Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
July 30, 2002
Volatility is still the word in the grain and oilseeds markets. Weather is still the major market mover. Crop conditions in Monday afternoon's report did not show an improvement and the trade expected corn and soybean conditions to improve by at least a few percentage points. This market will continue to be volatile depending on the weather, and I would encourage those of you who are trying to manage your exposure to a very risky market to go back and review last week's market letter. There was significant coverage as to why short hedgers, speculators, and those holding long hedges would all want to sell a rally toward the life-of-contract high. Sometimes seen as a risky move because it is selling into a rising market, if you will accept and understand the need to remove those short hedge positions if you get two consecutive closes at new life-of-contract high prices, selling a rally to the high is a good strategy.
Hold your short hedges on hard red winter wheat if you placed them on a rally toward that contract high in the KC December at $3.64. I would have been selling cash wheat and/or hedging wheat held in storage on a rally to that level, and while the market moved up through the $3.64, action early this week suggests there is no major upside to this market. Thus, having sold wheat or placed short hedges is the right thing to do. In soybeans, where the old life-of-contract high was $5.63, the recent rally to $5.60 should have been sold, and we are well off those highs this week even with the 15-cent gain on Tuesday. I would want to be 50 percent priced or more in the soybean crop and would continue to sell any move toward that contract high of $5.63. Keep in mind that the market has already failed in the attempt to take out that high once, and unless the weather really turns dry and negative in soybeans, that is going to be an excellent place to do some short hedging and take profits on long hedges. Then, be prepared to take appropriate action if we do happen to see two closes above the $5.63 level on that November contract.
In corn, I am showing the December chart again this week. That market has turned volatile and rallied into the $2.50s and never really made any serious attempt at moving up toward its contract high at $2.72. I would continue to sell into rallies in this market, certainly to anything across last week's highs, which are several cents per bushel below the contract high at $2.72. If you do get a rally up toward $2.72, I would want to be at least 50 percent, preferably two-thirds, forward priced in this 2002 corn, and I would certainly be interested in cleaning out any old-crop corn that you might still be holding on that type of rally. Odds are we will see a crop well above 9 billion bushels this year, and, while it may not be as big as the usage, it will not pull ending stocks down to levels that will justify anything up toward $3 in new-crop corn prices.
In the livestock markets, cutout values in both pork and beef were down on Monday, but it looks as if the Choice categories in beef are going to be up in Tuesday's session. The Choice cutout values are showing a very small premium to the Select, and that is reflecting the relatively heavy supply of Choice grade cattle given that carcass weights are as much as 25-30 pounds above last year's levels. Clearly, these cattle are being fed to a higher weight and have generally higher marbling than normally would be the case. The showlists are not burdensome, and there is talk at the feedlot level of $65-$66 cattle this week, but it is not clear the packers will pay it. We have had some limited sales already as high as $64, especially for pens of cattle that graded 80 percent Choice or better. The poultry dispute with Russia has not been settled, but they will continue to import poultry at least for several weeks while further negotiations are going on, so that uncertainty is at least mitigated for the moment. I continue to believe that the August live cattle futures will be sold on a rally to last week's high around $66.50. If you feel there is some upside in these markets above $66.50 and you don't want to place short hedges yet, then hook a trend line to the early June lows and to last week's low and monitor this market as it approaches the apex of a triangle with that trend line under the market and a flat resistance plane across last week's high at $66.50. If the market goes up out of this triangle to the upside, let it go and look for better places to short hedge. If it closes below the trend line, however, I would want short hedges in place because we are likely to see at least a significant correction to the downside. And I always prefer to sell the rally to the resistance plane such as the $66.50 referenced here.
In feeder cattle, much depends on what happens in the corn pits. The early July high up around $79 on August futures looks like fairly substantial resistance to me now. If we can take out that high and if corn prices do dip a bit more, we have more resistance across the early May high just under $80. I would be forward pricing late summer and fall feeder cattle on a rally toward that $79 high and be willing to set these short hedges a bit under $79 on the August and under the corresponding recent highs on the September, October, and November futures if you need those later contracts.
There is some discount to cash prices in the hog complex, but I wouldn't be bullish just based on that scenario. We are moving through late July, and July is usually the seasonally highest priced month of the year. We are likely to see cash markets moderate a bit to the downside as we move through August, and then, of course, the fourth quarter is the big worry this year. December futures recorded some highs within the past two trading weeks up around $41, and I suspect that is going to be fairly substantial resistance. I would be inclined to think about getting price protection either with futures or options on that December if the market can rally back up toward those levels. Keep in mind that we are going to be seeing a significant increase in pork production as we move into the fourth quarter, moving us back up toward the levels of production reached in the fourth quarter of 1998. It is all too easy to remember that price disaster when, on a live basis, hog prices actually dipped below $10 per cwt. I see no analysts really anticipating that could happen this year, but most expect prices to be below $30 per cwt. on a live weight basis, and there is always the possibility that prices will get even worse and move down toward that $20 level again. I would want protection on the fourth quarter hogs.
