Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
September 17, 2002
The performance of both the live cattle and the feeder cattle futures across the past week to 10 days has surprised me. But I didn't expect to see the boxed beef prices for the lighter Choice types move up nearly $5 per cwt. from $107.97 last Tuesday to $112.89 this Tuesday morning. That type of rapid acceleration to the upside in the boxed beef values is going to grab the packers' attention and they are going to be more inclined to try to make sure the kill lines are running at full steam and they will, if they have to, pay a bit more for cattle to take advantage of these surges in their selling prices. Cash cattle have essentially not traded yet this week, with a few sales at $64 in the South and limited sales as high as $65 in the North, but I suspect we will see activity at possibly $65 and better emerge again later this week. There were a few sales at $66 late last week as this surge in boxed beef values started. The October live cattle contract is trading above $70, and the December has moved above the $72 level in early-week trade, closing at $72.22 on Tuesday. Both contracts have taken out their mid-August highs which were around $70.75 in the December. Short hedges that were established on rallies back to these highs are probably okay because I am not sure we can hold the current level, and I would be inclined to continue pushing short hedging in these markets if you can lock in profits. A trend line sketched across the late June and the late August lows on that December contract will let the market run, if it can, to the upside and put you in a position of placing short hedges later if and when the trend turns down and we see a close below the uptrend line.
Prices are also better in feeder cattle because the corn market has not continued its rally and because the fed cattle market is starting to look better. October moved up and closed the old early April chart gap and has traded above $81 in early week activity. I think this is a decent forward pricing opportunity, but you need to recognize that this $81 price level in October feeder cattle is a rather conservative number given that some of the late year and early 2003 contracts are trading well up into the low $70s. I still think we are subject to some risk that the corn crop will end up being smaller than the slight decrease we got in last week's U.S. Department of Agriculture reports. So, I would be inclined to take advantage of opportunities up around $81 and better on the October whether you are doing it in the October or the November contracts in feeder cattle.
Everyone in the cattle complex needs to pay attention to what is happening in the hog market. We have cash hogs Tuesday morning on a carcass basis ranging from $26 to something above $40 per cwt. with a weighted average price on a carcass basis of $35.78 in the national direct hog market. This is, of course, a weighted average price that would translate to somewhere in the $26-$27 range on the traditional live hog basis. And, any way you cut it, these are miserably bad prices and spell big losses for producers who do not have these hogs hedged. It is going to be difficult to have hogs down in the $20s (we have already seen the low end of the price range dip below $20) and see the cattle going up into the $70s at the same time. So, I want to constrain my optimism in cattle a bit by some objective recognition of what is going on in hogs. We will increasingly see the price specialing at the retail levels switch over to pork and even to chicken if these price relationships keep up. The December lean hog futures spiked up to a bit above the $39 level in midweek last week and failed a full $2 below the July highs. This looks now like a completed correction of the last down move, and I suspect that we will see another leg down in this market. So, anything above $38 on the December in this lean hog contract I would see as a short hedging opportunity.
The grain and oilseed markets are largely lower to even in Tuesday's action after the modest gains that we saw on Monday. Last Friday's supply-demand report dropped the corn crop estimate from 8.886 billion bushels to 8.849 billion, primarily because the estimate of harvested acreage was reduced. Yield per acre actually went up slightly to 125.4 bushels per acre. Total ending stocks moved down only slightly from 767 to 729 million bushels. This change was largely anticipated by the market and had been already priced into the market, and we saw price declines in response to the report. The crop estimate in soybeans went up slightly from 2.628 billion to 2.656 billion bushels and the ending stocks increased modestly from 155 million to 160 million bushels. Stocks look even more adequate in soybeans now than they do in corn. The yield estimate in soybeans went from 36.5 bushels in August to 37.0 in the September report.
I have been recommending short hedges in all these markets on rallies up to or above the old highs, and I would continue that general line of advice. I continue to show the December corn this week because it is still an effective learning tool as we watch this market try to record new contract highs. The market did get above the old high at $2.885 but was never able to close up there for two consecutive days. It is now trading back down in the $2.70s, substantially below the new high up around $2.96. I would hold short hedges placed on the rally toward the $2.885 high and would continue to sell this market on rallies back up toward the highs. We have a substantial 8.8 billion-bushel crop essentially made, and I don't see any reason for sustained moves up in this market. I would do essentially the same thing in soybeans where the November contract also took out its mid-August high, just under $5.80, and rallied up to the $5.91 level but was not able to close up there. Both charts lend themselves to a trend line to protect the more conservative producer who hasn't been willing to get price established so far, and I show that line again on the December corn this week. Sell this market on rallies or wait for a close below the trend line and sell it if you are producer. If you are a user who has long hedges in soybeans, soybean meal, or corn, take profits on those long hedges on rallies to the highs or when we get a close below the uptrend line if that occurs first.
The wheat market is the one market in the complex that was able to take out the highs recorded in August. The hard red winter contract in Kansas City moved well above $4 on the old-crop contract, and the new-crop July reached the $4.08 level. Producers who sold on rallies to the old highs in this market, which were around $3.75 in Kansas City and around $3.50 in Chicago, will have answered margin calls if they didn't buy back those hedges on the second close up in new high price ground. But these hedges, I think, are going to be fine. This market has moved well down from those highs and is trading down again in Tuesday's session in the new-crop July contracts. If you don't have up toward two-thirds protection in this new-crop wheat, get there on rallies. The weather is still an issue in terms of whether the hard red winter crop gets planted in the Southwest. If it gets planted, we will see substantially lower prices soon. You can also watch the trend line that hooks the late July and late August low on the Kansas City July or the late July and mid-August low on the July Chicago contract and be prepared to hedge substantial parts of your wheat when we see a close below that relatively steep uptrend line.
