Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
June 12, 2002
The beef market may be finally showing some signs of life and starting to go back to the underlying fundamentals that have looked better for weeks than the prices we have seen. I see signs of reluctance to be long in the futures and in the cash with threats of terrorist attacks being discussed daily and the small but worrisome chance we could see a bioterriosm move in our food markets. Slaughter was big last week, boxed beef values are variable but around $115 for the Choice types (and that supports a better cash market than the $63-$64 we are seeing), placements appear to be below last year's level again, and we may finally be ready to see some seasonal reduction in the daily hog kills. August live cattle closed Tuesday up more than $1, and the August feeder cattle were up the $1.50 limit. And after a hard down day on Monday, the lean hog futures were up a bit on Tuesday with the October showing a hook reversal bottom with a new contract low and a higher close on the day.
It will take some time, but the August live cattle can challenge the early-May high near $65.50. When that rally comes, the August feeder cattle will challenge the early-May high near $80. My first price objective on these charts would be to think about replacing short hedges, and for those who have bought these markets in the recent depressed price areas, taking profits on long hedges on rallies to those levels. The risk and uncertainty hanging over these markets will not go away as long as we have the daily headlines, but with any prolonged relief from worry about the volatile world, the underlying supply-demand balance may be able to surface in these beef markets and get us to somewhat better prices.
The outlook for cattle later in the year cannot include much strength in fed cattle if the pork sector continues to self-destruct. There were already worries about having enough slaughter capacity this fall, and the situation with Farmland makes that worse. If operations stay at normal levels in that financially stressed company, we may all breathe a sigh of relief. And as the daily slaughter levels come down a bit on a seasonal basis, we should be able to mount some modest rallies in the pork complex as well. Last week's high below $50 on the July lean hog contract is the first resistance and then the chart gap back in May starts at about $51. This market will see selling resistance on a rally toward $51, and in the unlikely event it can challenge the early-May highs above $55 on the July, I would be aggressive in replacing short hedges and selling this market.
The continued weather pressure and the early signs of weak yields brought a nice rally in wheat, especially in Kansas City. That July contract rallied to the early April highs around $3.06 early last week and then faltered as the weather pressure relented a bit. I would continue to sell the Kansas City July on a rally to that level, and the July Chicago has strong resistance now across last week's high near $2.90. And this is the time of the year to take a hard look at your harvest-period basis. If the cash-futures basis in your area is weak and basis improvement between now and next March or May should more than cover storage costs (including interest on the value of the wheat you are not selling), then storing and hedging should work. If basis is not weak, the market is telling you to sell the cash wheat. If you are reluctant to sell because you think the market will trend higher, then look at a basis contract or consider selling cash and buying futures or a call option, which means you are speculating in the features or options and not in the cash this time around.
The July corn chart is shown again this week, and we have seen this market falter and close below the little trend line I showed last week. That was a sell signal for old crop corn and for new crop corn for selective hedgers. Look for the market to challenge the lows again and give a chance to buy back short hedges in the new-crop December as it challenges the low near $2.15. Buying against that low makes sense to lift short hedges and to place long hedges again, but keep in mind that if we see two consecutive closes at new contract lows, that is a sell signal and an indication that the short hedges should be replaced and the long hedges removed, even at these low prices. As soon as the corn crop was 99 percent planted, all the wet weather started to turn bearish in its impact as it helps a planted crop get started. And we have not seen enough strength in the export arena to offset the weather-related pressure.
The rally in soybeans ran out of gas last week at $5.20 on the July. There is more supply side support for old crop beans than for the new crop, with the July showing a premium of almost 35 cents to the November late last week. I think this market may be done for the time being, with the $5.20 high on the July last week the high price for some time to come if the weather does not turn bad. If the July is able to challenge that high again, the November will be pulled back above $4.85 and I would expect it to be sold aggressively by short hedges and speculators in the $4.85 to $4.95 range. Watch this market for a chance to sell against resistance across those past highs.
