Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
May 14, 2002
It is the middle of May and weather markets have returned to the grain and oilseed complex. With prices as low as $2 in the July corn futures and $4.50 in the new-crop November soybean futures, any excuse would be expected to prompt a rally in these markets. Corn has received the biggest boost on a percentage basis. Numbers in the May 10 World Ag Supply and Demand Estimates were positive for corn, and there is talk about wet weather delaying planting in the Midwest and causing acreage to move from corn to soybeans. Tuesday's prices did not show a follow-through to Monday's strong day at least partly because planting progress, while still relatively slow, was above expectations according to Monday afternoon reports. In corn, soybeans, and wheat, we are in position to watch these markets run into resistance on any surges in prices across the next several trading days. The objective, of course, is to be prepared with actions that fit your risk management plan and will protect the financial position of the firm.
We have an obvious buy signal on the corn futures as both old crop and new crop contracts showed us a close above the downtrend lines that hooked the January and mid-March highs on the charts. Those buy signals came late last week, and we are now in the process of moving up toward zones of resistance. The first selling pressure and resistance will emerge on the July corn around $2.20, and then there is strong resistance up around $2.30 and layers of resistance as the market goes up. These resistance zones are likely to keep the December new contract from going above about $2.35-$2.40 with strong resistance on that December across the January highs around $2.42-$2.43. Hold long positions to cover rising costs of feed needs in these markets and stay off short hedges and exposed to the cash market until we see this corn market start to run into selling pressure across past highs on the charts.
The July soybean futures contract has major resistance across both late March and late April highs around $4.85. That is likely to stop the recent thrust on the November before it reaches its March high, also at $4.85. Take a hard look at your position and see if you want to replace short hedges or move to some price protection by selling the November soybeans when the July contract runs to the $4.82-$4.83 price range. Keep in mind that if this weather does really delay getting in the field and getting the corn crop planted, the end result is likely to be a significant increase in acreage going to soybeans.
Wheat got a bit of help from last Friday's supply and demand reports, which had also boosted the corn market. All of this has helped to move the wheat market up from what is probably the seasonal low around May 1 on the soft red winter wheat traded in Chicago. There are bad conditions involving too much moisture in some of the midwestern crop, and in the Southwest where the hard red winter crop is grown, there is dry weather and relatively poor crop conditions. There will be strong resistance on the July Chicago wheat if it rallies to the $2.85 area and huge resistance on the late March high up around $2.97. The Kansas City July has recent highs in the high $2.80s, which are likely to be taken out. There is resistance up in the $3-$3.05 range, however, and that should be the initial pricing objective to replace or place short hedge protection as we move into harvest.
Cash cattle sold as high as $69 in Nebraska and the northern part of the feeding zone late last week, and prices were fully $3 above week earlier levels. Coming into this week's trading, we would expect to see at least $68 on these cattle and possibly better prices as the boxed beef values continue to jump to higher levels. With cash in the $68-$69 range, there is a huge premium to the June futures, which are trading below $63 in Tuesday's session. The question, of course, is whether cash will come down to the futures or the futures will come up to cash as we move toward June 1. We will need to see some continuation of these improved boxed beef values to be able to hold current and somewhat higher levels of cash prices. There is some talk that we are starting to see a pickup in export demand for beef as that market has been shocked by BSE and a number of other uncertainties. We now have last week's high just above $65 as resistance on the June live cattle contract and then the April highs become major resistance up around $67. I expect to see this market move up toward that $67 level. That would be my initial pricing objective to think about replacing short hedges, but we need to be alert. If this market falters around $65, it may try to move back to retest the lows again.
The feeder cattle market may be building a better head-and-shoulders bottom on the charts than the one I showed last week. This market had bounced up but has now been hurt by the surge in corn since we always have a strong inverse relationship between corn costs and feeder cattle prices. I still like this market and expect to see the feeder cattle trade to higher levels as we move into the late spring and early summer months unless we do have some disaster occur in terms of getting this corn crop planted, and that, of course, is unlikely. I would want to have long hedges if anything in the feeder cattle market given what I see fundamentally and on the chart, and would not be inclined to replace short hedges unless you see last week's high just below $80 as a reasonable pricing objective for the August futures when this market rallies again.
Cash hogs have generally been working to higher levels, but we are not seeing much improvement on the charts. The June contract has put in a double bottom across the April and May lows just above $50. How much price improvement we can see from here will depend on numbers that come to market as this uncertain fundamental picture continues to work itself out. I see resistance across a high just above $54.50 on the June from several trading days back, and the April high at about $57.75 will be major resistance. I would monitor this June contract and certainly on any rally toward $57 or better, I would take a hard look at getting price protection on hogs out through the rest of this year. It appears we are going to have abundance supplies of poultry, pork, and beef for consumers to work their way through as we move on into the late spring and summer months.
