Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
December 10, 2002
The USDA's December 10 supply and demand reports brought no major changes. Ending stocks in corn, wheat, and soybeans were reduced by small amounts, and that did surprise some market watchers. A rather slow pace of export activity had prompted some analysts to speculate on reductions in export estimates that might translate into small increases in ending stocks as we approached the December 10 release date. The decreases in export activity didn't materialize, but the slight decreases in ending stocks were not enough to create any major market moves. Ending stocks estimates for wheat were reduced to 348 million bushels, and that is the lowest level since 1973-74. Still, it appears that wheat prices in the U.S. are too high for world market trade. We see modest losses in the wheat futures in Tuesday's session. There was not much change in either corn or soybeans, where a great deal of attention is now turning toward what is going on in South America, especially in the soybean complex.
I would monitor the March wheat charts in both Chicago and Kansas City and hold off on selling wheat and hold short hedges until we see a price trend reversal. In both of these markets, action across the past week has pushed prices down through the support across earlier lows. On the March Kansas City, I would hook a trend line across the early October and the December 1 high, monitor this market, and hold short hedges until we see a buy signal with a close above that trend line. On the March in Chicago, you can hook essentially the same dates, the early November highs and the December 1 high. I don't want to assume a bottom in this market until we see one actually develop on the charts, so use the trend lines. A close above that trend line is a signal to lift short hedges. Users of wheat will, I think, be placing long hedges at the same time.
It is informative on the January soybean chart that last Monday's rally quit several cents below the early September contract high. That suggests an inclination to sell this market aggressively on rallies, and I think that is exactly what happened as hedgers, speculators, and trading funds sold the rally. This past week, we have traded down through a relatively steep but, I think, relevant uptrend line on the soybean chart. I would expect to see this market dip to somewhat lower price levels since it didn't get any significant help in the December 10 USDA report. Keep in mind that we will be watching the possibility of a record soybean crop in South America, so it would not surprise me to see this January contract work lower, perhaps down toward the support across October lows just under $5.30. I would hold short hedges until we see buying emerge along a support plane or we see a chart pattern develop that allows us to sketch a downtrend line and watch for a buy signal.
Of the grains and oilseeds, I think the corn market is more likely to be too low relative to the behind-the-scenes and not a directly observable supply-demand scenario. We have seen the March futures trade down to $2.35 within the past week, and that is about $.66-.67 below the $3.015 high back in early September. I continue to expect to see buying develop at these relatively low levels and would be looking to buy back short hedges and/or place long hedges if you are a corn user. It never makes much sense to pick bottoms, so if you want to wait until this market generates a buy signal, sketch a trend line across the mid-October and mid-November highs and let's monitor and see how far the March can go down before we see a close above that trend line and a buy signal. We need significant rallies in this market before I am going to be ready to think about selling old-crop product or pricing more of the 2003 crop.
In the livestock and meats, I see Friday and Monday's action as basically relieving overbought conditions. This cattle market has gone essentially straight up since early October when that February live cattle futures advanced from $71 to last week's high at $79.65. I think we saw on Friday and Monday some relieving of overbought status and some taking of profits and some pressure, especially on Friday, and then on Monday with the hogs from funds as they liquidated long positions when the uptrends were violated. But these are largely bullish markets from where we are, especially in cattle, so I am not surprised to see in Tuesday's session recovery in the live cattle and feeder cattle futures. Boxed beef values Tuesday morning for the lighter Choice types were at $123.03, up $2.01 per cwt. since Monday. We have seen some modest selling of cattle in Kansas this week at $73.50, and I suspect we will see a $74.00 market and possibly better if this strength in boxed beef can hold its own into Wednesday and Thursday of this week. Thus, I see on the live cattle and feeder cattle charts just a small correction of this last sustained two-month rally. I see the action on Monday in both pits as giving us a low across which we can sketch a trend line that we can hook back to that early October low on either the March feeder cattle that I show again this week or the February live cattle contract. These cattle markets are going to try the highs again for cyclical reasons, and because of improving short-term fundamentals as we move to fewer and fewer cattle in the feedyards, we are destined for significantly higher prices. How high they will go depends on how much recovery we see in demand for beef, where I think we have basically been static during much of 2002 compared to 2001 levels. If we look out into 2003 and pick up the rate of increase in demand that we were seeing prior to the 9-11 disasters and the fallout from both that phenomenon and the BSE crisis in Japan during the fourth quarter of 2001, we could see strongly advancing prices in the cattle markets. In the cattle futures, then, hold off on short hedges unless you placed those on a close below that uptrend line on the chart. If you did, answer a margin call if need be, but be prepared to lift those short hedges if we see two consecutive closes above $65.35 on the February chart. Follow the same approach on March feeder cattle.
In hogs, we had a limit-down day that occurred as funds liquidated in this market on Monday, and the market gapped down from Friday's activity. Carcass-based hog prices that had averaged $42.97 on Monday in the major direct markets were down $2.00 per cwt. to a weighted average of $40.97 on Tuesday morning. I don't expect this lean hog market to be as bullish as I expect the cattle market will be. The February hog contract had rallied from around $41 in early October to $55 across last week's highs without any major correction to the downside. What we are seeing now is a correction, and it wouldn't surprise me if we saw this February lean hog contract dip back to the $50 level or below before we see buying develop again. Clearly, the fundamentals in hogs have improved materially since the dire expectations that many of us held back in the summer months. Let this February correct to the downside, and when it records a low and starts to trade up again, you can pull short hedges that you hold and sketch a trend line across the early October and the new low that will develop sometime in late December. Continue to monitor that for a sell signal to replace those short hedges.
