Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
June 25, 2002
This is the last week in June, and we have the first bonafide weather market of the year. We had some volatility earlier as we approached and went through the planting season. But nothing replaces the weather forecasts that start to come as we move toward July as market movers. The weather reports that anticipate a ridge of high pressure developing in the plains states and indications that export inspections were better than expected last week, especially in corn, gave the markets a boost on Monday. But it is interesting to note that the closing price was at or near the middle of the trading range, and there is little to no follow-through in Tuesday's session. It is this type of rally (and I admit I was a little surprised at the strength of the rally on Monday) that gives us pricing opportunities. The corn and soybean markets gapped up in Monday's session, and I would be very surprised if we do not see a correction back down into those gaps with an effort to fill them, which puts the July corn back to $2.15 and lower and the December corn back at the $2.32-$2.33 level and lower. We do have an improved look on the charts, however. Let's watch these markets and see if we can establish uptrend lines, especially in corn, across the early May low and the lows recorded last week and let this market run to the upside if weather can continue to give it a boost.
More specifically in corn, I would hold off in placing or replacing short hedges in this market until we see how much of a pop we can get in the weather. I show the July corn chart this week, and you can see the uptrend line that we can start to monitor. Long hedgers who might have lifted those positions recently on dips down toward the early-May low might want to look at replacing those long hedges on dips down into the middle of the gap left on the July, which would be somewhere in the $2.12 area. Those prices are still extremely attractive and would set corn costs at very favorable levels. Producers with no short hedges in place are probably going to get an opportunity to benefit from some of these weather predictions that kick the new-crop December, for example, back up to the $2.40 level and above.
In soybeans, I see strong resistance across the early-June highs up in the $5.15-$5.18 range on the July, and the comparable highs on the new-crop November are in the high $4.80s. I see rallies up toward those resistance planes as additional hedging and replacing of short hedge opportunities. I don't think we have seen anything in changed fundamentals yet in soybeans to justify taking out those relatively strong resistance planes, and I would certainly expect this market to correct to the downside before it is able to gather enough momentum to move to still higher prices. It is very early to start talking about any significant weather impact on the corn and soybean markets, and what we are seeing this week is largely a nervous trade with some hedgers and speculators holding short positions buying back to cover those positions.
The move up in corn helped boost the Kansas City July wheat contract back up toward its high of last week just above the $3.15 level. I would certainly look at doing some pricing on wheat, and that could take the form of either selling cash crop at harvest on this price rally or thinking about hedging wheat you are going to hold in storage. You can construct a steep uptrend line on this July Kansas City chart and help make the determination of when product ought to be sold or priced when we see a close below that uptrend line. The picture in Chicago is very similar with yesterday's high not quite making it up to the early-June high on the July contract, which is in the high $2.90s. You can sketch a trend line across the early-June low and the low form last Friday, and use a close below that trend line as a sell signal and a chance to sell cash crop and/or forward price crop you are planning to hold.
In the meat complex, boxed beef values are holding up in a fairly respectable fashion with the heavy Choice categories Tuesday morning at $115. That will support better prices than the largely $64 cattle market we have seen recently. There have been limited sales so far this week up around $65, and we are coming off one of the largest weekly slaughters we have seen in the past two years from last week, which means we are working through the numbers aggressively. On the downside of all this, there continues to be concern that Friday's quarterly Hogs and Pigs report will support something like a 4 percent increase in slaughter later this year. With that comes concerns about having adequate slaughter capacity. I don't think anyone is really anticipating a repeat of 1998 again this year, but there is concern and this market is already pricing hogs on a live hog equivalent in the $30s or even below $30.
Last Friday's Cattle on Feed report did not bring surprises, but the cattle being placed are heavier than had been expected. That put some pressure in Monday's session on the October contract in particular. But all of the live cattle contracts closed near the highs yesterday and regained most of the early losses, and I continue to see the early-May high around $65.50 as the first logical upside pricing point on the August live cattle. As I have noted in earlier letters, a move of that magnitude in August live cattle would give the August feeder cattle a chance to rally back up toward the early-May high just below $80. I would treat those as my first pricing objectives in terms of placing or replacing short hedges. We have to recognize that if corn does find reasons in the weather forecast to continue to trade higher, we will have to lower our expectations on the August feeder cattle and perhaps back off to last week's high at $78.50 as a more reachable objective.
Cash hog prices are being helped by the heat and the reduced marketings and the slower gains that are coming with those high temperatures. The July contract on Monday advanced and closed the late-May chart gap, and that surprises me a bit even though the close was near the middle of the trading range for the day. Tuesday's session is showing somewhat lower prices in the summer contracts and largely no major change in the October or more distant contracts. That October continues to get sold when it rallies into the late-May chart gap, which is below $41, and I expect we will see a continuation of that pattern. The odds that Friday's quarterly report will be so bearish as to push this October contract down through its contract low just below $37 are, I think, fairly small, and I would stand aside in this market until we get better rallies to do some protecting on that fourth quarter price picture. Even at $40 on a lean hog basis, these hogs are being priced at $30 and down on a live hog equivalent. There is a good chance we will see some better opportunities than that as we move through the summer months.
