Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
April 24, 2002
The price discovery process in the meats is usually good in handling the supply side issues. We get regular reports on cattle on feed, and we now get monthly reports on hog numbers with information on what appears to be happening to the breeding herd and inventory numbers. When we see the type of price plunge we have seen in the past 8 to 10 weeks, and they do not come very often, there is usually something on the demand side that hits price hard before anything becomes apparent in the data. Hog prices in early week trade are averaging $44, or $32 to $33 on the traditional live hog basis. Hog prices and cutout values have plunged in parallel during this period, and the cutout values are running strongly counter to what we have seen in the past 2 to 3 years. There are concerns that we will see a challenge of the slaughter capacity in hogs this fall, and it is now becoming clear that we have seen more backing off in demand in the institutional and export markets, especially for beef, than analysts had anticipated.
In these bear markets, expect the markets to plunge and then correct to the upside. The trade watches for corrections of 38 percent, 50 percent, or 62 percent, and those corrections are a chance for producers to place or replace short hedges. The June lean hog chart shows the recent correction, with prices back up to the $57.75 area last week. A 38 percent correction of the break from above $67 to $50.40 would have been $56.75, a 50 percent correction would have been $58.75. The chart gap around $57.75 stopped the corrective rally with hedgers and speculators selling the rally to the bottom of the gap. The hogs may dip back to test the lows, but I believe that is an extreme and look for lean hog futures to find support near current prices. We can now sketch a steep trend line on the chart with last week's rally giving us a high at $57.75 to hook the trend line, and this market will either make new lows-which I do not expect-or give us a buy signal on a close above the trend line and a chance to lift short hedges. Then, we will need to monitor the upside moves for a chance to place or replace short hedges on a challenge of the new resistance plane across last week's high near $57.75.
The August feeder cattle completed a 50 percent correction on last week's move up to the $79 area and the June live cattle futures made a 38 percent correction of the April break from just above $67 to $61, and has since taken out the $61 low. The market was hurt badly by the rumor on foot and mouth disease and last week's revelation of a case of BSE in Florida, apparently contracted in Great Britain. This market is trying to find a bottom. Boxed beef values are down on Tuesday, but values have not lost that much a ground over the past week. Sketch the steep trend lines on live cattle and feeder cattle charts and look for a close above those lines within the next few weeks to give us a rally as the fundamental picture gets itself sorted out and the surprisingly small increase in placements in the last cattle on feed report start to have an influence. Fundamentals will stop the price declines in these markets unless the unobserved demand side of the price equation has been hurt much worse than is apparent.
The corn market may have recorded a short term bottom about 10 days back when the May dipped to the low $1.90s and the new-crop December hit a low of $2.15. I expect the market to stage at least a modest rally from these levels. Use a close above the downtrend line on the May (hook the mid-January and the mid-March highs) as a buy signal to lift short hedges if you are a selective hedger. Users of corn should use the buy signal to cover all corn needs in the various futures contracts out through 2002. We will not see the corn market stay at a price consistent with the old crop. May won't be below $2 across the next few weeks.
In soybeans, there is strong resistance across the late March high near $4.80 on the May futures. The March high on the November is around $4.90, but the resistance on the May will stop the November short of the $4.90 level as this market tries to rally. Use a rally toward $4.80 on the May to sell old crop soybeans. If you want to be long this old crop market, it will be cheaper and easier to buy the July futures on a subsequent dip to lower price levels or to buy a call option on the July. The area just below $4.90 on the November is my first upside price objective to place or replace short hedges from a producer's viewpoint. It is just that I do not expect to see that level until later, and it will be tied to some uncertainty about getting the crop planted or weather later in the summer.
The wheat market is proving to be very vulnerable to upcoming harvest period pressure. The July Chicago contract is making new contract lows, and that will take the Kansas City July down to its low of 10 days back at $2.85. The March and April rallies gave chances to price in this market, but the levels were below what most people wanted to see. Keep in mind how hard it is for wheat to make a rally and sustain it when corn is below $2 on the May contract. Wheat is an important food grain in the world market, but when corn gets cheap, it can be and is substituted for wheat in some corners of the world. I would hold short hedges until we see a bottom build in this market, and with Chicago making new lows, I would not be quick to buy back short hedges in Kansas City on a dip to the $2.85 contract low. Let's see what kind of pressure we will have as the start of harvest approaches and give the corn enough time to generate a buy signal above the downtrend lines before lifting short hedges in wheat.
