Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
April 30, 2002
Volatile action continues this week in the livestock and meat sector. I continue to use the June lean hog contract that I show again this week to demonstrate what I think is going to happen in hogs and in the live cattle and feeder cattle futures pits as well. The corrective rally up to the $57.50 area by the June hogs allowed us to sketch a steep but usable downtrend line. We have the same pattern that is starting to develop on the June live cattle contract and on the summer and fall feeder cattle contracts. What I expect to see happen is a continued move in this big "wedge" that is formed by the downtrend line and the support plane across the life-of-contract low. We will move sideways and then we will either make a new low in these markets, which I don't expect to happen, or we will see a close above these downtrend lines and see an important buy signal being generated. When those buy signals occur, I would lift any short hedges you are holding in these markets and look for a significant rally, especially in the cattle complex. Fundamentals are in better shape in the beef sector than in pork, but I expect to see all of these livestock and meat markets working to the upside across the next several days. If you have short positions in that June hog contract, you might want to lift them on a dip down toward the low near $50.25, but the safer choice, as I suggested last week, is to let the market close outside this triangle one way or the other before you do anything. If it closes down, keep your short hedges in place. If you get a buy signal above the downtrend line, then the short hedges need to be lifted and long hedges need to be placed, and the same thinking can be extended to the cattle and feeder cattle contracts.
In adopting this generally consistent approach in the livestock and meats, keep in mind that the live cattle futures and the feeder cattle futures are in the process this week of completing that correction to the upside that we have already seen completed on the June lean hog futures. That contract is actually back down toward that support near $50.25 this week. Across the next few days, I expect to see the same thing happen in live cattle futures and in the feeder cattle futures. The correction to the upside will be completed just like we have seen in hogs and then the market will dip down toward the lows again. That low is around $59.25 on the June live cattle contract and at about $71.70 on the August feeder cattle contract. I am not suggesting that we will necessarily see these lows in the cattle and feeder cattle challenged again, but we will dip back down toward those lows so it will pay to be alert. When we see some signs of buying emerging, short hedges need to be lifted and long hedges need to be placed in this market. I would be aggressive in placing long hedges in the feeder cattle in the summer and fall months. Obviously, I didn't expect to see prices at this level and thought we would see much higher prices on feeder cattle than we have seen across the past few weeks, and have been recommending long hedges in this market for weeks and months.
In the grains and oilseeds, the wheat market is definitely feeling pressure from the harvest that is getting ready to start in the southern producing regions. The late July run up toward the $3 by the July Chicago contract stands now as the last decent pricing opportunity we are likely to see. We dipped from those highs down to about the $2.73 level in early April and then corrected part of that move back up toward $2.85. Now we are at the $2.65 level and definitely continuing the pattern of new lows and a down trending market. If you placed any short hedges on either of those two recent rallies, hold those hedge positions until we get some indication that the market has bottomed. I would rather let this market trade sideways, maybe rally a bit, and be able to draw in a downtrend line. Then, plan to lift short hedges and place long hedges later when we see a close above any downtrend we can get constructed on these charts. The pattern on the July Kansas City wheat chart is very similar with that market making new lows down around $2.80 this week. I see no reason to have any different strategy on the hard red winter contract in Kansas City than I do on the July Chicago contract that is primarily pricing the soft red winter wheat.
In corn, it is more of the same. This market has been locked into a substantive downtrend since last September. On virtually any chart you can construct a downtrend line across several sets of highs, but my preference would be the mid-January and mid-March highs. Wait to lift any short hedges or to place long hedges until we see a close above that downtrend line. We have seen July corn at and below $2 across the past several trading days. It has been a long time since I can recall seeing July corn at $2, but that is the nature of the beast. We have no supply controls in place and in a global market, we are going to tend to see supply continue to expand until we see price pushed down toward the low cost producers wherever they happen to be in the world arena. That doesn't translate into profitable situations for Virginia corn producers, so it is important that you hold any short positions you have here until we get a bonafide buy signal. Essentially the same downtrend line can be drawn on the May, the July, the September, and the December corn, and I would want to watch those chart patterns very carefully as a guide to action across the next few weeks.
The soybean market doesn't look quite as bearish as the corn, but that may change as we see growing recognition that soybean planted acreage could be bigger than the expectations in the late March Prospective Plantings report. I see the July old-crop futures this week trading 40 cents above its $4.25 low back around the first of January and some 20 cents off recent highs around the $4.85 level. On any rally up toward that $4.85 level, I would definitely sell old-crop soybeans and at the same time take a close look at the new-crop November. Anything approaching a 20 cent rally in this market would take us back up toward the recent highs around $4.72-$4.73 on the November, and then there are those major highs in late March up around $4.85. I would place or replace short hedges aggressively on any move up into that $4.73-$4.85 range and put your sell orders at $4.82-$4.83 if you are waiting on a challenge of that $4.85 high to increase chances that you will get a fill and actually have short hedges in place.
