Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
January 21, 2003
The January 17 Cattle on Feed report was basically positive for near-term cattle prices. The number of cattle on feed is down 8 percent compared to last year. Placements into the feedyards during December were up 4 percent compared to last year. Marketings were up significantly during the month, suggesting that the feedyards are current and moving cattle into slaughter without allowing average weights to climb back up again. Generally, this should support the market we have seen that ran as high as $80.50 during last week's cash sales. Not a big majority of the cattle were sold at that high and it happened primarily in Texas, but we have a legitimate $80 cash market in fed cattle, which is coming a little earlier in the year than I had expected. These better cash prices are being supported by boxed beef values that were up to $135.15 on the light Choice boxes in Tuesday morning's market. It has been a long time since we saw cutout values that high. We had some numbers above $130 in the first six months of 2001, but we certainly didn't come close to that level during the entire year of 2002 with values in the $125 area about as high as we saw. In the presence of that positive story about cattle, we don't see the same picture on the more distant futures charts. February live cattle futures that had traded up to $82 are in the $80 area and slightly lower. In August live cattle, obviously there is concern that we will respond to these current high prices and the profits in the cattle-feeding sector by placing so many cattle that will wreck the August market, which has traded down around $68. The chart on the August has given us several sell signals based on trend line developments, etc., and that market is trying to find support at $67. I absolutely would not be hedging or placing short hedges or buying puts on these more distant live cattle futures. Look for the August cattle to possibly dip back down toward the recent low around $67.40 and buy back any short hedges you placed on sell signals below the uptrend lines. I expect this market to rally. We would have to increase beef production by 6 percent-8 percent between now and August to justify a decline from an $80 cash market to a $67 cash market, and I don't expect that to happen.
In feeder cattle, the March contract has traded down because the more distant live cattle futures like the August live cattle have traded down. Those holding short hedges on spring feeder cattle should be looking for a place to take profits. We saw a low on the March last week that pushed down below the $78 level, and I would be very interested in buying back short hedges on the March feeder cattle around $78 and, indeed, would start moving my planning horizon out and thinking about placing long hedges on the summer feeder cattle. Clearly, I don't expect to see this cattle market being under any sustained pressure. Odds favor a huge planted acreage for corn and cheap corn again this year, and there will be some upside in the summer feeder cattle giving us some long hedging opportunities.
Weighted average cash prices in the slaughter hog market early this week are in the $45-$46 area on the carcass-based prices, which puts us in the low-to-mid-$30s on a live basis. February hog futures are in the $51-$52 area and July is trading about $10 higher around $61. I have said in recent letters that I would sell a rally in the July back up toward what appears to be a double top around $63.80, and I would continue to give that line of advice. I would be an aggressive seller on the late spring, summer and early fall contracts if that July contract can rally back above the $63 level.
In corn, I would be an aggressive buyer of the March old-crop contract to lift short hedges you might have on corn held in storage or to place long hedges on spring and corn needs on any dip to $2.30 and below. We see a $2.24 low back in May, and this market is trying to turn higher a bit above that $2.24 level. I suspect that is because there are a significant number of relatively anxious buyers, whether it is a matter of lifting short hedges, placing long hedges, or placing long speculative positions. I think this is a unique opportunity for us to get short hedges lifted on old-crop and to be placing long hedges. The new-crop December which has a May low of $2.355 dipped to about the $2.37 level last Friday. I would be aggressive in terms of placing long hedges in this market throughout 2003. There is too much uncertainty in front of us to rationalize keeping the old-crop contracts down around $2.25 and the new-crop contract down at the $2.38 level or below. The modest increase we saw in ending stocks based on decreased usage numbers in the recent U.S. Department of Agriculture Supply and Demand report certainly do not give us a set of ending stocks that justify the futures market as low as we are seeing this week.
I have essentially the same attitude in the soybean complex. The old-crop March has major support across the October lows around $5.30. Longer term, this market could drift lower and test that support at $5.30 on the March, and there is parallel support on the new-crop November in the high $4.90s. I would be a buyer in these markets on these price dips to lift short hedges on old-crop product and place any long hedges on soybeans or soybean meal if you have those needs moving out through the calendar year. We have not seen a break in soybeans off the highs nearly as big as the break we saw in corn. That puzzles me a bit, especially in the presence of a potential record crop in South America which will be coming into the marketplace in March and April. Export demand has been better for soybeans. I would want to buy short-term dips in this market but longer term, as we move out into that important yield-determining period in South America, we may need to turn and be selling rallies. That is always a possibility on any rally toward recent highs, and we have a set of highs and related resistance on the new-crop November at about $5.27 coming from about two weeks back.
The wheat market is still reeling from the supply-demand report back on December 10 that showed winter wheat acreage up 8 percent. All of that increase was in hard red winter. These markets have tried to recover some of the rather substantial losses after that report. We have the July Kansas City trading in the $3.25-$3.30 range, and that is about as low as any prices we have seen on that chart since back in the summer months. I think this market will rally. There will be weather uncertainty as we move out into the February-March period and talk about wind damage and possible frost damage. There is a comparable area of support on the July Chicago at about $3, and I would be buying dips to those areas. Farmers would be lifting short hedges, but I suspect processors will be placing long hedges and buying across those same support planes. We will see better prices to place or replace short hedges on this winter wheat crop later with all the uncertainty still in front of us on how big the crop off the expanded acreage will really be.
