Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
June 4, 2002
In the grain and oilseed complex, weather continues to be the market mover. Concerns about getting the crop planted before it's late enough to reduce yields is helping soybeans. Concerns about weather impacts on yields in wheat has helped wheat prices. According to Monday afternoon's report, corn is 92% planted and that takes out some of the concerns about corn even though that level is behind recent years. Soybeans were about 70% planted. I wrote last week about resistance on the July corn around $2.17 across mid-May highs, and this market is still below those levels. In soybeans, I expected to see selling resistance around $5.02-5.03 in the July, and that contract has been able to move a few cents above that level. It is trying to carry the November contract above the late-March high around $4.85 and keep it up there, but the November closed at $4.81 on Tuesday. July Chicago wheat popped up through the May highs at $2.84 and now may try to challenge the downtrend line that is coming through at about $2.90 this week and then possibly the late-March high up around $2.98. But Tuesday's market was down 4 cents at $2.825. The July Kansas City is going to run into more selling trouble across the early-April high at around $3.07.
In corn, I would still want to have long hedges in place as this market tries to rally off the very low prices that were recorded in early May. From a producer's viewpoint, I would watch the July corn contract that I am showing this week and recognize that the market is contained in a triangle between the resistance line across the mid-May high and the uptrend line that I am showing on the chart that hooks early-May and late-May lows. One approach here is to leave this market alone and place or replace short hedges in 2002 corn, in the December, only when we see a close below that uptrend line on the July. That would also be the signal for firms holding long hedges in corn to take profits. Longer term, I wouldn't be surprised to see this market move up through the highs in May around $2.17 and try to challenge the highs around $2.20 and higher during February and March. Weather is now going to drive the markets.
In soybeans, the July is showing an unusually large premium to the November, and that suggests there is still anticipation of a big soybean crop and pressure on prices this fall. I would want to have long hedges, if any positions, in this market as the market continues to rally from the lows around May 1. On that November soybean futures, producers can take the same approach that I suggested on corn by hooking the early-May and late-May lows and sketching an uptrend line on the chart. Let this market run to the upside as weather causes it to be increasingly volatile and be prepared to place short hedges and take profits on any long hedges in this market on a close below the uptrend line. Friday's close in the November was above the late March high around $4.85, but the market turned lower again on Monday and closed up slightly on Tuesday at $4.81, back below $4.85. Look for soybeans to work a bit higher and use the uptrend line underneath this market to be prepared to take action whether you have been holding long hedges in this market or whether you need short hedge protection.
I talked about the resistance across the recent $2.84 highs on the July Chicago wheat last week, and that market moved up through those highs on Monday. Tuesday's close was down 5 cents to $2.82, however. There is a downtrend on the July Chicago contract that is coming through at about $2.90 this week, and then we have the late March high up around $2.97 that is going to be substantial resistance. I would use rallies up into the $2.90s to place or replace short hedges in this market and expect to see some harvest pressure resume again as we move deep into the harvest. On the July Kansas City, note that it is still trying to take out the April high at around $3.04, and then there is the earlier April high at about $3.07, and I would think rallies to that area need to be sold.
In the livestock and meat complex, I would expect that in terms of fundamental and technical considerations, packers have long hedges in place in the cattle complex. The June contract is still honoring that double bottom I discussed last week around $59.25 on the chart. We have a similar pattern on the August, which is now becoming the actively traded contract. This market will run into trouble first in hitting a downtrend line that hooks the late March highs to the surge back in May, and that is going to come through around $63 this week on the August. There will then be major resistance across that May high around $65.50, and I would place or replace short hedges on a rally to that level. Longer term, and fundamentally speaking, I am inclined to be positive about this market, but we have great reluctance to be long in this food complex with the various threats that face the sector. I wouldn't think the August is going to be able to move up through that $65.50 high without considerable difficulty.
In the August feeder cattle, we see a bit more optimistic chart pattern in that this market held well above the late April low and is trying to climb higher. There is major resistance in front of it around $76-77, and it is that downtrend line hooking March highs and the early May price surge. Then there will be significant resistance on the August as that early May high, which was just below $80, is approached. Chart watchers will recognize that we have a chart gap just above $80 during the price plunge in April. Anything back up toward the $80 level in this August contract would signal a chance to forward price not only late summer feeder cattle but fall feeder cattle as well, and I would be aggressive.
The pork complex continues to befuddle analysts and observers. Weighted average price for hogs in the Iowa-Minnesota market area is around $43.51 as of Tuesday morning. This puts hogs on a live hog basis just above $30, and indeed we have seen some hogs well below $30 on a live-hog basis during May for the first time in a number of years. There is rising concern about slaughter capacity this fall and uncertainty about the numbers games since we continue to slaughter more hogs than the USDA reports would imply. We will get a quarterly report at the end of June that may help to shore up the numbers and confirm the situation we are in. Anything in this market that brings a rally by the July back up toward $51 or better (and I am looking at a chart gap here) ought to be sold. I would use the same opportunity to extend price protection, albeit at lower prices, out through the end of the calendar year.
