Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
July 23, 2002
The grain and oilseed markets are backing off in Tuesday's session after closing with strong gains on Monday. Rain across the weekend was not as widespread as had been expected, and the weather phenomenon is driving these markets. Last week I suggested selling the December Kansas City wheat on a rally toward its life-of-contract high, which was $3.64. That market has taken out that high this week, but it is not clear that it will be able to hold levels above $3.64. I had also suggested selling November soybeans on a rally toward its life-of-contract high at $5.63, making the argument that the weather would have to get persistently worse before prices above $5.63 would be justified. I like selling rallies toward contract highs, but those don't usually happen unless we have a weather problem, and that makes for nervous trading and nervous price risk management by producers. So this week, I want to spend time on what strategy should be employed in placing sell orders up near the highs and then what producers should do in the event that weather pushes the market up to new higher price ground. We saw that happen in 1980 and 1988, which are the two years that most people who watch the weather patterns and the drought situation around the country are likely to use as baselines in evaluating the 2002 growing season.
Put sell orders a few cents below the life-of-contract high to increase your chances of getting a fill on the order. Producers who need short hedges, speculators who would like to take short positions, and long hedgers and long speculators who would like to take profits on their hedges or their speculative positions will all tend to sell a market on a rally toward life-of-contract highs. Let's use the November 2002 soybeans as an example, where the contract high is $5.63. On Monday, the market closed up 18 cents at $5.55 and reached an intraday high of $5.60. I always counsel that you back off a few cents from the high and place your sell orders, so let's assume that producers sold this market at $5.59. That sell order would have been filled during Monday's session. Once short positions are established, then it is important for the selective hedger to watch the following days to see whether or not that life-of-contract high at $5.63 gets taken out. If there are two consecutive closes by the November soybean futures above $5.63, I counsel producers to buy back the short hedges on that second close. If this weather is really going to turn extremely bad and duplicate something like what we saw in 1980 and 1988, then this market could go to $7, $8, or even $10, and I see no reason to answer margin calls on that type of extreme weather-driven price move up. But once the short hedges are bought back on the second consecutive close above the old life-of-contract high of $5.63, it is important that you continue to monitor the market.
If, on the day after the short hedges are bought back, or anything within 5-10 days after that occurs, you see a close back below the old contract high of $5.63, the short hedges need to be replaced. Two consecutive closes in new higher price ground is a buy signal in every corner of the world. One of the most important developments in a marketplace like soybeans is for the market not to do something that it is supposed to do. When it closes two consecutive days in new higher price ground, odds are 85 percent-90 percent, based on my experience, that the market is going to go up. But occasionally that does not happen and it turns and closes back below the old high. When that occurs, the market has "failed" in a very important context and is not honoring the widely recognized buy signal by the two consecutive closes. It is appropriate, then, to have short positions in place in this market because often if the weather improves, prices can move down substantially. With those guidelines in mind, I would continue to sell rallies toward the $5.63 high in November soybeans, and that contract closed down over 19 cents in Tuesday's session as the weather outlook starts to improve. The contract high on the December corn is $2.72. I would have already been selling that market on rallies into the $2.50s but would certainly sell aggressively any rally up toward the contract high at $2.72 and put my sell order around $2.69. Then, use the two consecutive days in new higher ground as a protection against the unlikely weather market. I continue to develop this strategy on the chart this week.
In the livestock markets, we are coming off a Cattle on Feed report that showed placements down about 15 percent. A surprising characteristic of the report was the substantial reduction instead of a suspected increase in the number of heavier cattle placed. That would seem to put a better supply-side look on the prices for cattle to be sold this fall and into the early winter months. Some beef cutout values are down Tuesday, but we are still above where we were late last week and the Choice cutouts are up as much as 49 cents at noon. In the pork complex, futures are still showing a discount to cash, and that is encouraging some buying, but there is continued worry in all of this complex about whether or not the poultry dispute with Russia will get settled this week.
The August live cattle contract closed above the early May $65.5 high last week but is back below that level at Tuesday's $64.90 close. With the poultry issue in dispute, I would hold short hedges here and add hedge protection on a rally toward Monday's high at $66.50. Feeder cattle prices will be hurt if weather pushes corn higher. Key off the August and sell summer and fall futures if August rallies toward last week's high around $79.
After rallying throughout July, the lean hog futures have turned lower. As we approach the end of July, usually the high-price month for the year, we might get a rally by the December back toward recent highs around $41. The fourth quarter worries me most, and I would sell to place or replace short hedges if we get that rally.
