Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
October 1, 2002
The grains and oilseeds are off the price highs and continuing to show weakness. The lower prices on Monday appeared to be coming from long liquidation, and that liquidation is in turn being fueled by continuing anecdotal evidence that corn yields are better than had been expected. Stocks are tighter than last year, but the anticipation of possible increases in corn production in the October report due out next week makes the bullish arguments difficult. Trend lines have been taken out in both corn and soybeans as prices come down, and the next task will be to think about where one might take profits on short hedges and/or place or replace long hedges.
In corn, Monday's close on the December was weak at $2.51, but I do not expect to see sharply lower prices from these levels. Tuesday's session was better with signs of some buying coming in. I would look to take profits on short hedges and place or replace long hedges on any signs of a turn in the $2.40 to $2.50 range on the December. We are likely to see at least a correction of this last price break that has approached 50 cents as it came down from the high at $2.96 a few weeks back.
Monday's close in the November soybeans was over 14 cents lower, and I see more signs of weakness here than in corn. Yields are uncertain given the August rains, and we are ready to see planting of a record acreage in South America. There were clear signs of long liquidation in Monday's session, and I would not rule out a retest of the $5 level on the November in this market. The trend has turned lower; unless we get a surprise in next week's U. S. Department of Agriculture reports, I expect to see this market stay under some pressure. Don't be as quick here to lift short hedges and replace long hedges as in corn. World prices are such that we are hearing talk of soybean meal coming in from South America. We will have more than adequate world supplies and stocks if the South American crop is normal or near normal.
In Kansas City, old crop wheat futures are failing in any attempt to retest the highs. That suggests we have seen the highs in the new crop July. Sell this market on a rally back toward the $4.08 high on the July and if that does not happen, carry protection by sketching a trend line across the late July low and last week's low. That will work for those who have not already placed short hedges in hard red winter wheat. Many producers have short hedges placed on past rallies or closes below earlier and steeper trend lines. In Chicago, we have also seen the old crop contracts quit without any serious run up toward the old highs, and the July is well off its $3.80 high. I would sell this market aggressively to get to 60 percent to 65 percent priced on a rally back up toward the $3.65 level on the July. If that does not happen, keep a trend line under the market connecting the late July and last week's low near $3.40, and be prepared to get price protection on a close below that line.
In the beef sector, boxed values for the light Choice types ran out of steam last week around $116. A few cattle traded at $66 in Texas Monday afternoon, but with the boxed values down Monday afternoon and then up again Tuesday morning, this market is nervous. It will be hard to get to and hold a $66 market, I think, and the futures markets are showing the same thing with the December now closing below obvious uptrend lines on the chart. We have seen that contract at $72.70 during September, but that level will be hard to reach again. A correction back up the $71.50 to $72 range should be seen as a chance to place added short hedge protection in the live cattle futures.
The uptrend line is still intact on the October feeder cattle, and the weaker corn prices have made feeder cattle stronger than the live cattle futures. Watch that trend line and be ready to sell a rally toward the recent highs around $81.75 on the October if we get that rally before any close below the trend line. The tighter numbers will start to help the light cattle markets in all classes of cattle so long as the corn market stays at or near current levels. My concern here and in live cattle futures and my willingness to sell rallies aggressively is the negatives that will spill from the pork complex into the beef sector as hogs go below $20 again this fall on a live weight basis.
I show December lean hogs (chart will be available Wednesday, Oct. 2) this week to establish some perspective in the broadly defined meat markets. Last week's report showed all numbers within the range of expectations, but the all-hogs, breeding, and marketing categories were generally on the bullish side of the average pre-report expectations. Prices jumped on Monday, the first trading day after the report, but there is no sign on Tuesday of any significant follow through to the upside. Pork production will be near record levels in late 2002, and even after some recent improvement in cash prices, the weighted average is only around $40-$41 on a lean hog basis. Some live-based prices are well below the $30 price that comes with the $40-$41 on a lean hog basis. Low hog prices will constrain what the cattle markets can do to the upside, and that is a reason I am encouraging selling cattle and hogs on rallies. And I would continue to sell the late 2002 and early 2003 hog futures aggressively on a rally to the $41 area on the December with strong resistance across the July highs and Monday's high round that $41 level.
