Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
December 3, 2002
The grain and oilseed markets are showing price weakness in early-week trade, and it is coming from concerns about the demand side. The basis at the export points has weakened. We have China selling corn to Asia and taking part of our possible export market there. South Korea, for example, which has historically been a good customer of the U.S., is buying corn from China. Europe, especially France, is selling wheat to Africa, and there is talk again that U.S. wheat is just not priced competitively in the world market, that our prices, even though we are far off the September highs, are simply too high for world market consideration. All of that brought a very weak close on Monday and prices down as much as 15 cents on the nearby Chicago wheat contracts and down 8 cents on the July contract on Tuesday. Along with the wheat has come some weakness in soybeans. We have a contract high on the January soybean contract at $5.935 back in September. The high on Monday had gotten up within 6 cents of that at $5.875. The close was then $5.785 on Monday, and then this market is down sharply again in Tuesday's trade with the January closing near $5.64, down 14 cents on the day.
I had been suggesting in soybeans, which had been showing more resiliency, that on any rally up toward those September highs we needed to sell this market, sell old crop product, think about pricing product in storage, and be looking out toward the 2003 pricing possibilities as well. In corn and in wheat, I had none of those sentiments because I thought we would see better prices than we had been seeing across the past few weeks, and I continue to think so. But the new-crop Chicago wheat is being pressed down on its September lows, and in Kansas City we have lower prices in November than back in the September lows. Weakness this week is moving prices on that Kansas City July back under $3.50 and back down toward those November lows, which are in the $3.40s. We need to treat these sets of lows as a double bottom and look for a price bounce to give us some renewed pricing opportunities. Given what I am seeing right now, I would hold short hedges that you have in wheat until we see whether these recent lows can hold. The growing concern about the demand side of the price equation is troubling me. We will watch the wheat across the next few weeks and look for better opportunities to do some selling and pricing.
The pattern on the corn looks much like the pattern in wheat with the March contract, for example, based on what we are seeing this week, being pressed down on some November lows just under the $2.40 level. I am certainly not inclined to jump into selling old-crop corn and pricing new-crop corn here. Let's back off from this market and give it a chance to reflect a bit more on what the yields are really going to be and what the crop size is actually going to be and then factor in all the uncertainty that we have before next year's crop is in the bins. We will get some rallies out of that and get some better pricing opportunities. This may well be a very nice opportunity for the user of corn to place long hedges somewhere around the $2.40 or lower level on that March contract. I am relatively confident that we will see a decent rally to the upside from here and give you a chance to take profits on those long hedges and manage your exposure to this market.
In the beef complex, we have the Choice boxed types around $120 in Tuesday's activity, and this comes in the wake of as much as a $10 advance across a week's time period on some of the boxed items, especially the heavier Choice items, prior to the Thanksgiving holidays. If you look back to November 25 on the lighter Choice types, they pushed up as high as $121.66 on November 27, and Monday closed at $120.76. So, it looks as if we are into a sideways trading zone and this valuation of around $120 on these lighter Choice boxes is having influence on what packers are paying for cattle. We came out of last week in the cash market with recorded prices as high as $73.50, and in Texas some of the weighted average prices across last week's activity were above $73. That is starting to get in line with the December futures contract that had traded as high as $75.10 last week and settled in Tuesday's session at about $74.77. We still have strong uptrends in this market with the February contract trading up at $79. I would continue to monitor this market and let it run to the upside and be prepared to place short hedges if you get a close below some of the apparent uptrend lines on the chart. This market probably, before it pushes February to the $80 level, is going to trade sideways, give us a close below the trend line, and give a sell signal and an opportunity to place or replace short hedges.
Use the same approach in feeder cattle with uptrend lines clearly available on that March contract, which is closing around $83.45 in Tuesday's session. This market has rallied from the $76 level in early October to the $83 level and better. We will see a sell signal on this market shortly, and be prepared to take action when you see a close below that trend line. Place short hedges on cattle you will have to sell in the spring and take profits on long hedges that you might have placed on these spring feeder cattle contracts back in October or November. At a minimum, we will see a significant correction to the downside before any rally resumes.
I see some signs of faltering on the lean hog contracts. February closed up a bit at $54.70 in Tuesday's session. Be prepared to look for a sell signal with a trend line or some indication of topping, and the expiring December contract looks like it might be putting in a double top. We continue to get the benefit from the fact that the reports say that producers continue to liquidate their herd and we are probably going to see a quarterly report showing the breeding herd down 3 percent-4 percent compared to year-earlier levels. But I think that is already priced into the market, and maybe more than priced into the market, and will be looking for an opportunity to be short in the lean hog futures. This is especially the case as the cattle complex approaches the highest prices it can support in the short run and gives sell signals for a correction to the downside.
