Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
January 28, 2003
The $80 cattle appear to be gone, at least in the short run. We closed out last week with mostly $79 cattle in Texas and Kansas, down about $1 from prior week activity. Prices were down even more, toward the $77-$78 range, in Nebraska. This is coming at least partly because boxed beef values that had pushed above $135 on the lighter Choice types slid back down toward the $130 level and below on Monday and Tuesday. That takes $2-$3 per cwt. off the expected price to be paid for cattle coming out of the feedyards. I am watching the February live cattle, which closed fairly strong on Tuesday at $79.75. This market had reached $82, dipped back down to the $79 level and slightly below, and is now making a correction back to the upside. In the $80.50 area, I think this market probably will run out of steam on this correction, and I would think about selling the February at $80.50 to $81 and, at the same time, later futures contracts if you need later coverage. In the event we don't reach those target price levels, sketch a trend line across the December low and the low from last week and that trend line will be coming above the $79 level this week. Be prepared to sell this market if we see a close below that trend line. Longer term, I think the trend in cattle is up, but we could see a significant correction to the downside, especially if the boxed beef values continue to fall back from the highs we reached about 10 days back.
In the feeder cattle complex, the March continues to try to do some base building around the $78 level with the Tuesday close at $78.10. I would continue to look at buying back short hedges on this contract. On any little price dip, think about placing long hedges if not on the March then out into the August contract when March does dip to the $78 level and below. Longer term, I expect to see a large corn crop and cheap corn and expect to see some value come back into the feeder cattle complex. We finally, toward the end of 2002, appeared to be back up about the breakeven line on cattle coming out of the feedyards. If we can start seeing some profits, we can make some modest contributions on the positive side to all the equity that has been lost across the past two years. If that starts to develop, I think the ability to buy and the demand for these feeder cattle will get a bit better, and the numbers are certainly going to be tight enough to justify better prices.
In hogs, we see some signs of slightly lower prices in early week trade with barrows and gilts down as much as $1.25 in the national direct market on Tuesday morning. We have a weighted average price of about $45.43 on a carcass basis, which puts us in the $33-$34 price range on a liveweight basis. This continues to be a market that is testing the costs of even the most efficient and largest producers and forcing a negative cash flow on smaller and more nearly high cost producers. That is going to restrain any tendency to come back in with rampant herd building in this market and may indeed, because of cash flow issues, prompt at least some modest continued gilt liquidation on some farming operations. The February lean hog futures have backed off from their early December highs up around $55 and are trading in the $49-$50 range this week with a Tuesday close at $49.15. I wouldn't be surprised to see some continued move to the downside to the $47-$48 area before this correction of that big move up from August up into December is completed. Hold your short hedges and don't be anxious to long hedge in this market until we see better signs of bottoming action, possibly in the $47-$48 price range across the next few weeks.
The March corn contract has traded up from the lows around $2.28 that we saw last week. To me, this was encouraging in the sense that buying showed up in this market before we had a challenge of the $2.24 contract low that had been recorded in early May. Tuesday's close is at $2.385 in the March corn, and I see some gap-filling action going on. I have been suggesting down around the $2.30 level or below buying back short hedges and placing long hedges, and with the little rally we have seen here, let this market run to the upside. I think it will run into trouble when it gets near $2.50 and then is likely to dip back down toward the lows again. I do think there is some upside potential in this market if we get some uncertainty on planted acreage and get some variable weather as we move out toward planting season, but we are not likely to see much move in corn until we get to those time periods. For the moment, I would continue to watch for dips down toward the $2.30 level and below in the March to place long hedges and to buy back short hedges. Producers should wait until we see rallies before doing any selling of cash corn or forward pricing new-crop corn.
In the wheat market, the Kansas City prices are struggling to maintain any momentum. The last report showed an 8 percent increase in hard red winter planted acreage, and that has kept the July Kansas City contract down around the $3.25 area, and that is the close we saw on Tuesday morning. I see some signs of base building going on here and would be interested in buying back short hedges across the lows around $3.25. This market is probably going to try to put in at least some modest short-run weather rallies, and I don't see substantial downside from here until we get farther into the growing season. The Chicago July looks a bit better with the Tuesday close at $3.11, and this market has rallied as high as the $3.23 area across the past few trading days. The low around $3, which occurred in late December, is the major support, and I would buy dips to that low to buy back short hedges or place long hedges if you are in the type of business that needs long hedges in wheat. We need to see better prices than we are currently seeing before I would recommend placing or replacing short hedges in the 2003 wheat or selling old-crop wheat.
The soybean market looks better than wheat or corn. The March contract has continued to try to fill the big chart gap left after some of the bearish surprises we got in the January 10 U.S. Department of Agriculture report. While March has been trying to rally back and correct the damage done by the report, the November has rallied nicely and is above the pre-report trading levels. There are some analysts that obviously think that when we fully digest the report and what is going on, we have better demand-side prospects in soybeans than we have in some of the other crops and/or we are going to get helped by some switch of crops in some sections of the country where it can be cotton and soybeans or where it can be corn or soybeans. This rally in November interests me because the contract high is $5.43, which was put in back in early September. If we get a rally within 5 cents of that high, such as in the $5.37-$5.38 price range, I think short hedges should be placed and placed aggressive in this November soybean futures contract. I would anticipate a bunch of sell orders sitting up around the $5.43 high and would be inclined to sell it on any approach to that high to help ensure that sell orders get filled and short hedges get placed and/or profits are taken by anybody who holds long hedges in this soybean market.
