Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
January 14, 2003
The December 10 U.S. Department of Agriculture reports changed the outlook for grains and oilseeds. I was not surprised this happened, but I did not expect it this quick. Winter wheat acreage is up 8 percent. Wheat prices above costs and a 2002 farm program that guarantees enough subsidies, if prices dip, to push per-bushel revenues above costs will, surely and predictably, prompt increases in acreage. If acreage is up 8 percent and if yields even match this year's levels, look for price to be down a big 15 percent to 20 percent. In corn and soybeans, usage is lagging and ending stocks increased for both, and most analysts expected to see decreases.
In wheat, this is why the September and October rallies toward $4.10 by the July Kansas City and to $3.80 by the July Chicago were pricing opportunities. I went back to review the October market letters and found recommendations to sell rallies back toward the highs or on a close below uptrend lines if such closes happened first. Last week, prices surged and closed above downtrend lines around $3.10 on the July Chicago and $3.40 on the July Kansas City. For producers who lifted short hedges given those post-report price plunges, there will be chances to get them replaced above the depressed prices of this week. Let's watch for rallies back up toward $3.20 on the July Chicago and $3.45 on the July Kansas City.
In corn and soybeans, liquidation of long positions by trading funds has put pressure on the markets since the January 10 reports. March corn may challenge contract lows at $2.24 with the new-crop December may head for lows near $2.35. On such dips, I would buy back any short hedges and place or replace long hedges. The sizeable increase in ending stocks in corn still shows a number below 1.0 billion bushels, and that "buffer" against weather scares is too small to prevent price rallies as we move into February and March and toward the late March Prospective Plantings report. I show the March corn this week and expect the market to hold at or above the support plane at the $2.24 lows. This will be an interesting chart to watch over the next few weeks.
Look for March soybeans to test the October low near $5.30 and that will mean November will test lows in October around $4.96. I am less confident these lows will hold than I was with corn, but stocks are still too small to be a major buffer against weather problems and South American weather is spotty and not the most conducive to crop development. Consider lifting short hedges on old-crop soybeans near the $5.30 and $4.96 lows on the March and November respectively. We have a better chance for good demand in soybeans, and I expect to see buying here to place or replace long hedges in soybeans and soybean meal across these lows.
The January 7 letter called for more aggressive selling of March feeder cattle on rallies, and the market traded below the trend line later in the week. A 62 percent and full correction of the $8 rally from early October to early December that reached $84 will be around $79 and the Tuesday close was down near $79.75. Hold short hedges until you see signs the market will bottom. We need to see more of the high prices associated with the pending cycle support the summer live cattle contracts and boost them to better prices. The August live cattle contract is below $69 in early-week trade, too low to support March feeder cattle well above $80. But I think these relationships will improve and see the August live cattle contract as too low fundamentally speaking. Cash cattle at $78.50 and light Choice boxes in the high $120s late last week kept February live cattle above $80 and they reached $82 last week. With February at $81 and August at $69, the market is suggesting a $12 break by summer. No way, not with the cycle at work. I am not sure the feeding complex could buy and place enough cattle to increase beef production enough by summer to justify $69 cattle. I would sell the February near the highs or on a close below the trend lines hooking October and December lows. Hold off on the summer cattle. Packers should be placing long hedges on the August cattle, and I suspect they are. Light Choice boxed prices Tuesday morning were $133.70, over $10 above January 7 levels. Cash trade was zero through Tuesday morning, and we will see higher prices later in the week.
Hog futures are consolidating after the December 30 reports. February shows an early-December high near $55, and July recorded a double top during December with two separate surges to $63.80. As a selective hedger, I would sell the July toward the $63.80 high and be prepared to buy the short hedges back if we see two consecutive closes above $63.80. If you are not inclined to be that aggressive, sketch a trend line across the late October and mid-December lows and sell a close below that line. This same approach will work on the April, June, and August contracts as well. It is not clear to me that we will see still higher prices given the numbers in the December 30 quarterly report. Lean hog prices above $60 are very profitable for efficient producers, and these "profit windows" are usually closed quickly with increased slaughter weights and/or a cyclical expansion.
