Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
July 9, 2002
The June 28 Hogs and Pigs report brought some relief to the beleaguered hog market. Total numbers were up 2 percent from last year, but there was no significant increase in the breeding herd. There will not be, it now appears, an onslaught of hogs in the fourth quarter of this year that will swamp the capacity to slaughter. There was support in the report for seasonal increases in hog prices during the summer months, and the nearby July lean hog futures jumped nearly $9. The December contract surged to prices above the $38 resistance across recent highs and has approached $40 this week. Expect this market to correct to the downside and then try to rally again. On the next rally, producers can either sell a rally to the recent high just under $40 on the December or sketch a trend line across the late June lows and the lows in the correction I expect across the next week or two. Be ready later to place short hedges when the market closes below the trend line if we do get a rally to the highs again.
Last week's fed cattle market was in the $64 to $64.50 range and this week is starting at about the same levels. We needed some improvement in the boxed beef levels we were seeing in mid-June to see rallies in the cash and futures markets, and those needs are not being met. The heavy Choice box values lost more than $2 last week and entered the new week after the holiday on a down note in the $110 area. The August live cattle contract failed near the May highs around $65.40 and are drifting sideways to lower this week. Don't be surprised if that contract drifts down to the $63 area before trying to rally again, and if the boxed values can turn higher on good movement into consumption, the next rally should take out the resistance at the $65.40 highs. I would either look to sell a rally to those recent highs or look to sketch an uptrend line on the chart that hooks the early June lows and any dips to the $63 area this week or next week. I do not expect to see any major "down" in this market in the short run. Keep in mind that the sigh of relief that moved through the pork sector after the June 28 report brings at least some improvement in the outlook in cattle as well.
August feeder cattle look weaker than the live cattle futures because of the recent weather-related higher corn prices. If the August live cattle can clear resistance above $65, the August feeder cattle may clear the late June highs near $78.50 and try to move up toward the $80 high in May. But that will not happen if the live cattle contracts cannot advance or if the corn market surges again on weather forecasts. I would be inclined to sell rallies to the $78.50 area on the August and sell the September and October at the same time. It also looks like a good idea to take profits on any long hedges you have in the feeder cattle market on that same rally. The generally dry weather around the country is affecting pastures, and we may see the run of calves and yearlings start early this year.
The soybean market was helped by the June 28 Acreage reports, and the corn market suffered a modest negative blow. Corn acreage was pegged at 78.9 million acres, up 4 percent from last year and a bit above pre-report expectations. Soybean acreage was down 2 percent at 73 million acres. Already moving up on decent expert movement and perceptions that old-crop stocks were being pulled down, the July soybean futures surged to the $5.85 level in Monday's session. In the process, it helped create an unexpectedly positive opportunity in the new-crop November. That contract recorded a new contract high at $5.195 last week, taking out the old high that was a cent or two lower last July. Placing short hedges on a rally to old contract highs is always an opportunity worth waiting for. A sell order a few cents below the old highs would have been filled, and the market was not able to close two consecutive days in new high price ground--a major failure that should not be overlooked. Producers should have been aggressive hedgers on this rally, and if you do not have 50 percent to 60 percent of your expected crop hedged, get to that level on any opportunity back above $5.20 by the November. Unless the weather becomes a much more important factor in this market, I do not see us holding those price levels in the November contract.
The July corn chart is shown again this week, and reference to that chart makes my suggestions on corn clear. The surge in corn prices that was starting to develop in late June was pushed higher by the strength in soybeans and the weather forecasts from last week that saw more dry weather on the way. Let's key off the July and get the same type of new trend line in place on the December and be ready to sell this market on a challenge of last week's highs or on a close below the new trend line that we have yet to draw if that sell signal comes first. I see this as a major opportunity and would prefer to sell rallies to the recent highs as a producer and sell to take profits on long hedges as a user.
Kansas City July wheat surged to $3.40 and better on Friday with continuing news on yields providing price support. Wheat was also helped by the surge in corn that was primarily due to weather and then the renewed surge with soybeans that was tied to the June 28 Acreage report. July Chicago wheat managed the $3.20 level on the same rally, and I would be aggressive sellers of wheat futures on a retest of the $3.40 area by the July Kansas City and/or by a retest of the $3.20 level in Chicago. As a supporter of selective hedging, it is highly likely that we will not get a chance to buy those short hedges back on price corrections to the downside that are surely to come as we more nearly complete the harvests.
