Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
November 12, 2002
Most of the attention in the November 12 U.S. Department of Agriculture reports is being focused on the reduction in ending stocks of wheat in the U.S. and the USDA's significant increase in estimates of China's wheat stocks. In the U.S. the estimate of ending stocks for this crop year dropped to 358 million bushels, down from 371 million in last month's report and substantially below the 777 million bushels from last year. This reduction in ending stocks came primarily from cuts in production and in imports. The 358 million bushels is by a significant margin the lowest U.S. carry-out figure since 1973-74. China's carry-out was increased by 42.5 million tons to 61.97 million tons. Wheat prices, especially old-crop futures months, were up during the session on Tuesday but closed lower, down 4 to 7 cents. Corn traded about even on the day and soybeans were down. Both corn and soybeans saw modest increases in crop estimates from the October numbers and both showed an increase in ending stocks, with corn ending stocks going up from 764 million to 848 million bushels and soybeans increasing from 175 million to 185 million bushels.
After this report, I look for the nearby December 2002 corn futures to test the support at the July low at $2.30. I would be inclined to look at buying back short hedges around the $2.30 level and, as a corn user, would be thinking about placing or replacing long hedges out through the various futures contract months in 2003. Support levels on the March corn are at $2.35-$2.36, again with support across a July low. Dips to those levels will mean that the December 2003 could be bought from a corn user's viewpoint around the $2.40 level or possible a bit lower as we move through some continued harvest-period pressure. In general, I expect to see a large acreage planted to corn next year and, assuming normal weather, another big crop, possibly much bigger than the 9 billion-bushel crop that we are harvesting this year. But there is a lot of time and uncertainty before that transpires, and I would definitely expect to see this market rally off the $2.30 low in the nearby December and make at least a partial correction back up toward the highs that we have seen. That argues in support of buying back short hedges and/or placing or replacing long hedges in anticipation of that corrective rally to the upside.
In soybeans, it looks as if the old-crop November was turned back last week at about $5.85, some 6 cents a bushel below its early-September contract high at $5.91. We see similar patterns on the early 2003 contracts with the markets trading down from last week's highs. A close below $5.50 on the March 2003, for example, would generate a sell signal below a short-term uptrend line and might well set up the possibility of at least a retest of the early-October low around $5.30. I basically see these markets as having rallied back up toward the early-September highs and failed at varying distances below those highs. I would want to be short in these soybeans markets, expecting a move to lower levels as we monitor the completing crop harvest in this country and continue to watch weather and progress in South America.
In the Chicago wheat markets, it has been the old-crop contracts that have continued to try to hold price levels, and that has helped at least slow the slide in prices for the new-crop July futures. Old-contracts such as the March are seeing a close below a rather uptrend line that can be drawn by hooking the June lows and the dip that occurred in mid-October. I expect that is the first step toward somewhat lower prices in this market, at least back down toward the October lows around $3.65 on this March wheat chart. For the moment, I would certainly hold any short hedges I had in place in this market and let's monitor to see if we can find support across the October lows. I don't expect to see a retest of the highs in this market, especially in light of the increase in stocks that we had in Tuesday's report for China. Egypt bought wheat in early-week transactions, and that is bullish, positive, and encouraging, but it remains to be seen whether or not this market has already reached prices that factor in any reasonable expectation of export activity. Price action in the Kansas City wheat looks similar. The new-crop July that had reached $4.08 back in early September is now trading in the $3.60s, and I expect to see that market drift a bit lower from this point. If the July Kansas City can find support somewhere around $3.50 and start a rally, we will have another opportunity to make sure that new-crop wheat is priced at a reasonable percentage of expected production.
In the meats, the lighter Choice beef boxes were up 99 cents on Monday and up to $111.78 as this market continues to try to find reason to rally from the $110 level. We saw new contract highs in the cattle complex and one or two of the hog futures months in Monday's session, and these fairly strong live cattle prices with only limited gains in boxed beef have the cattle packers' margins looking relatively tight. New highs are being generated in the February and April live cattle contracts in Tuesday's session as buy-stops above the old highs have helped boost daily prices. But feeder cattle gains are harder to come by and that complex is not showing much inclination to move to new highs. I expect to see these gains in the live cattle complex stop when the nearby and active December contract approaches its life-of-contract high at $73.80. I would be inclined to sell that contract on a rally to that high and would move out into the February and April and sell those contracts at the same time.
In feeder cattle, the March did make a new contract high at $81.75 on Monday but then closed back below the close on Friday. I am showing that chart this week because it offers an excellent opportunity to sketch a trend line across the early-October low and the early-November low. All producers who have yearling cattle to sell in the spring months need to get them hedged when we see a close below that trend line, and that will occur across the next few weeks. All those who need to buy cattle in the spring months and have placed long hedges on this March contract down in the $76-$78 range should look at taking profits on those long hedges when we see that close below the uptrend line.
In the pork complex, it is becoming apparent that analysts are losing their fear of a burdensome surge in daily slaughter levels. This market continues to try to trade up in all the futures contracts, with the February out into early 2003 making new contract highs on Monday. This means this market had completely erased the nearly $15 decline that occurred in the first half of 2002. All of these pork contracts are trading down hard in Tuesday's session as we start to see a correction to the downside from the almost astounding rally that we have seen in the last few weeks. Cash hogs are lower in early-week trade, and the weighted average lean hog price is below $40, which puts the live-based prices down around $30. On that February chart you can sketch a trend line across the September and October lows, and I have a feeling this current downside correction will give us a new low across the next several days to which we can hook a steeper trend line and the same trading strategy is then appropriate here as for feeder cattle. Watch for the opportunity to sketch in that last relatively steep trend line and be prepared to forward price these hogs on a close below that line.
