Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
February 11, 2003
Last week was generally good in the livestock markets, especially in beef. The Choice cutout values were up from $2.50-$3 on the week depending on which weight and grade you examine. Live cattle prices were up at least $2 from week-earlier levels, there was a big volume of trade at $82 toward the middle of the week, and some cattle topped at $82.50. In spite of the impressive performance in the cash market, the futures, especially the nearby February, traded down during the week and its close on Friday at $80.47 was down $2.13 from week-earlier levels. It appears that the nearby February contract had waited for the cash market to show some improvement so it could justify $82 and above in that contract. Then, when the cash market improved, the futures immediately backed down. April, which increasingly to me shows a double top now at $80, closed out the week at $77.10, down some $2.87 from week-earlier levels. Monday's session brought higher prices in the futures pit with the nearby February up 92 cents and the April up 85 cents. Boxed beef values in early Monday trade had softened a bit, however, and there is still some uncertainty in this complex.
I would continue to sell rallies toward the $80 highs in April with some concerns about whether we can hold that level. Feedlots are current right now in mid-February, but that could change significantly depending on weather and how the different weight groups are bunched by the time we move to April. I believe we ought to sell this market on rallies.
In the feeder cattle, I was surprised to the see the March break down through what I thought would be strong support at $78, and Friday's and Monday's sessions moved down to test the $76 level across some early-October lows. Monday's close was a strong close with this nearby March contract up some 92 cents, and I would be looking to buy this contract and buy the late spring and summer contracts to place long hedges. It is a bit dangerous picking bottoms here, but I think, fundamentally speaking, $76 is certainly low enough. There is also technical chart support across the early October lows, and I expect to see a significant rally from this level in the feeder cattle contracts. Remember, you can sketch a relatively steep downtrend line across the early January and the late January highs on this March contract and watch for a close above that downtrend line to give a buy signal if you are inclined to be a bit more conservative and make sure the market has put in some bottoming action before you buy.
February lean hogs are trying to rally from their $48 level and the April contract shows attempts to move up from last week's close around $53. Technically, we are still in a downtrend in this market and will be until we see some bottoming action and a close above a downtrend line. Watch that April lean hog contract and connect the early-January highs around $60 to the late-January highs just below $58. Look for this market to trade sideways and eventually give us a close above that downtrend line--that would be a buy signal. Keep in mind that we have some support across the $53 level lows that we put in across the past few trading days, and I like to catch the market in a triangle in this fashion. I would not lift short hedges in this market until I get a buy signal above that downtrend line or until you see the $53 level of support tested again. Generally, I am not nearly as bullish on this complex as I am on the cattle side and expect that we will continue to be mired in selling prices for cash hogs at or near the cost of production across the next few months before a summer rally.
The grain and oilseed markets showed some gains in Monday's session with some futures contracts in soybeans up 7-8 cents. Chicago wheat was up around 5 cents, and corn was up 2 cents. The close in corn was relatively weak with the March closing near the lows even though this market gapped up into a very small trading range. I would continue to look at selling old-crop corn or pricing corn you are holding in storage on a rally up toward the early-January highs just above $2.45 on the March. I rather expect to see this market in a trading range for several days between about $2.28 and the $2.45-$2.46 range on the March, and that doesn't give pricing opportunities as attractive as I would like on old-crop corn. New-crop December rallied past the early-January high, which is around just below $2.47, traded up toward $2.48 in Monday's session, and closed down on the day. Aggressive selective hedgers might be interested in scaling in some short hedge positions here because I would certainly expect to see this market correct back to the downside before it makes any major move up. Those holding long hedges in the various contracts out through the year might look at rallies toward Monday's highs as a chance to take profits, again expecting to see the markets correct back down toward the recent lows and give us a chance to buy these contracts at better levels from a long hedge viewpoint than current price levels.
The July Chicago wheat is trying to get out above the recent set of highs in the $3.22-$3.23 range, and this may give us a challenge of the November highs, which are around $3.32-$3.33. That would be an opportunity to place or replace some short hedges in this market if you had short hedges in place and bought them back on the recent dips to the lows. In the Kansas City July contract, Monday's close looked fairly strong, and it is very close to the early-January high at about $3.47. I would be inclined to replace or add to short hedges here in this $3.47-$3.50 arena and be more aggressive on this hard red winter contract if this market can climb up toward its December 1 highs around $3.63-$3.64. I would be surprised to see a move that aggressive just yet even though we have left a small chart gap on this July Kansas City contract from early trade last week.
In soybeans, the market was basically down and recording a set of weak closes late last week. These modest gains on Monday start to reverse some of that negative price action, in particular on the new-crop November which is pushing it back up into the high $5.20s. We have recent highs on this contract up around $5.33, and I would sell this market rather aggressively to place or replace short hedges on 2003 soybeans on rallies back up to that level. You need to take a look at prices being offered on old-crop product you are holding in storage at the same time. This $5.33 price level is only about 10 cents from the contract high in early September, up around $5.43, and I think the November soybeans will be sold aggressively if we do get any attempt to challenge that $5.43 high.
