percent forward priced on any rally up into the high $2.90s on the July. Kansas City doesn't look a great deal different and is dipping down toward the lows in that market, which were recorded in March around $2.87. Resistance in that July contract is around $3.07 across the early April high and then we have January highs at about $3.08-$3.09.
