Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
June 18, 2002
A guide to management of December corn futures is now available. The pricing signals provide protection against lower prices and added $.16 per bushel on average to prices across 1990 through 2000. Go tohttp://www.reap.vt.edu and click on "publications." Then scroll down to REAP Research Reports to download a pdf version.
There are a number of positive indicators in the livestock and meat markets this week. Boxed beef values had been dropping but have been consistently higher in trade early in the week, and it appears that movement was decent over the weekend. Cash hog prices are starting to show some day-to-day increases with the weighted average lean hog prices in the Iowa-Minnesota area above $49, and that is better than we have seen in recent weeks. It appears that we will get at least some type of seasonal rally in the pork complex. Slaughter levels continue to be relatively high in beef, and it appears that packers are enjoying decent margins and therefore have no reason to back off on slaughter. I doubt that the important quarterly Hogs and Pigs report coming out toward the end of June will be bearish given the heavy discounting for hog numbers and relatively low prices that have occurred going into the report.
The picture in cattle and feeder cattle is relatively straightforward. Monday's nice rallies moved us out of some trading ranges that had been tending to contain daily movement. Unless the emerging somewhat positive picture in beef cutout values and the generally strong situation that I think we have on the demand side deteriorate, we ought to see a slow working up toward the early-May highs at about $65.75 in the August live cattle contract. That is going to give the August feeder cattle a chance to move up toward its early-May high around $80. I have been talking about these two price levels in live cattle and feeder cattle respectively as the first upside pricing objectives. On those types of rallies, I would look at placing or replacing short hedges in cattle and in feeder cattle and taking profits as a selective hedger on any long hedges that you might be holding.
I am not sure how far this little rally in hogs can go, but that important June report will set the tone for the hog complex for the rest of the year. The July futures have rallied over $4.00 off their late-May lows down around $46, but there is a chart gap in the $51 area that I am afraid will cause problems on this current rally. With the July trading above $50 and the December trading above $37, we certainly have the relatively large seasonal pattern in hog prices that we normally see. It is hard for me to see how the late year contracts can get back up toward $40 or better on that December, for example, if the July cannot muster a rally up into the mid-$50s. It may take somewhat bullish surprises in the June Hogs and Pigs report for us to get to those levels, but for producers at this point in time, I would monitor these rallies and be prepared to place or replace short hedges if we do get to those targeted pricing levels. We will have an opportunity to review this again before the Hogs and Pigs report is released.
Monday's USDA reports were important to the grain and oilseed complex. In general, it appears that the corn and soybean markets have caught up with last year's pace in terms of planting and emergence. About the only bullish things we found in Monday's reports were decent export movements in corn and continued deterioration of crop conditions in the winter wheat. We no longer have any weather delays in terms of planting and crop emergence to prop this market up, and the markets will start to face the reality of a very large corn crop and a large to huge soybean crop in the U.S. in the presence of relatively large South American stocks.
I am showing the July corn again this week, and in spite of the weather-related rallies across the past two to three trading weeks, I would not be surprised to now see this market test the early-May low around $2.00 again. If that occurs, we may see the December moving back down toward the two lows it recorded in April and May around $2.15. The sell signal on the close below the little uptrend line on the July contract should have hedges back in place for producers who are selective hedgers and profits taken on any long hedge positions that corn users were holding. I would essentially stand aside this market now until we see whether it is going to, in fact, test the early-May low or whether it will find buying support across the lows in late May and early June. This market is not going to jump in any direction in a dramatic way across the next few weeks, and we will start seeing the weather forecast become a factor as we move further into June and out toward the critical pollination period.
The July soybean contract continues to look much more positive than the new-crop November, reflecting the rapid pace of usage of soybeans and the pull-down of stocks that goes along with that usage. I definitely think the early-June high up around $5.20 is the short-term limit on the July contract, and I really do not expect to see that high challenged again unless we start to get some renewed concerns about the weather. With the July trading in the mid-$4.90s, we have the November in the mid-to-low $4.70s. Both of these charts show us a nice and important trend line across the January 1 low and the early-May lows. On the July chart, that trend line comes through somewhere above $4.70 across this week and next, and it would be in the neighborhood of $4.60 for the November. One approach for producers would be to hold any short hedges you have and wait for rallies to place more price protection, or let this market move to the side and eventually either challenge the highs or challenge those uptrend lines before any additional hedging activity is in order.
The weather issues pushed the July Kansas City wheat up to higher levels than were reached in Chicago, but after taking out the highs in early April and early February, the Kansas City market stumbled below those highs in the $3.17-3.18 area that go back to last October. This market has now turned down from those levels, and I would sell this market aggressively on any resurgence of a rally back up toward last week's high, which is about $3.16-3.17. Indeed, I would place sell orders here at $3.15-3.14 on that July Kansas City contract to help ensure the orders will be filled. In Chicago, this little rally matched to the fraction of a cent the April 1 high around $2.98. I would be aggressive on selling this market on any rallies back into that $2.95-2.98 price range. As we move through harvest, we are likely to see some continued harvest-period pressure even though yields are not always turning out to be up to hoped-for levels or even up to expectations.
