Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
August 6, 2002
The grain and oilseed markets continue to bounce with the weather uncertainty. The August 12 U.S. Department of Agriculture reports will bring some direction. We have early private estimates calling for a corn crop below 9 billion bushels, and I have seen estimates of yield around 125 bushels. That type of decrease from trend yields is possible, but it doesn't happen very often. I am not confident that the weather we saw during July damaged this crop that much. But if we are moving toward something below a 9 billion bushel crop, we are likely to see the contract high on the December corn futures at $2.72 challenged either before or after Monday's report. On a rally toward that $2.72 resistance plane, I would encourage producers to finish off forward pricing and move up to 65 percent-70 percent forward priced in new-crop corn. Users of corn who are holding long hedges placed back in the April, May, and June period are looking at major profits which are needed, of course, to reduce the cash price of the corn they are going to have to buy. As a selective hedger on the long side of this market, I would take profits on a move up toward $2.72, putting my sell order at around $2.69-$2.71. Remember, for both short hedgers and users who might take profits on long hedges, if we see two consecutive daily closes above the old high at $2.72, short hedges should be bought back on that second close, and long hedges should be replaced on that second close. I do not expect to see that happen in the corn market.
In soybeans, the contract high on the November is still $5.63, and that occurred on the first days of trade back in late 2000. The recent rally in this market went to $5.60 and was turned back. Then we had another rally up toward $5.57 that occurred last week. To date, we see no private estimates that are suggesting a short soybean crop. This is likely to be a relatively large crop in the presence of major competition in the world market from South America, and I would continue to sell rallies toward the contract high on this November and finish off forward pricing on soybeans by moving up to 65 percent-70 percent forward priced. Put your order at about $5.59 to help make sure that you get a fill. Remember that if we see two consecutive closes above that old $5.62 high, we need to buy back those short hedges on the second close above $5.63 since that suggests this market is going up into uncharted territory.
It is wheat that surprised me with that December Kansas City contract having moved up through its old high around $3.64 and is holding prices up around $3.80. This market has advanced from the low $2.90s in late May to almost the $3.85 level without any correction to the downside, and we are clearly positioned for a downside correction if and when the corn and soybeans stop moving up on weather scares. I would hold short hedges, if you have them placed, at recent levels on hard red winter wheat you are holding in storage and look to add to price protection on a move back up toward the recent high at $3.835 on the December Kansas City contract. In Chicago, the December is still well below its old high of $3.65 and managed to trade on Tuesday up to $3.56. I would be selling cash product and short hedging product you are holding in storage aggressively in the soft red winter wheat market as well. As a selective hedger willing to place short hedges and then buy them back on any price dips, I would be placing short hedges on about a third of the 2003 crop if the Chicago July contract rallies above $3.35. This market has recorded two highs recently at around $3.36 and $3.37 and is not likely to go up through those highs without a correction to the downside. On the hard red winter contract in Kansas City, the July is trying to make new highs up above $3.55. Move to a third forward priced on this contract as well up around $3.60 or $3.65. If you get nothing done, make sure you sketch a trend line on that chart that is hooking the mid-June and the late-July lows and be prepared to place short hedges on hard red winter wheat on a close below that obvious trend line on the chart.
In the beef market, it looks like the boxed beef cutout values are finally trying to stabilize around $107-$108 for the Choice types and somewhere around $103 for the Select types. These cutout values have come down over $2 per cwt. across the past five to six business days, and that is hurting the chances for feedyards to get anything better than $63-$63.50 for cattle. Weights are still very high compared to year-ago levels, but the numbers of cattle on the showlists are not growing and that is encouraging. There is talk already that we will get some boost on the demand side from the Labor Day market buying. The nearby August live cattle contract is being pressured a bit by talk of futures deliveries, and we are $2 off the $66.50 high that we saw about two weeks back. Out a little further in the December, we corrected down a bit from the $69 level but closed at $69.30 on Tuesday. I would continue to sell the nearby August on a rally toward that $66.50. We either need to sell more distant contract like December on a rally above $69 where we have recent highs all the way up to about $69.40 or be prepared to place short hedges in that market when we see a close below the long-term trend line that hooks the late April low and the late May and early June lows on the December contract.
Feeder cattle are getting helped a bit by the pressure we are seeing on corn this week and better live cattle prices. These contracts are up 50 cents or more in Tuesday's session with some live cattle up more than $1. We have resistance from last week across a high on the August at about $78.25 and then a bit earlier resistance at about $78.50, and that is going to stop any rallies in this August market. Looking out a bit further, the most obvious resistance on the October is the highs just above $79, and I would be inclined to sell any initial thrust up toward those levels. By the time we move into late in the year if corn is relatively cheap, I expect to see better prices on these fall and winter feeder cattle contracts, but they will correct to the downside after a thrust up toward the $79 level.
Most of the pork cuts are lower in early-week trade, and cash hogs are also lower. We are generally at the $48 level now for the lean hog prices, which translates to $36 and below on a live hog basis. As we move away from July where cash prices are in a normal season at the highest level of the year, I was concerned that this market would trade down again, and we have seen substantial losses in the lean hog futures across the past week. Looking out into the December contract and continuing to be concerned about fourth quarter prices, the mid-July rally up toward the midway highs around $41, which I thought at the time was a short hedging opportunity, certainly looks that way in hindsight. We are now down to the $38 level and I would not be surprised to see this market go still lower. Hold short hedges that you have but let's wait and see if we can get a rally, if you have no protection in place, to place short hedges at prices better than we are seeing this week.
