Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
October 15, 2002
The grain and oilseed markets are getting a pleasant shock from the wheat sector in Tuesday's session. News that Egypt has bought 420,000 metric tons of primarily soft red winter wheat pushed the active December contract in Chicago up the daily 30-cent limit. New-crop July is 11-12 cents higher. This surprising announcement comes after weeks of Egypt denying they were going to buy U.S. wheat and after expectations of a much smaller volume of purchase than we see in the announcement on Tuesday. This is a purchase that amounts to something close to 16 million bushels of wheat in the middle of a market that was showing higher prices because of relatively tight stocks on winter wheat in particular. The January soybeans were up around 14 cents and the December corn is up about 8 cents with most of this coming from the spillover support from wheat.
I see this as an unexpected and pleasant pricing opportunity. The surge in wheat is not likely to last more than two-three trading days before we will see some correction to the downside. December Chicago wheat could get pushed up into the early October high around $4.10-$4.12 and may even challenge some of the earlier highs that reached above the $4.30 level around the first of September. That type of surge in the old-crop wheat could carry the new-crop July Chicago contract back in the $3.55-$3.60 area, and I would certainly be interested in making sure I was up to 60 percent-70 percent forward priced if we get that type of rally. Keep in mind that this market surged to a new high around the first of September and has backed off substantially since that time. I look for this to be a correction of the 40 cents-45 cents move down we have seen in the new-crop July Chicago wheat and not necessarily a challenge of the old contract high, which is up around $3.80. Certainly, if we get a rally back up toward that high, I would be an aggressive seller of this new-crop wheat contract and treat that as an opportunity to sell old-crop product that you are still holding in storage, especially if is has not been forward priced at levels to ensure profit to the storage program.
As the corn and soybeans move up in sympathy with wheat, we might see the January soybeans move up toward the late September high around $5.70. That contract is trading around $5.52 on Tuesday with help spilling over from the wheat pits. A rally to those levels certainly should be seen as an opportunity to think about selling old-crop soybeans that you have just harvested and put into storage, and we will need to look out to next year and see if there are attractive forward pricing opportunities on the 2003 crop. In corn, with that market around $2.54 in Tuesday's session on the December 2002 contract, we could see a corrective rally back up toward the $2.70 level. If we get that, I think it is an opportunity to look at selling old-crop corn, especially if you don't have it forward priced at a profit to your storage program. We will watch and see if the rally creates more attractive pricing opportunities than we have seen recently out in the 2003 crop as well. Certainly, any long hedgers in corn who have reestablished on hedge positions on the recent dip or are holding long hedge positions ought to monitor that December 2002 contract and whatever futures month you might have long positions in. If that market rallies up toward the $2.70-$2.75 level and starts to falter, we will have to look at the possibility of taking profits on those long hedges.
In the livestock and meats, it is the hog complex that is bringing us slightly better prices across the past few days and it is also the hogs that continue to be my primary concern for the fourth quarter of this year. The Hogs and Pigs report and the information that we are bringing into this complex in terms of expected production for the fourth quarter is taking a bit of the pressure off price. The December hog contract I show has traded up through the past highs around $41 going back into the summer months and around $41.50 in early October, and we are trading at $42.50 and better in Tuesday's session. I would not be very concerned about short hedges that you put in place on rallies to the recent highs. I suspect there is only limited upside from here and would probably just be inclined to answer the margin call and watch this market. If you have no protection in place, then you should hook the trend line across the September low below $36 and the early October lows around $38.50 and monitor that trend line for a close below it. On such a sell signal, place or replace short hedges in this pork complex. We are not going to be straining the system with losses as heavy as we had once feared, but keep in mind that at $40 lean hog futures contract is pricing the average hog on a live weight basis around $30, and that is below cost for all except the most efficient producers.
In beef, the good news is that the boxed values have turned higher again. The lighter Choice boxes that were at $110.34 on October 8 were at $109.52 on Monday, and are showing $110.59, up $1.07, early in Tuesday's session. Apparently hurt by the dock strike on the west coast, this market may be ready to try to improve boxed values again. We have been to the $115 level within the past few weeks. In the cash cattle market, we are still selling some $64 cattle in limited sales in early week activity, but we are also seeing $65.50 prices. We may move a bit above $65, which is basically where we closed last week with limited sales last week at the $66 level. If boxed beef can continue to hold and improve a bit this week, we might add $1 or so in cash. I would key off the December 2002 live contract and any move up toward the September highs at $72.67 I think ought to be seen as a pricing opportunity. It is true that we have a contract high on the December up toward $73.80, but I am too concerned about what still might happen in the pork complex to count on a retest of that contract high.
In the feeder cattle, the January chart has already made new highs, but the November is trading up toward its high around $82. Once again, given what we have coming in terms of total meat in the fourth quarter and the very real possibility that we will still see substantial price weakness in the pork complex, I don't think boxed beef and cash cattle prices are going to be able to rally much from current levels. With the corn situation relatively stable, the feeder cattle ought to have a hard time going above the $82 level. I would be forward pricing feeder cattle to be sold in late October and November and also out into December and January using the January futures when the November bumps into selling resistance at the contract high around $82.
