Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
November 26, 2002
Prices for fed cattle in the direct trading regions have jumped across the past 10 days. Last Monday, November 18, the lighter Choice boxed beef values were at $115.66. They stand at $121.42 on Monday, November 25, and were as high as $122.02 in the middle of last week. Packer's margins appear to be in decent shape and they did pay more for fed cattle last week, with $71-$71.50 the going market during most of the week. Prices on Friday jumped to $72 and a number of cattle were sold. It is not clear whether that level will be maintained this week, but the boxed beef values at the levels being recorded are certainly encouraging. The December futures are trading around $74 and are therefore showing a substantial premium to cash. We will have to see which of these sectors moves as we near December 1 and the need for basis convergence. I suspect we will see a $72 market or so being maintained in cash and perhaps the December futures will decline a bit seeking some basis convergence.
The rather bullish scenario we have seen develop in the cattle complex has been allowed because of the massive rally in the hog complex as the fundamentals in hogs improved from late spring and midsummer to the current time period. You don't expect to see cattle in the $70s and live hogs being priced below $20. This week, we have cash cattle in the low $70s and liveweight cash hogs in the high $20s, and that is tough enough to be sustained. The improving outlook in the hog complex is going to be very important to prices in cattle.
I see the same strategy in both the live cattle and the feeder cattle markets. On the February live cattle, a trend line hooking the mid-October low to the low around $76.50 in mid-November, gives us a steep but workable uptrend line. I would expect to see this market correct to the downside significantly on a close below that trend line, and while we may eventually see these prices or even higher prices as the cycle works its influence going through the year, we will see a correction down from current levels and an opportunity for selective hedgers to take advantage. In the March feeder cattle contract, which is now trading around $82, we have essentially the same possibility except we hook the trend line to the lows near $76 in early October and then the mid-November low, which is around $80.60. When the live cattle correct to the downside, I think we will see the same thing happen in feeder cattle. So, producers should place short hedges on a close below the trend line in the March feeder cattle. Users with long hedges in place to cover light cattle needs in the spring months should take profits on long hedges that you might have set as low as $76-$77 back in that early-October time period. Keep in mind that the longer term supply-side cycle, with the prospects for herd-building, is bullish to the cattle complex and the short-term fundamentals at the feedlot level have turned very bullish across the past few months. We now have about 9 percent fewer cattle on feed than we had last year at the same time and, taken alone, that could translate into 15 percent-20 percent higher prices for fed cattle using a demand elasticity at the feedlot level of about -0.5.
Keep in mind that the February lean hog contract trading in the $53-$54 range is $15-$16 above the cash market as we approach the Thanksgiving break. In terms of both the supply-side cycle and the seasonal patterns, we would expect to see somewhat higher prices in February but I am not sure that this type of premium to the cash market is deserved. By all means, pay attention to the uptrend lines on the February and more distant live hog contracts, and be prepared to place short hedges on a close below those trend lines. We have an opportunity to hook the mid-October low, which is around $46.50, to last Fridayıs low around $52, and I think that is a very useful trend line on the February contract. I suspect we will see some correction to the downside in futures as this market tries to do a better job of maintaining a relationship in the cash-futures basis for the hog markets.
In corn, I see the markets in a price correction to the upside. The March contract, which had reached above $3 back in early September, dipped below $2.40 in early November and has managed only a modest rally off that low. Look for resistance to come out in the chart gap below $2.60 on the March and then the early October highs provide layers of resistance at $2.65 and then at about $2.67. I would think about pricing old-crop corn you are holding in storage into the next year for tax reasons on rallies up to that $2.60 and better level in the March, and we will need to take a look at the new-crop December 2003 at the same to see what prices are being offered there. Ending stock levels in this market are in the 800-plus million bushel level, and that is small enough that any unexpected development in weather, some increase in nitrogen fertilizer costs associated with an energy scenario, or anything like that could bring a significant price rally in this market. A 38 percent correction on this March contract would carry us back up to $2.63, so we have other reasons to think about taking action around that general price level.
The March soybean futures look a little strong than does corn, and we have seen a rather complete correction already of its price break from around $5.92 back down toward the $5.30 level during September and October. This past week, this market traded back up to the $5.73-$5.74 level and ran into some selling apparently across the early November highs around $5.73. Keep in mind that behind the scenes, we are seeing a very large acreage and the prospects of a record crop in South America developing. On the March contract, I would hook the low in early October to the mid-November low and sketch a trend line on this chart and be prepared to sell it aggressively on a move back up toward the high, which is in the low $5.90s. I don't expect to see this contract reach that level and would be inclined to be aggressive on a scale-up basis or hit this market hard with selling action when we see a close below the uptrend line on the chart.
The wheat markets, I think, have completed their price plunge from the early September highs. On the July Chicago, that plunge reached from $3.80 down to $3.10, and a 50 percent correction puts us back up around $3.45. A comparable 50 percent correction on the July Kansas City would put us somewhere around $3.75, and we also have resistance across early November highs at that level. I would try to be patient in these markets and look at lifting short hedges if you have short hedges in place on price dips. If you have not, watch for this corrective rally and think about getting some old-crop product either sold or forward priced and stepping up to the 60 percent-70 percent levels on the new-crop wheat. I have been pushing getting this wheat priced for several months and actually started at prices well off the highs, but I think the situation is somewhat clearer now. We do have relatively tight stocks at the world level in wheat, but the strong prices we have been seeing for the July contracts are going to draw acreage back into production. We can expect to see a year coming up that is going to increase stocks rather than continuing the current decline.
