Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
April 16, 2002
The June lean hog futures help us sort out the mess in the livestock and meat complex. Without any effort to justify exactly why it happened, we saw a $17 per cwt. decline from early March levels to last Friday when a new low around $50.40 was recorded. That price decline is even bigger on the now expiring April contract with the plunge in excess of $20 per cwt. Across exactly the same time period, the June live cattle futures declined from just under $71 down to the $61 level last Thursday. What has happened is painted fairly vividly in these price declines, and I show the June lean hog contract this week to give a visual picture of this phenomenal price break. The "why" is much more difficult to get at. Pork production is running only a few percentage points above the same weeks a year ago, with last week up 4.4 percent. Actually, beef production is up more, showing a 7.1 percent increase compared to year-earlier levels last week and a 5.7 percent increase two weeks back. But none of these increases come anywhere close to justifying such phenomenal price declines. These are emotional and panicky moves in a market that has been plagued by false rumors about foot-and-mouth disease and some talk about livestock and meats being a market for bioterrorism acts. Once the price plunge started, it was fueled by margin liquidation as traders holding long positions were forced out of the futures market in both the pork and the beef complexes. All this may have come to an end late last week, but we have no strong confirmation to date that bottoms are in place in these markets, and I will deal with each of them briefly in that context.
In hogs, we saw key reversal bottom on the June lean hog futures last Friday. In June cattle, we saw a hook reversal bottom last Thursday with a new contract low being recorded and a higher close on the day, but it was not an outside day. Technically, then, we have some indication that bottoms are starting to be formed. In both live cattle futures and lean hog futures, I would try to be patient. One patient approach is to give these markets a chance to make a corrective rally to the upside, possibly up toward that chart gap around $57.50 on the June hogs and somewhere in the $64-$65 range in the June cattle. We are likely, then, to see some effort to retest these recent lows, and I would let that correction to the downside occur and look for an opportunity to sketch a downtrend line on these charts coming off the March highs and then across the highs in any price correction to the upside we see across the next two weeks. It is safer and more disciplined to then lift short hedges on a buy signal above that trend line than it is to pick a bottom. More aggressive traders can look at buying a dip toward the $61 level in the June live cattle futures and down toward the $50.40 low set late last week on the June lean hogs with some confidence that these will, in fact, turn out to be at least short-term lows.
The August feeder cattle have been pressed down with all the problems in lean hogs and in the live cattle futures. In every case, I think we are discovering prices this week below where these cattle markets will end up in a fundamental context. The first significant upside resistance on the August feeder cattle futures is the chart gap left about eight-nine trading days back above $80. By monitoring what is going on in lean hogs and in the live cattle market and watching whether or not we see cash cattle climb back above the $67.50 level that we are seeing in some trades early this week, I would be interested in lifting short hedges in August feeder cattle and placing long hedges in this market. I have been expecting better prices in this complex for several weeks and months and have been wrong on this market given the disasters we have seen develop in the lean hog and live cattle arenas. Still, longer term, I think this market has substantial potential to the upside, and I certainly wouldn't expect to see August feeder cattle futures trading below last week's low around $75.80 when we approach August 1.
In the grain and oilseed markets, it is more of the same in the corn market. May corn futures recorded a new low around $1.93 last Friday, and the new-crop December contract recorded a new low at $2.15. We are still solidly in downtrends in these markets and I continue to council patience and discipline and wait for a close above the longstanding downtrend lines on these charts to lift short hedges or to place or replace long hedges. I showed the situation on the May futures in last week's report, and I see nothing this week to change approaches in this market.
In the soybean market, I see somewhat different technical patterns on the active May contract as compared to the new-crop November. If you hook an uptrend across the January 1 low and the early February low on the November, we have now seen several closes below that uptrend line suggesting sideways to down action from here. Look for the November to find some buying support in the area of $4.50 and try to rally. If we do rally from this week's level, we will be able to sketch in a more long-term uptrend line across the January low and the mid-April lows, but we need to see a rally before we can generate that chart pattern. Look for an effort to correct at least much of this last price dip on the November from $4.85 down to $4.50. A 50 percent correction would be in the $4.67-$4.68 range, so I would not be surprised to see that develop. Longer term, we will have to take out that $4.85 high that was recorded in late March or see a close below the uptrend line that we look to sketch on this contract, and we can base selective hedging decisions on what we see develop. I certainly would be interested in selling a rally back toward that $4.85 high and being fairly aggressive in that approach because I think there is going to be substantial resistance unless we see weather problems during the planting season or later in the growing season. We have higher prices in the soybean complex in Tuesday's trade, so the corrective rally back to the upside may have started and we need to carefully monitor developments.
In wheat, as we approach important yield-determining parts of the growing season in the winter crop, we saw new lows made on both the Chicago and Kansas City July futures last Friday. In Kansas City, the July dipped to a new contract low at $2.85 and recorded a hook reversal with a new low, higher close, but failing the outside day requirement to be called a key reversal. On the July Chicago contract there was a key reversal action last Friday with a new low around $2.73 being recorded on an outside day. These markets are trying to bounce back up after we saw a rather sharp price break since early April levels. We have resistance on the Kansas City across that early April high at about $3.06-$3.07, and I think that is an opportunity to add to short hedge protection if we get a rally back to that level. In Chicago, that early April high was at about $2.975 or $2.98, and I would think that there is going to be fairly substantial resistance on any rally to that level. Keep in mind that to get to that resistance plane, the July Chicago contract would have to climb up through a downtrend line that can be drawn by hooking the mid-January and late March highs, and that trend line might turn this market back. Be aggressive in adding to price protection if we do get a rally to those recent highs, and move up to 60 percent-70 percent forward priced in these wheat markets.
