Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
November 5, 2002
The trend in boxed beef prices has turned negative again with the light Choice types dropping from $113.01 on October 28 to $110.83 on the morning of November 5. Last week saw cash prices as high as $68.75 on a live animal basis and up to $108 on a carcass basis. Weighted average prices were in the $67-$67.75 area for the week, and that was up almost $1 from prior week activity. Cash hog prices have been slightly lower in early week trade with a weighted average carcass-based price around $37. That level, of course, is considerably better than many of us feared we would see as we moved into November where we usually see the highest daily slaughter level of the year. The hog numbers are not quite as bearish on the supply side as had been originally anticipated, and that is bringing some relief to swine and cattle. The dip in boxed beef values have hurt packers' margins and earlier hopes that we might see $69 cattle this week and encourage some continued upward movement in futures have started to fade by the middle of the day in Tuesday's session. As the live cattle futures continue to climb higher, I would either be placing short hedges on a scale-up basis if prices are profitable or you can continue to watch that trend line that I have shown on the chart for the last two weeks that hooks the lows during October and be prepared to place short hedges on a close below that line.
Feeder cattle futures have moved up with the live cattle contracts and the seasonal strategy of buying the spring feeder cattle futures during October and November has worked well again this year. The March contract made several lows back in October at $76, and we now see it approaching $80. Long hedges on spring cattle needs have moved into profitable territory and it doesn't appear that we are going to see any significant deterioration in these cattle prices anytime soon. Hold those long hedge positions, and you can always hook a trend line across the lows under that March feeder cattle contract or other feeder cattle contract that you are watching and be prepared to get some protection if we see a close below that trend line. With the lean hog futures on the nearby contract trading up the limit periodically in Tuesday's session, we are seeing some help come out of the pork complex and support both the live cattle contracts and the feeder cattle contract.
Fund buying, some new buying by individual speculative traders, and short covering are said to be behind the limit-up lean hog prices in Tuesday's session. Monday, the December contract was pounded down in spite of the fact that cash prices started out the week about where they were at the end of last week. The funds in particular have stepped back into this market on Tuesday. Open interest was up during Monday's session, which suggests some new buying and new activity and not just short covering is behind the spiraling prices. The active December lean hog futures have taken out the recent highs at $43.45 and $43.84 and seem to be taking aim on a high going back to April 19 that reaches to just above the $46 level. I didn't expect this type of positive move in this market and think we are overdoing it to the upside given the substantial and growing premium in the nearby December to the cash market. If that December can run up toward the $45.50-$46 level, I would suggest being an aggressive seller. We have trend lines under this market to protect in the event it turns abruptly lower and we don't get sell orders filled up under the highs. Producers who have already placed short hedges around the $43 level probably should just answer the margin calls and hold these positions until we see if this market is going to turn back up against the $46 high.
In the grain and oilseeds, corn is marking time near the late October low in the low $2.40s, and that is the first line of support if this market works lower. We also had lows back in early August at around $2.40. I expect the market to find some support at these levels, which are a full 50 cents off the contract highs that we reached in September. I wouldn't be doing anything in this market at this point in time from the short side from a producer's viewpoint. We need to be lifting short hedges if you held them through the harvest-related weakness, and it is time to start watching for an opportunity to replace long hedges for those who need to cover corn needs across the next year or so. We are probably going to trade sideways in this market with a bit of influence coming over from wheat. Watch the continuing reports and watch the export activity, but I don't see any reason for much movement. From a producer's viewpoint, I would wait until we see a rally to do some selling or pricing new-crop corn. From a user's viewpoint, I think we are approaching support levels and we can think about replacing or replacing long hedges on contracts out through 2003.
Soybean prices look a little better than the patterns we see in corn. Since the October lows on the November contract in the low $5.20s, we moved up to the $5.75 area in recent trading days, and we have seen a comparable move up on the January where we are also reaching that $5.75 level. Keying off the now active January contract, I would be an aggressive seller in this market if this rally can carry up toward the early September high at $5.935. This would be an excellent opportunity, I think, to sell old-crop product, and if and when we get that type of rally, we can take a look at starting some pricing on the 2003 crop as well. Keep in mind that you can sketch a trend line on that January that hooks the early October and late October lows, and I show that chart this week. If we don't approach the high above $5.90 and see a close below that uptrend line first, then selling old-crop and starting to think about doing some hedging of anything you are holding in storage or even in the 2003 new-crop would be in order. We will watch this opportunity closely across the next few weeks.
In wheat, the July Chicago contract reached a high of $3.80 in early September and is now trading at or below the $3.30 level. In Kansas City, the early September high reached all the way up to $4.08 on the July contract, and we are currently trading around $3.90 with that market having bounced off its lows across the past 10 trading days. That bounce came on some anticipations of bad weather, but we are hearing this week that the winter wheat crop is off to the best start we have seen in about four years as weather conditions in the southwestern producing region improve. My first pricing objective on the July Kansas City to add to hedge protection would be the October highs at $3.90, where I think we are going to run into major resistance. We are likely to see this market turn lower before we get to that level, so we will have to be alert on the Kansas City contract and watch the weather. In Chicago, we will have to be careful when that July contract approaches October highs at $3.45, and there is more resistance at $3.55 across the late September highs. Be prepared to watch a correction of about 50 percent-60 percent in this market back up to the $3.50 level or better and resume selling old-crop wheat and hedging the soft red winter wheat crop for 2003.
