Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
May 7, 2002
The livestock markets are trying to get back into a more stable mode. There has been considerable discussion about the price discovery performance of these markets across the past several weeks given all the volatility that we have seen. These markets have faced uncertainty that has not been there historically, and uncertainty always brings volatility. We don't often get, for example, rumors that we have foot-and-mouth disease in the state of Kansas nor have we ever before appreciated the significance of a case of BSE in a resident of the State of Florida. Add the possibility that every food sector has to worry a bit about bioterrorism and this is a market that is facing risks that have not traditionally been present. It makes it much more difficult for someone to stand in and buy these markets when they dip to levels that, fundamentally speaking, would appear to have value. If there is some non-zero probability that some disease or bioterrorism incident could drive these markets dramatically lower, then the value that is showing up in the marketplace gets discounted. Prices may have to go to levels below those we would have liked to seen in a fundamental context before any buying surfaces. That certainly appears to be what is happening in the beef complex with the live cattle and feeder cattle futures going down to relatively low levels and then trying to turn Monday with limit-up moves in both the live cattle and feeder cattle. But Tuesday's session is showing little follow-through, and that reminds us again that this is an unusually risky and uncertain environment.
Boxed beef values appear to have turned this week having gone down to $110 on the lighter Choice categories late last week and showing big movement during the week. Higher levels emerged on Monday and Tuesday. Cash cattle are mostly $65 in limited trade so far with some cattle as high as $66 or even $66.75 in the northern part of the feeding regions. With the June hogs showing a possible double bottom just above $50 and the head-and-shoulders bottom formations that are starting to show up on feeder cattle and live cattle futures, we should see these markets work higher across the next several trading days. We need to see the improved values in boxed beef sustained, and we need to see continued fairly aggressive movement of boxes. And we certainly don't need to see the weights get still heavier in the feedyards. Look for the June live cattle futures to try to climb back up into the $66-67 area to get a bit more consistent with the cash market. There will be resistance across the early April highs just above $67, and anything up toward that level I would think should be seen as a short hedging opportunity. August feeder cattle will try to rally into the low $80s. There is a chart gap around $80.50 in early April and the early April highs at $83 that will be resistance. We have a head-and-shoulders bottom in place on the August feeder cattle contract shown this week that does in fact project up toward the February and March highs in the $85.50-86.00 dollar range. But it will take time and continued improvement in boxed beef values and fundamentals to get the market to that level. Let's hold any long hedge positions, stay off short hedge positions, and let's watch these cattle markets and see how far they can rally before they run into selling pressure and create an opportunity in which short hedging ought to again be considered.
Carcass-based hog prices are averaging $42-43 in the major production regions. This is, of course, significantly below the $52-53 trading level that we see on the June hog futures. As we move through May and into June, we are likely to see some decline in daily slaughter levels and this market will have an opportunity to show us somewhat better prices and get the cash market and the futures market more nearly in line. So long as the June is showing this much premium to the cash market, I would be inclined to sell rallies in that June and would be especially aggressive if the market does muster a rally up toward the mid-April high just below $58. Put your orders in at about $57.45 to encourage the chance of getting a fill on that type of rally.
In the grain and oilseed markets, we can deal with corn fairly quickly. The new-crop December is trying to show us a double bottom around $2.15, and we still have on the old-crop contracts and the December contract downtrend lines that can be constructed across the highs in mid-January and mid-March. I would be inclined to hold short hedge positions until we see a close above that downtrend line. Users of corn should be aggressive in placing or replacing long hedges out through the rest of this year and even into 2003 on a signal that is generated when the May or the July closes above that downtrend line. Don't be surprised if we see a buy signal on the May come before the buy signal on the December. It is important that we watch all of these corn charts.
In the soybean complex, the nearby May is trying to show us a double bottom around $4.53. We see the same thing on the November contract just fractionally above the $4.50 level. I rather expect to see these lows hold for the time being and we may try to rally a bit in these markets as we move into the planting season. If weather is good and fields get planted to corn, then we will have some basis for upside potential in soybeans. If the weather stays wet and moves out through the end of May and some acres start getting shifted to soybeans, that will look bearish. We have a downtrend line on this November contract that hooks the late March and the late April highs, and then we have the support plane right at $4.50 under this contract. Let's let this market trade and see which way it comes out of this triangle. If it comes out to the upside, it will run into resistance first across the late April highs up around $4.73, and then severe selling resistance ought to come in across the late March high up around $4.85. I would certainly sell this market on rallies to those levels.
The condition of the winter wheat crop continues to improve. The July Kansas City contract has made new lows recently at $2.80, and the July Chicago contract recorded a life-of-contract low in late April just below $2.65. I think the price levels we are seeing are reflecting a decent yield in wheat and the expectations of a relatively larger crop given the acreage that we know has been planted. We will not see much upside possibility in this market as we start moving into harvest-period pressure, and I would be inclined to watch these lows at $2.80 on the Kansas City July and around $2.64 on the July Chicago contract as important support zones. Look for bounces off those levels to somewhat better prices to think about selling wheat in the cash market and/or placing or replacing late short hedges.
