Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
May 21, 2002
The meat markets continue under pressure. Monday's sharply lower closes in the futures reflected concern that cash cattle prices will be lower when trade starts this week. The weakness was helped along by the bearish storage report from Monday and the surge in talk about terrorist attacks. The very weak closes on Monday destroyed the more positive chart picture that was starting to emerge. June live cattle tested the late April low just above $59 on Tuesday, and June lean hogs moved to limit down, showed no trading range, and smashed any support across the two April lows just above $50 in Tuesday's session. Concerns about surges in total meat supplies and reluctance to buy in the face of talk about another terrorist attack have pushed futures quotes lower, and it appears that the lean hogs will again lead the way down and put pressure on the cattle complex. June live cattle futures are at a $6-$7 discount to where cash trade is likely to be this week, and all this is being helped along by a boxed beef market that appears to have topped out near $120 for the Choice grades. The $6 drop in cash cattle that June futures are suggesting would take about a 5 percent surge in production if demand stays constant, and a surge in production of that magnitude is not likely. The problem here appears to be renewed reluctance to step in and buy this market on fundamental supply-demand grounds when the uncertainty associated with being long in a food market grows with talk about a new terrorist threat.
Short hedges need to be placed or replaced in live cattle futures if we see two consecutive closes below the late April low at $59.32 on the June futures. I do not expect to see that, but if such a pattern develops in the presence of all the uncertainty coming from outside the meat complex, still lower prices could develop. At a minimum, it will be time to get protection against a disaster by selling the futures out through the summer or buying put options. Most of the technical measures such as the 9-day and 18-day moving averages generated sell signals on Monday's weak close. Treat the feeder cattle complex the same way if we see renewed weakness in live cattle futures and replace or place short hedge positions in the summer and fall feeder cattle contracts if the June live cattle futures generate that important sell signal. Feeder cattle are not that close to their lows as the August contract shown this week suggests, but feeder cattle will not hold if the live cattle futures break to new lows.
Support on the weekly lean hog chart is now all the way down to the lows near $41, and that is not encouraging for this complex. The correction up from the April lows on the June futures quit twice just below $55, and that last surge early last week was the only pricing opportunity we are likely to see in the near term. If Wednesday's close on the June is again below $50, the two consecutive closes below $50 will be a widely seen sell signal and put added pressure on the hogs. Producers should consider replacing short hedges or buying puts if Wednesday's close is weak and well below $50.
In the grains and oilseeds, the story continues to be delays in planting. Corn is 70 percent planted based on Monday's report, but that is behind the normal pace. In soybeans, the progress is even slower and that has prompted nice rallies in that complex.
The July soybean contract closed above resistance across the March and April highs near $4.85, and that has pulled the November up through recent highs around $4.73. Look for the November to now challenge the late March high at $4.85, and I would look at selling old crop soybeans and moving up toward 50 percent forward priced in the 2002 soybeans if we see a move up toward $4.85. Put your sell orders at about $4.83 to increase the chances you will get a fill. Remember, there will be a horde of sell orders at and just under that $4.85 high as hedgers and speculators look for such favorable places to enter the market on the short side.
The rally in corn has been less impressive, but was about 20 cents in the July and more than 15 cents in the December. As the July dips below $2.10 after last week's surge to the $2.17 area, we will be able to sketch a trend line across the early May lows around $1.98 and the lows we are getting this week during the correction. I expect the next rally will move up through the $2.17 high from last week on the July and would prefer to let this market run to the upside if it can challenge the next resistance near $2.20 across the March highs. But if it turns lower and you see a sell signal on a close below the trend line we are waiting to draw on the chart, it will be time to replace short hedges as a producer and to take profits on long hedges if you are a corn user.
Wheat prices showed us a better rally in Chicago than in Kansas City because it is the soft red winter harvest and yields that are being threatened by Midwestern rains. Last week's high in the high $2.80s is likely to turn the Chicago July futures lower again and I would use that type of rally as a chance to place or replace short hedges. The Kansas City July will run into selling pressure in the low $2.90s. It is unlikely that we will see enough weather impact for these markets to move above those highs where the markets ran out of steam and quit within the past 10 days.
