Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
October 22, 2002
The October 18 Cattle on Feed report brought some good news for the livestock and meat complex. Placements during September were well below pre-report estimates, and the heavier placements for cattle 800 lbs. and up were down some 16 percent. That takes some of the supply-side pressure off the early 2003 market and futures on Monday were up strong in reaction to the changes in supply projections. With corn stable and well off the price highs, feeder cattle are moving up with the live cattle market and we can anticipate some improvement in the cash market, which was up $1 to $66 late last week. The lighter Choice boxed beef was up in late week trade and back above $111 and more price increases are expected for this week. Monday's early trade was nearly $112 for the light Choice boxes, up from Friday. A bullish Cattle on Feed report can change the psychology in both the futures and the cash markets, and we see some of that happening this week.
I am showing the February live cattle contract this week. The heavy supply-side pressure from the pork sector during the fourth quarter was a factor in the cattle market turning lower last week, but the outlook is different now. December live cattle will rally and the early 2003 contracts will move up even more. Look for the February to take out last week's high and rally another dollar or so before running into selling pressure. The low prices from the pork complex continue to be my big source of worry. Feeder cattle prices late this year and into 2003 will move up with the live cattle. In live cattle and feeder cattle, a useful approach is to sketch the uptrend lines across last Friday's low and the early October lows. Look to place short hedges on a scale up basis if you can lock in nice profits or be prepared to place those short hedges on a close below the trend line that I show on the chart.
The cattle report gives some relief to the late year supplies and that should help the hogs as well. I would sell a rally to the recent highs just above $43 on the December lean hog contract and above $48 on the February. In a seasonal context, February prices are usually stronger than December prices, but that looks like a large premium in the February and I would not expect to see the supply side pressure on prices disappear by February. Be aggressive in selling this market on rallies.
Harvest progress and exports are now the movers of the grain and oilseed markets. Coming into the week, corn prices were about flat, wheat was down a bit, and soybeans were showing modest gains in the presence of weather concerns in South America where planting is being delayed by dry weather in some regions and too much rain in others. It is wheat that is in the best shape for better prices in terms of fundamental supply and demand considerations, but the market is struggling in efforts to take out the recent highs. Much of the pressure for higher prices is in the old-crop wheat and I would continue to look at selling the 2002 crop across the highs and get to 60 percent to 70 percent priced in new-crop. Exports are running significantly behind last year's pace, suggesting that our wheat is already above wheat in some other producing countries and in the world market. Last week's announcement of the large sale to Egypt was the big reason for this recent price bounce, but we will not see that type of surge often unless the weather for the winter wheat crop here in the state becomes a big problem. I would reward the market by selling and forward pricing on the price bounces to the highs.
The corn crop will be in the 8.8 billion-bushel range and that suggests some reduction in ending stocks since total disappearance is going to be bigger than the crop. Models of ending stocks and cash process are suggesting a cash price average for the crop year we are now in of about $2.60, but examination of the models shows that each year across recent years ends up below the predicted levels. That is testimony to the tendency for global prices to seek the costs in a low-cost producing area, and prices are coming down in recent years relative to the historical patterns. December 2002 corn has been trading around $2.50, more than 40 cents off its highs. I would not be surprised to see a rally to the $2.70 to $2.75 range as a correction of this last price dip, but it will take some change in the November and later reports to move this market still higher. Thus, I would replace short hedges on a rally to the $2.70 area and those holding long hedges might look at taking profits on the same rally. We are very likely to see this market back down toward current levels as we move through the harvest and after we see a corrective price bounce.
The November soybean chart looks like this market is already in the process of making the correction of the last price dip. Trading around $5.50, this market is, like corn, well off its early harvest highs. Weather that delays harvest in the U.S. is helping support this market and the uncertain planting conditions in South America are also a factor in volatility. But behind the scene, we will have a relatively large crop here, and the South American crop could be a record if early planted acreages expectations pan out. Sell rallies in the market and take profits on long hedges in soybeans and soybean meal. The late September high near $5.65 is one price objective that should be worth watching for as a pricing opportunity. Look at selling or pricing your old crop beans at the same time.
