Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
July 16, 2002
The cattle markets are starting to show some life again. Boxed beef values for the Choice grades dipped to the $107 area last week and may be at or near a short term bottom. Early trade in futures on Monday was lower, reflecting disappointment that cattle sold at $63 in the direct trade areas late last week. But prices could be at $63 or better this week as trade starts to develop with packers showing some early-week willingness to buy at prices of $64 on some better sets of cattle. Monday's close on the August live cattle was near the high for the day and above the resistance below $65.50 across the early May high. The Cattle on Feed report is expected to show placements well below last year's levels. The negative is still the slaughter weights with levels running above last year's already high levels. The next resistance on the August is the early April highs above $66.50, and I expect to see the market there within the next few days. Cattle owners can sell this market on a scale-up basis if the August offers acceptable profits over the breakeven prices that are well below last year's cattle in mid July. A steep but usable trend line can be drawn across the early June lows and last week's low near $63.50, and a close below this trend line will be a sell signal when this current thrust runs into selling pressure at higher prices. Longer term, I expect to see this market work higher but it may not come on the August contract.
August feeder cattle are not as strong, getting hurt from the higher corn prices in early-week trade. Last week's high is near $79, and I would quit waiting for a test of the earlier $80 level in this market and sell a rally toward $79. If the weather stays on the dry and hot side, higher corn prices could continue to hurt the feeder cattle market even though the supply-side fundamentals for feeder cattle are positive and expected to get more positive as we move through the rest of the year. Consider selling the fall and winter futures when the August challenges the $79 level.
The hog futures are trying to put a better face on the outlook in the pork complex with the August futures contract now $6 above its June lows. Cash hog prices were up as much as $1.50 in some early trading on Monday and the August futures are poised to become the nearby futures at a discount to the cash price index. Monday's close was strong on the August contract and above last week's highs above $52. The next resistance is the mid-May high above $53, and I expect this market to run into selling at that level. If we get a correction to the downside across the next several days, we may get a chance to place an uptrend line on the August hogs that hooks the late June lows near $46 and the lows put in place by the downward correction. Keep in mind that we have the pigs on the ground to generate a year-to-year increase in production this fall, and this summer rally will not last. I would be more inclined to sell the fall and winter contracts on a rally by the August into the $53 to $55 range than to wait.
The weather turned hot and dry again and the grain and oilseeds came into the week with good gains. Crop conditions are bringing buyers into the markets and both the corn and soybeans have recorded nice gains compared to the prices late last week. In corn, I switched to the December this week as the July is ready to expire, but the same patterns we have been watching in recent weeks are there on the December. Friday's low was near $2.30, and that gives us a second point for a trend line after Monday's prices jumped to higher levels. There is strong resistance across the early July highs above $2.50 and we now have a trend line under the market. This is a familiar scenario and producers can either sell rallies to the highs or wait on a close below the uptrend line. I would opt for selling the rallies to place short hedges and take profits on long hedges. The $2.50 and better price on the December is in the top part of the fundamentally based price range for the year.
The wheat markets continue their harvest-period rally as the yields continue to bring some reductions in the expected crops. The Kansas City December contract has run up toward $3.55, and the contract high on this chart is $3.64 back on the first day of trade in July of 2001. I would sell cash wheat that is not in a decent storage program and sell the December futures aggressively on a rally toward that $3.64 high. Put your sell orders in around $3.59 to increase the chances of getting a fill. If this market can close two consecutive days above the $3.64 high, the short hedges can be bought back. But I do not expect to see that type of strength and see selling the rally as the way to go. In Chicago, the December made a new high last week at $3.40 but was not able to close at a new high. I would sell the Chicago wheat on a rally toward that $3.40 high. Put your sell orders around $3.37 or $3.38.
The November soybeans are over $1 above the January 1 lows of $4.285. That price was too extreme even in the face of fundamentals which were bearish at the time, and the $5.35 area is likely too high even though we have seen some positive developments in the acreage and stocks data. The contract high here is $5.63 from late in 2000 when there was little trade in the November 2002 contract. This is an excellent opportunity and producers should put sell orders around $5.59 and sell this market aggressively on a continued rally. Only significant extensions of the hot and dry forecasts would justify this market in new high price ground above $5.63. Remember that the right thing to do here is to sell the rally toward the high, and if the weather really does turn unusually bad, be prepared to buy the short positions back on two consecutive closes above $5.63 if that should occur. If that sounds too hard for you to do, look at cash contracts on the day the rally toward $5.63 on the November occurs. This will take away the need to worry about margin calls. I would not buy puts up here. Paying for upside flexibility by buying puts does not work when the market has to make a new contract high to cover the premiums.
