Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
September 10, 2002
All of the grain and oilseed markets are giving us excellent pricing opportunities. The problem, if there is one, is to manage these volatile weather-driven markets in such a way that when things settle down, we are positioned correctly in these markets from a risk management viewpoint. It appeared November soybeans was going to make a double top around $5.80 after running up to that level on Monday, but the strong close in Tuesday's session on the high of the day at $5.785 suggests to me that we will probably see the $5.80 level taken out. But as I see the fundamental picture in soybeans with the likelihood of a record total availability when you combine the United States and South America, I don't see any reason for sustaining substantially higher prices, so I think short hedges are in order. The rule is, remember, if we get two consecutive closes above that $5.80 level, you should buy that short hedge back. But I might even take a hard look at that long-standing rule here when we don't really expect to see the fundamentals allow any substantial move above current levels. Alternatively, of course, you can go back to the trend line approach hooking the June lows and the late July lows. Then, just wait for all this volatility to settle out and not do any short hedging or selling of cash crop until we see a close below that uptrend line.
Odds are that there will be at least some slight reduction in the crop size in the September 12 estimate on corn, but I wouldn't be surprised to see that bring only a modest decrease in ending stocks. The December corn futures made a new contract high at $2.96 on Monday and closed down a bit on the day on Tuesday at $2.875. Part of this is "gap filling" on the chart, and part of it is realization that we may not need prices significantly above the $3 level on December corn. I see $3 here as having something of a psychological impact much as I do the $6 level on the soybeans. Once again, and I continue to show that chart this week because it is a picture very much like the soybeans, you can sketch a trend line on this contract. Right now, I would be hooking the late July and the late August lows using that steep uptrend line and be prepared to short hedge this market when we see a close below it. You might get better prices if you will step up and forward price on a market up around the $2.96 high or anything just under the $3 level. But that always carries the possibility of margin calls later so producers need to take a look at their financial position and decide which way to go. Corn users should be taking profits on long hedges at the same time.
The wheat markets have surprised me, perhaps even shocked me. We have been building a bullish scenario in wheat for years with world level stocks continuing to come down, and it has just been within the last few months that the market has started to pay attention. I think the weather problems in the U.S. and Canada, which may bring something like 30 percent reductions in availability of wheat, were the catalysts that finally started demanding attention. The Kansas City contract is booming to the upside, and that is a reflection of the relatively short supply and tight stocks of high-quality milling wheat in the world market. There is a lot of wheat in other parts of the world, including some in Canada, that is going to be feed quality. This is a market that if short hedges were placed on a rally up toward the highs, they should have been pulled back on the second consecutive close up in new higher ground--that would have been up around $3.88 on the July Kansas City contract and somewhere around the $3.58 level in Chicago. But having said that, I don't look to see these markets boom to the upside from current levels. We have seen no correction to speak of since this rally started in June. The July Chicago closed at $3.72, down about 4 cents in Tuesday's session, and the July Kansas City closed near the low, down about 8 cents at around $3.86, so I am expecting to see some continued selling pressure in these markets. If you have short hedges in place, you might want to just hold them until the picture clarifies a bit.
The less volatile livestock and meat markets are also offering pricing opportunities, especially on the cattle side. Boxed beef values tried to find a bottom around $108 on the Choice types back a few weeks. We climbed well above that level and have now dipped all the way back down to that level, and it looks like there is some support coming in around that $107-$108 level on the Choice types again this week. Cattle that are selling in early week trade are mostly selling around $64. There have been a few cattle at $64.50 in Kansas, and there is talk about some carcass-based cattle at $101 in Nebraska. That gives us some indication that we are probably going to climb up across the next week into the $64-$65 range in this cattle market. December live cattle are, in spite of the coming disaster in the fourth quarter in hogs, trading up around $71, and closed up a bit at $71.17 on Tuesday. You can either forward price cattle that are going to finish late year on a scale-up basis, or as we see on the grain and oilseed charts, we can sketch an important trend line across the late June low and the very recent early September lows. This market is going to climb a bit higher it appears, but across the next few weeks, we will see pressure and will probably see a close below that trend line in this complex. I would place short hedges at that time. Do essentially the same in the feeder cattle market. We had a small gain in that October contract in Tuesday's session as the corn market moderated a bit after Monday's strong closes. We have a recent high at $80 on the October feeder cattle contract and a rally back up to that level would prompt me to forward price any feeder cattle ready to sell in September, October, or November.
The looming and perhaps imminent disaster in the livestock and meat complex is in the hogs. We have seen the December contract trade all the way down to the $33 level in late August and the cash market broke several dollars per cwt. across the past 10 days. Some live-based prices in the western part of the Corn Belt were below $20 late last week. The cash market is looking a bit better in Tuesday's session and may be up $1 or so on the day, with a weighted average price around $31 on a lean hog basis (of course that puts us in the low $20s on average on a live hog basis). The disaster that has been in the making and we have been concerned about for a long time is here. The nearby October contract closed up the limit on Tuesday and the December was up over $1, so we are getting a bit of short covering and/or a fund buying rally in this market. Remember, the highs back in July on the December up around $41 would be an excellent place to get some price protection and do some forward pricing, and we need to be careful. I expect all we are going to see is a correction of that move down from $41 to $33, and a 50 percent correction is back up around $37, a 60 percent correction takes us back up near $38, and we are reaching those levels in this week's session. By all means, be prepared to get some price protection if we are fortunate enough to see something back up toward those $41 highs in July.
