Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
January 7, 2003
The grain and oilseed complex has not changed very much since the last report prior to the holidays. The corn complex looks slightly weaker with the March contract having traded recently down toward $2.35, and that carried the new-crop December down to the $2.40 level. Those are the general levels that we were looking at toward the end of 2002 calendar year. I think we have some possibilities of bottoming action on the corn charts because we are in the bottom portion of the fundamentally justified price range for this year. I would continue my late 2002 advice that suggests no selling of old-crop cash corn, no additional pricing at this point in time on the new-crop 2003 corn. The only thing I would be doing as a user of corn is to be looking at good opportunities to work long hedges in on the various futures contracts that you need out through 2003. Being able to peg corn out into December 2003 at a cost consistent with a $2.40 or lower level in that futures contract makes a lot of sense to me.
The look in the wheat market is a bit more negative than what we see in corn. The March Chicago wheat contract across the past week has traded down to the $3.20 level. Remember, this is a contract that in early September had traded up toward $4.50. The July contract in Chicago dipped last week below $3 and has rallied a bit since that time from an oversold condition, closing at $3.13 in Tuesday's session. The Kansas City July had dipped down toward $3.25 before staging a modest rally. I would be looking to lift short hedges on moves down toward the recent lows in this wheat market if you have wheat in storage that you have hedged or if you have placed short hedges on the 2003 crop. If you are bit less aggressive in terms of your attitude toward lifting short hedges, watch the downtrend lines that are so apparent on the wheat charts and be ready to lift those short hedge positions when you see a close above the downtrend line. On the July Kansas City, I would hook the mid-October and the December 1 high and sketch that trend line down, and we are about 10 cents below that extended line this week. On the July Chicago, the trend line you should work with is probably the one that developed recently hooking the late November, and the mid-December highs.
Prices in the soybean complex were holding up better in late 2002, and we see the same thing happening in early 2003 trade. The March futures moved up last week across a December 1 high just under $5.85 and ran into some selling pressure. The November contract went above the October, November, and December highs and above $5.20. This market is getting to the point that one ought to consider adding to price protection on 2003 soybeans with the November in the $5.25-$5.35 range. I see rallies to that level as a primary correction of the major price break that we saw from above $5.40 in mid-September down toward the lows in October and November around $4.97-$4.98. I believe selective short hedges ought to be placed on rallies. Keep in mind that both corn and wheat are struggling, and that is going to curtail any ability of this soybean complex to rally to the upside, especially as we continue to hear news about the possibilities of a record crop in South America.
The important December 30 quarterly Hogs and Pigs report showed total inventory numbers down 1 percent from last year with the breeding herd down about 3 percent. If we look at the post-report price reactions, it suggests that most analysts expected to see that breeding herd and the total numbers down a bit more. February and April hogs traded down hard and down the limit the day after the report, and now, this week, we are seeing these markets rally with price levels that basically have erased all of the post-report losses. Going out a bit further to the July hog contract, which is showing a double top up around $63.75, the market had traded down there suggesting that we are going to have more pigs coming into the supply chain across the next few weeks than we had earlier anticipated. But that contract is also recovering this week. I would be interested in hedging April hogs on a rally to the recent contract high, which is around $60.50 level. Looking ahead at the July, there is an opportunity across what appears to be a double top around $63.75, and I think rallies to those levels ought to be sold. By all means, if you are not inclined to sell the rallies, hook trend lines to the mid-October low and to the mid-December low and be prepared to place short hedges in any of these various months that you need to deal with when you see a close below that trend line.
In cattle, I said before the break, that we are looking at a bull market in cattle built by the supply-side cycle, which is going to decrease commercial production across the next year or so, and also the declining number of cattle in feedyards across the past few months. I had mentioned the magical $80 level in cattle and suggested that we would have some trouble getting to that level, but the nearby February contract boomed up through $80 and closed at $81.42 on January 7. The highs on the cash cattle late last week were generally $75.50 in the Kansas and Nebraska areas and $120 in the beef in Nebraska. There has been some trade Tuesday morning in Nebraska at $121, so we may see further improvement in the cash market this week. In early Tuesday trade, the lighter Choice boxed beef values are up $.90 from Monday's levels at $123.21. We are seeing some improvement in the boxed values, which will give the packers a bit more room to bid for cattle. Nonetheless, I would think that we are very close to a short-term top in this market, and I don't expect to see the February contract continue to rampage to the upside. I see some relationships here that defy logic with the February contract trading above $81 in Tuesday's session and the August around $70. I understand that we could change placements of cattle on feed during the first quarter of this year and influence the August market a great deal, but the supply-side cycle says that those lighter cattle to go into the feedyards will be hard to find and hard to buy at levels that prompt some sort of reasonable breakeven. So, I certainly don't expect to see an $81-$82 market here in the first quarter and then see a summer market at $70.
I am showing the March feeder cattle contract, probably for the last time this week, and demonstrating what sometimes happens when we get dips down through a trend line but no close below it. I had been counseling hooking the low in early October to the mid-December low. Across the past few trading days, the markets had dipped down through that trend line but never closed below it. I think that trend line is, therefore, still valid and I would also draw a new one now that hooks to the low of last week and monitor both. Certainly, I see evidence that suggests that we ought to be selling rallies toward the high just under $84 on this market aggressively and not necessarily waiting for the close below the trend line. We see more strength in the live cattle futures than we do in the feeder cattle market right now. That concerns me and suggests that we have an $83 March feeder cattle at least partly because we have a $70 August live cattle contract. Longer term, I expect both of those levels to improve and if the August trades up in the live cattle pits, this will help the March feeder cattle contract. So, I would be inclined to sell a rally up toward the $83.95 highs on this March contract and any of the other spring contracts in which you will have cattle to sell. If you are fortunate enough to be holding long hedges placed down to the mid-to-high $70s in this March contract last October and November, by all means look at taking profits as a selective hedger on those long positions if we can rally up toward $84.
