Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
September 3, 2002
The grain and oilseed markets are not as volatile as they were a few weeks ago. There are signs the markets are starting to wait on the September 12 crop production reports and the supply-demand reports. There is still some thinking that weather during August has boosted the soybean yields, but yield estimates in corn are all over the board and we are seeing some private estimates that are pulling the corn crop down to 8.7 billion bushels and lower. The August U.S. Department of Agriculture report was down to 8.8 billion bushels on corn because of reduced yield expectations and because of the substantial decreases in expected harvested acreage. As prices go up, we may see some of those marginal acreages get harvested, so we are probably going to end up seeing a crop around 8.9 billion bushels in corn. In soybeans, there is a bit of a different story. We may see, relatively speaking, a substantially large crop here. The best prices we have seen in the new-crop November contract are still below $6, and by the time you account for cash futures basis, the best prices have not been much better than the full cost of producing the soybean crop on a per bushel basis. Wheat continues to show some price strength partly because of higher prices in corn and soybeans, but also because we have two or three producing countries around the world that are having some drought problems.
With corn up 5 cent-6 cents per bushel in Tuesday's session, the December contract is still 14 cents below its early August highs up above $2.88. I see absolutely no reason to change the posture we have had here for some time. We want to sell rallies to the highs. If you are short in this market and are holding short hedges, I would continue to hang onto them. If you lifted them on recent dips, then replace those short hedges on anything up toward $2.85 and better in that December contract. The chart this week shows a steep but relatively serviceable trend line that you can use to do late selling or to place short hedges on some additional corn when we see a close below that uptrend line. I don't see any reason from current supply-demand balance considerations for this market to challenge $3 and go on higher, and I suspect it will be sold aggressively on any rally back up toward the $2.885 high that we recorded about two weeks back.
The chart on the November soybeans is similar. The early August high ran up to $5.795, and now we have backed off and are trading that November contract up and down around the $5.50 level in Tuesday's session with the market up on the day. There are chart gaps above us that will mean some selling pressures on any sort of rally. I expect to see this market, even more so than in corn because of the possible improvement in soybean yields based on August weather, get sold aggressively on any rallies. The trend line here would need to hook the mid-June and the mid-July lows. That is a steep and serviceable trend line, and there is major resistance at $5.795, which is the early August high. I would put any sell orders around the $5.76-$5.77 level if you are going to sell this market to enhance your chances of getting sell orders filled.
In wheat, the new-crop July Chicago contract has made a high of $2.52 in Tuesday's session, a new-contract high. I would be selling this market aggressively as a producer and would want to be at least 50 percent forward priced in my new-crop wheat expectations up around this $3.50 level on the July Chicago contract. The early August high on the Kansas City contract is around $3.76 and we are trading 10 cents below that level in Tuesday's session. I would sell this market aggressively on a rally up toward that $3.76 high. Keep in mind that these wheat prices are well above anything we were offered last year. This rally is being helped not only by dry growing conditions and crop difficulties in major growing countries like Canada but also by the recent strength in corn and soybeans. I would be an aggressive seller on any rally up toward these highs in the new-crop contracts and would be selling the old-crop product in the cash market at the same time.
About the best fed cattle prices we can find from last Friday into limited early sales this week is the $64.50 on some heifers in the Kansas area. Most of the trade last week ended up around $64, and that was a bit of a disappointment to the feedlot sector that they could not squeeze another dollar or so out of these markets. The reason the higher prices are difficult is that boxed beef cutout values have turned down again, losing some 65 cents on the lighter Choice types last Friday and another $1.50 on those same Choice types in Tuesday morning's session. October live cattle futures are trading around $67 in Tuesday's session, and that is more than $2 off the early August highs in this market. I had been suggesting that we get this market sold on rallies, and I would hold those short hedges. It is not abundantly clear to me that we can hold even the $67 level if the boxed beef values don't start to improve. The chart shows that we have closed several times now below a rather obvious uptrend line on the chart and we have some support across an early August low just above $66.50, but if that support is taken out, then we are likely to correct all the way back down toward the $65-$66 range.
The feeder cattle market has behaved a bit better across the past two weeks than had live cattle, and now it is under a bit more price pressure in Tuesday's trading session because corn is higher. The October contract that I have been focusing on and suggesting we sell anything on a rally up toward the $79 level and better where we had quit in terms of price thrusts back in May and again in July and in early August is still the key contract. Across the past few days we have meandered above that level and up to $80 on Friday of last week, but in Tuesday's session the October is back below $79 and down significantly on the day. I would continue to hold short hedges on any of the fall feeder cattle in this market. I am not yet convinced that we are going to see enough strength in the fed cattle complex or enough weakness in the corn to justify still higher prices.
The price picture in the lean hog pits continues to be dismal, and it is not likely to get sharply better in the near term. Cash prices are down again in Tuesday's session, down as much as $1.50 from late last week, and the weighted average price on a lean hog basis is in the national direct trade is being quoted at $26.60. Some of the plant-delivered hogs are better than that, and some of the hogs that are showing minimal back-fat thickness are getting up to the $37 level based on a value grid, but the overall picture is sorry indeed and puts virtually every producer, regardless of size, in a loss position. I had wanted to see these hogs forward priced during the July rally that reached back up to the $41 level on that important December contract and since that time, we have been below $33 and are trading down toward $34 in Tuesday's session. We have to recognize that the sharp rally we saw late last week was just a short covering rally in front of the three-day weekend, and we are going to see these on occasion, but they are not indicative of a bottom. I would continue to counsel to hold short positions in this market.
