Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
December 17, 2002
The feedyards probably came into this week looking for $74 at best on direct fed cattle. I suspect some would have been willing to sell a bit lower at $73, which is where most of the cattle moved last week. But Monday's action in the futures pit may raise some of those initial asking prices in the cash market. The live cattle futures moved up strongly on Monday with buy-stops above some of the recent highs kicking the prices to still higher levels. We are not seeing any appreciable follow-through in that market in Tuesday's action, however, and that suggests we probably are not ready just yet to challenge the highs above $79 on a contract like the February or challenge that psychologically important $80 level. Feeder cattle only partly moved up with live cattle futures on Monday and continue to trade in a volatile pattern after having given sell signals with closes below uptrend lines. Indeed, that is what we see in all of the livestock markets, including the lean hogs. We have seen sell signals with closes below the uptrend lines on the charts, but these sell signals are coming in the middle of what is a rather strong bullish bias tied to the supply-side cycles in both cattle and hogs. Thus, we haven't seen a major dip to the downside after the sell signals, and I did not expect that to occur. I do expect to see these markets chop and try to find a level in which buying materializes again.
The strongest performance in the entire complex came in the live cattle pits where running some buy stops above recent highs pushed the February back above $79 at the close on Monday. Boxed beef is up nicely again in Tuesday morning's trade, up to $124.43 on the lighter Choice types, and that is up $1.43 compared to Monday morning's level. This market had been around $123 last Tuesday and traded up to $124 and then meandered around and is now back above $124 again. That would support cash prices at $74 and better if the packers feel they have to pay that to keep their lines running at the desired speeds. In live cattle and in feeder cattle, I had said I expected to see after a break below the recent steep uptrend lines a modest correction to the downside and then a rally again. We would then be able to draw a better trend line or at least a trend line that is not quite so steep. You can see that on the March feeder cattle that I show this week. This market is probably going to go back and try its highs again as we move on to early 2003, and I would be inclined to either sell a rally up against that high at $83.95 or just sketch a new trend line on the chart and wait and see what this market can do. Be prepared to place short hedges on spring feeder cattle and take profits on long hedges when we see a close below that somewhat flatter and probably somewhat more relevant trend line we see on the chart this week. Do the same thing on the February live cattle contract where you can hook the early October lows and the lows from last week, and we have a solid trend line under this market with the contract high at $79.65. I certainly wouldn't see anything wrong with selling a rally toward $80 in this market. Keep in mind that the markets are likely to be relatively stable this week waiting on the Cattle on Feed report. Pre-report estimates call for the on-feed count to be down a bit over 9 percent with placements during November about 3 percent below last year's levels.
In the hogs, I continue to watch that active February contract. This market had traded up to $55 and then traded down and gapped down sharply last week. That created some trend line sell signals, and the market has turned volatile trying to find the right price level since we saw those sell signals. Tuesday's high on the February is at $53.30, and that essentially closes the chart gap that was left early last week. Now, as on the cattle charts, we can hook the September and mid-October lows to the low that occurred last Tuesday when the February dipped down toward $50. You have a resistance plane across the contract high at a little above $55, and you have a very relevant trend line under this market. Either sell rallies to the highs or watch this market and place short hedges on closes below that trend line.
In the grain and oilseed markets, we see some modest gains in wheat on the nearby contracts. Corn is very little changed on the day, and soybeans are showing 4 cent-6 cent losses on the old-crop contracts with more modest losses on the late summer and fall contracts. The small gains in wheat reflect continuing very modest climbing off last week's four-month lows. We are also hearing some talk about small export deals, and there is a rumor of damage to Ukraine's winter wheat crop. There is nothing really of a fundamental nature going on in either soybeans or corn, with no export information or other new information to move these markets in either direction. March old-crop corn is trading around $2.40 and dipped recently toward the $2.35 level. We have been in a $2.35-$2.50 trading range since November, which is putting the new-crop December 2003 chart in a 10 cent-15 cent trading range, around $2.40. At these levels I would not be doing anything except working long hedges in on futures contracts out through the coming year. I would not be selling old-crop corn or doing any forward pricing on the 2003 crop. If producers do anything here, it would more nearly be buying back short hedges.
In soybeans, the nearby January made a run up toward the contract high at $5.935 back in early September, but it quit below the $5.90 level about 10 days back and gapped down the next day. Last week's late rally did nothing but move up to try to close the chart gap and ran into selling around $5.76-$5.77. It was a weak close on Monday, and we see this market down a bit on Tuesday. I would not be at all surprised to see this market come down and challenge the late October lows around $5.45, and we have some even more distinctive and, I think, more important lows around $5.30. This market has given us sell signals below uptrend lines, and I expect it to correct to the downside, and I don't see the $5.30 level in that January as impossible, especially if we hear favorable talk about crop emergence and development in South America. I would hold short hedges in this market that you might have placed on these recent rallies.
In wheat, I continue to watch the March Chicago contract with a trend line hooked across the early November and the December 1 highs. That is a steeper line than I like on most chart patterns, but I expect to see across the next few weeks a close above that trend line and some attempt for this market to make a correction of that last price break, which ran from $4.15 on the March back in later October down below $3.50 last week. When we get a close above that downtrend line, we are going to see a rally in this market. That will give us a chance to sell old-crop wheat and take a look at forward pricing in the new-crop July at the same time. The patterns on the charts look very similar--it is just that the one on the July is at a bit different price level. I don't want to do anything in these markets until we see a corrective rally back to the upside, and that would carry us above the recent $3.13-$3.15 prices on the July Chicago and give us better forward pricing opportunities. The chart patterns in Kansas City are very similar, albeit at different price levels on the hard red winter. I think I would want to key off the March Chicago contract and watch it for some indication as to what we might expect near term. At this point in time, I am in a waiting mode, and if I did anything, I might be looking for a close above some of these relatively steep downtrend lines on the chart as an opportunity to lift any short hedges in place on stored product or any early hedges you might have on the 2003 crop.
