Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
August 27, 2002
The grain and oilseed markets appear to be settling in to wait for the September 12 U.S. Department of Agriculture crop reports. Crop conditions have improved slightly with rainfall across the past several days, and there is talk about the improved weather adding a bushel or two to the yields on soybeans. In wheat, there is talk that the market is finally realizing that stocks are tight and getting tighter at the world level, and that is the explanation for the abrupt run up in price we have seen since back in the spring months. But on the other side of that coin, the recent weather in Kansas will facilitate planting of hard red winter wheat. There are pros and cons in all of these markets, and we seem to moving past the time period when we are going to get extremely volatile price action based on weather.
I continue to show the December corn chart because I want to follow this lesson through to see where this eventually goes. I would be prepared to place or replace short hedges or hedge more of this crop that is moving toward maturity on any rally back up toward $2.85 or just under that $2.885 high from about 10 days back. If you are not willing to sell the rally toward the high (and I would encourage that action), then continue to watch the trend line that you can sketch across the two lows during the month of July and recognize that eventually this market is likely to close below that trend line and that would signal short hedges. Follow essentially the same pattern in November soybeans, but I would sketch my trend line there across the late June and late July lows, and that line comes through this week just below the dip from last Thursday down toward the $5.30 level. I would be aggressive in selling this market on any rally back above $5.70 with the contract high now just under $5.80. I see nothing except possibilities for increased crop estimates in soybeans as this crop benefits from the rain that we got in August that was too late to improve yields very much in corn. Users of corn, soybeans, and soybean meal ought to be willing as selective hedgers to sell long hedges and take profits on rallies up toward these obvious highs and resistance planes in the corn and soybean market.
In wheat, we have made some new contract highs on old-crop contracts this week, but that is on the past crop. I see excellent opportunities to forward price on the July Chicago on any run up toward its recent high just under $3.50, and we are going to see those opportunities this week. In Kansas City, on the July, we have an excellent opportunity at even better price levels on any move up above $3.70 and up toward the $3.76 high from about 10 trading days back. Be aware that these markets have gone up essentially 70 cents in Chicago and almost 80 cents in the Kansas City market since May with no significant and sustained correction to the downside. I certainly don't expect to see these markets be able to hold these fairly lofty levels even with an improving fundamental supply-demand picture around the world. The market will get only so much mileage out of the reported short crop in Canada and the tendency for stocks to tighten, and then we will start dragging acreage back into wheat with improved price prospects, and we are in the midst of doing that now for both hard red winter and soft red winter. I would want to be at least 50 percent forward priced on the 2003 wheat if we can get a rally back up toward those very important resistance planes on July wheat in Chicago and in Kansas City.
Cutout values for the lighter Choice boxed beef are at $113.44 in Tuesday morning activity, and that continues to show improvement from about the $108 level of several days back when we appeared to be putting in a short-term bottom. Although the spread is not wide by historical standards, the Choice values are also rallying relative to the Select, and that is suggesting that we may be getting past some of the problems with heavy weight cattle in the feedyards. We are up only about $1 across the past five trading days, but the movement is in the right direction, and that appears to be supporting a $64 cash cattle market early in the week in very limited trade, and we may see $65 again before the week is out. With the October live cattle contract trading just above $67, we are now $2 off the highs that we saw in the futures this month and appear to be heading toward a cash-futures convergence as we move out toward October somewhere in the mid-$60s. I had suggested that rallies up toward that high around $69 should be sold, and I would hold those short hedge positions until we see whether or not this market will be able to find some improvement in short-term fundamentals, put a bottom in place, and start to climb to somewhat better price levels. I don't see any evidence of that so far and would be content to sit with short hedges in place in this market until we see some new developments.
In the feeder cattle market, we are seeing slightly better pricing performance, and that is consistent with corn coming off its highs and the modest improvement we have seen in the fed cattle. Last Thursday's close was above the July high just above $79, and then the market reversed and came back down closing well below $79 in Friday's session. I have been suggesting that producers should go ahead and forward price these fall cattle on rallies up around that $79 level, and if you did that, I think it is going to work. If you did not place short hedges, we now have a high just under $80 from last Thursday that becomes the new resistance plane. You might ratchet up your thinking a bit and sell a rally back above $79.50. I would monitor the October contract where much of the trade is in this market and sell the September and November at the same time if you need to have hedge protection in one of those months.
As a proponent of selective hedging, I am often willing to buy back short hedges on dips to contract lows like we the one we have seen across the past week in the December lean hogs. But I had suggested in earlier letters that short positions established here on the July rally ought to be held until we see some evidence that these lows are going to contain this market and today it looks as if the support has been taken out. We have closed below that old June low just above $35 on the December contract on several occasions now, and that market is now trading down in the $33-$34 area. There is increasing concern that we have already started to see some of the expected seasonal weakness as we move toward the latter half of this year, and cash prices were down significantly on Monday compared to last week's prices and down again in Tuesday's early session. There is a price range now of roughly $28-$40 on the carcass-based lean hogs and the weighted average is around $34.76. That converts to a really dismal price performance when you recognize that $34 on a lean hog basis is down in the high $20s already on the traditional live hog basis. Hold short hedges for fourth quarter hogs until we see some signs that this market can find some fundamental support and start to show bottoming action on the charts, and I see no sign of that through Tuesday's session of this week.
