Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
August 20, 2002
The grain and oilseed markets continue very volatile patterns in the aftermath of the August USDA reports. Estimated crop size in corn is down some 9 percent from last year, and soybeans are down 8 percent. But the market is not acting this week as if it fully believes the reductions will be that large. We have seen some rainfall across the past several days that arguably has improved the yield prospects for soybeans. Crop conditions in corn had improved some in Monday's report but continue to run well below year-ago levels. Stocks in the U.S. and at the world level in corn, wheat, and soybeans are at levels relative to usage that have prompted higher prices historically than we are currently seeing. Arguing against any notion that prices will move sharply higher from levels we are seeing this week is recognition that across the past several years, we have seen prices decline relative to the historical relationships in any efforts to model prices as a function of carry-out stocks relative to usage for the year.
In corn, I think the picture is not as clear as it is in soybeans. This market gapped up past the old life-of-contract high on the December futures at $2.72 and reached a new high of $2.885 late last week. Short hedges should have been bought back on the second close above the old contract high. If that is the case, producers should be out of the futures market at this point in time, and users of corn should have replaced long hedges on the recent price surge. Watch this market, and don't be surprised if it corrects back down to the $2.72 level or possibly a little lower, and we are seeing that occur in Tuesday's session. We now have resistance across the new life-of-contract high of $2.885 and some steep trend line support connecting the lows in early July and later July that captures this market in an emerging triangle. I am showing that pattern on the chart this week and would encourage producers to look at replacing short hedges on any move back up toward that $2.88 level and/or a close below the relatively steep uptrend line that I am using, whichever comes first. If late season weather stays as generally favorable as it has recently, I don't expect to see the highs taken out in either corn or soybeans in the immediate future.
The picture in soybeans is, I think, a bit clearer. Remember, the old-contract high was at $5.63, and I had been encouraging placing short hedges in this market on a rally up toward those highs. After the report, the November contract rallied up to $5.795 and then turned substantially lower and is now back below the old high of $5.63. That is not supposed to happen and constitutes an impressive failure, in my reading of the charts, in this market. Hedgers who might have lifted short hedges on the second consecutive close above the old $5.63 high should have put those hedges back on as we saw closes back below that high on Monday, down around $5.50. If that is not the case, then I would sell a rally toward that new-contract high up against $5.80 or a close below the trend line on the November chart that you can construct by hooking the lows in mid-June and those in late July. I would suspect that we are going to see more downside pressure as the crop size improves in soybeans where there is still time for a weather-related impact on yields.
In wheat, I see this as a huge opportunity. Much of the recent surge in price in wheat is coming from support from corn and soybeans and not from sharply improved fundamentals in wheat. The December Kansas City hard red winter wheat contract had run up to the $4.00 level and better, and I suggested last week that somewhere around $3.70 or better on the July contract I would get up to 50 percent forward priced on your expected wheat production. Keep in mind that basically our wheat is priced above the world market at current levels and will take us out of any appreciable activity in the export arena. In Chicago, I would be aggressive on getting at least 50 percent of the expected crop forward priced on any rally back up toward last week's highs, which are just below $3.50. I see this as a big opportunity in wheat and would want to take advantage of both selling old-crop and getting up to 50 percent forward priced on the new-crop product.
In the cattle complex, the boxed beef Choice grade cutout values have climbed back up around the $111 area, and this is giving some support to my thesis that these markets found a short-term bottom across the last two to three weeks around $108 for the Choice types. Cash prices got as high as $64.50 last week. Feedyards are going to want more this week. So far, the limited trade has shown a high price of about $64, so I would expect trade to develop during the week at $64.00-64.50 with some outside chance of $65.00. Whether we see that $65.00 market might depend on what happens to boxed beef values late on Tuesday and into Wednesday and Thursday of this week. The October live cattle futures, which have been trading up around $69, started running into trouble on Monday. That is continuing Tuesday as this market is trading back down under $68. It is hard to hold a $3.00-4.00 premium in the futures contract, and we may see some moderation here with slightly lower futures prices and slightly higher cash prices, and as we move through September we may start seeing some convergence somewhere in the mid-$60s. I would hold short hedges that you might have replace recently on that move up against the July high that is between $68.50 and $69.00.
Feeder cattle are trading a bit better this week, and that is partly because some of the weakness we are seeing in the corn market. I continue to recommend that you watch the actively traded October for any late fall feeder cattle pricing needs. Be prepared to sell this market if the October rallies up toward $79. We have seen this contract quit there about four times now going back to an effort to close above the $79 level back in May. Keep in mind that if corn settles in, say, at $.50 per bushel above last year's levels because of the short crop, we can expect that to take about $5.00-6.00 per cwt. off yearling steer prices and possibly $7.00-10.00 per cwt. off calf prices. There is a very strong inverse relationship between corn costs at the feedlot level and what they can and are willing to pay for feeder cattle.
In mid-July, the December lean hog contract rallied up to the highs that were recorded in May around $41 and ran into trouble. In Tuesday's session, that market is trading down the $2.00 limit at $35.225. This is clearly a retest of the life-of-contract lows on this market, and I would be inclined to hold any short hedges here until we see whether or not those lows will hold and turn this market higher again. It is a relatively poor and dismal price outlook in the fourth quarter for hogs. Part of this price weakness is clearly related to Tyson's announcement that they plan to shut down their live hog production program. Add the fact that the recent Cold Storage report showed a record high volume of hams in storage, and that this report comes in the presence of frozen poultry supplies at the end of July running 33 percent above last year's levels.
