Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
May 28, 2002
It is two different stories when you look at beef and pork this week. The beef sector is trying to find a bottom in the market, and the technicians are talking about the double bottom on the June live cattle futures above $59. The chart this week shows this important possibility. We have rallied substantially since a retest of that old low occurred last week. That makes the chart pattern much more positive than it was 10 days back, but the other side of the coin is what is happening in the pork complex. Hog numbers continue to run above expectations. We have the December contract trading around $36 in Tuesday's session with the summer contracts down the $2 limit. The $36 trading level for the December lean hog contract puts hog prices on the traditional live basis in the mid-$20s. The type of weakness we are seeing in hogs and in pork is not conducive to maintaining a rally in the beef sector where we would like to see cash prices climb out of the $63-$64 levels we saw last week. We would like to see the boxed beef start moving higher again, but values were down on Tuesday morning with the Choice 600-750 lb. types at $115.96. We are not likely to see $20-$25 hogs in the second half of this year with $70-$75 cattle, and that makes expectations in the beef sector a little more difficult to formulate.
The August feeder cattle shows the head-and-shoulders bottom that we finally have in place in this complex, and the ability of this market to hold last week and form the right shoulder on that formation was tied directly to the ability of the June cattle to hold above those $59-plus lows. Cash trade may develop this week $1-$2 above last week, and that would put us around $65-$66 and show a continuing discount in the June futures as we approach the delivery period for that contract. But the short-term outlook is uncertain. It is not clear how aggressively the retailers will come back in looking to restock after the long holiday weekend, and it is not yet clear what type of movement and what type of clearance we had over the holiday weekend.
In the lean hog contracts, producers need to be short in this market with the second of the two consecutive closes in new low contract ground last week delivering a clear sell signal and suggesting still lower prices to come. We are seeing that in the futures trade this week and we will have to find fundamental reasons to find support on some of these key contracts now that these markets are again making new life-of-contract lows. I still expect to see some sort of decent summer rally, so hold short positions that you have and let this downside move run its course. We can then see what type of seasonal rally we can get as we move on through June and into the July and early August period, which usually shows us the highest hog prices for the year. There will be some reduction in the number of hogs ready for slaughter as we move through the summer months, but it will be important as to how big those daily reductions turn out to be. In the cattle complex, I would not want to be short in the presence of this double bottom on the June live cattle contract. Look for that market to rally up toward resistance above $65 and then think about replacing short hedges or taking profits on long hedges. In the feeder cattle complex, there will be resistance on the August contract up around $80, and that will be the point at which you can think about replacing short hedges as a producer and/or taking profits on long hedges if you are going to have to buy feeder cattle in the summer months.
The grain and oilseed complex is showing somewhat better prices in Tuesday's session. We rallied off those lows in the corn complex with July having traded below $2. The market was able to rally significantly. What we saw last week was a correction of that last rally, and it appears that correction may have run its course and the markets are trying to trade higher again. The soybean complex shows us a similar pattern with that market up 5-6 cents in Tuesday's session, and we see somewhat better prices in wheat as well, especially in the Chicago contract.
I would continue to hold long hedge positions in corn in particular. I rather expected to see this market correct back down toward the recent lows and then find buying support again, and that is what is happening. The weather picture and exactly how much of this crop we have planted is still not clear, but the markets are not suggesting that we are likely to see any substantial switch from corn to soybeans. Soybeans are up more in Tuesday's session than is corn, suggesting that the consensus is that the corn will get planted and there will be little or no switch from corn into soybeans in the Midwest. With corn and soybeans able to try to start another rally, we are getting somewhat better prices in wheat even though we are moving into the thick of the wheat harvest period.
It is a matter of holding any long hedge positions that you have until we get up to target levels at which this market is going to get sold by hedgers and by speculators. I would suggest that on the July corn that will occur around $2.17, and on the July soybeans, somewhere around $5.02-$5.03. I see comparable resistance cropping up on any rally on the July Chicago wheat up around $2.84, and that would suggest about a $2.95 price on the Kansas City July. I would watch these markets and look for rallies up to those pricing zones before considering placing or replacing short hedges or taking profits on long hedge positions.
In general, the price outlook in the grains and oilseeds is for relatively low prices this year. We have a farm bill that will pay substantial subsidies to producers and what that tends to do is keep acreage in production. With no supply controls in the current farm legislation, there will be some switching back and forth from one crop to the next by farmers, but generally we are going to have large acreages and large crops assuming normal weather in all of these globally grown commodities. In that type of overall environment, I like the idea of being a selective hedger where we will try to be short hedged and protected when the market is trending down, and from a producer's viewpoint, get to a cash-market exposure position to benefit when the trend turns back up. I will report in some future letters how you can get access to some objective and math-based trading systems on some of these commodities. The first one that will come out after some editing is completed is "Math-Based Price-Risk Management Guides for December Corn Futures." Some of you might want to take a look at these systems as an alternative to trying to read the chart and as a source of safety net protection during years in which we are likely to see very low prices.
