Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
February 18, 2003
The $80 cattle market came before I expected it, but it also did not last. It appears that the packers cut line speed last week, and that eliminated the need to go out and bid up cattle as they did the prior week with top prices up to $82.50. Boxed beef values, even with the reduced weekly slaughter, did not hold up and were well off recent highs at week's end. Cattle on feed numbers from Friday showed the on-feed count down 7.7 percent, about as expected, but marketings were lower than expected and that will hurt the feedyards' efforts to get higher prices. Late week prices were in the $78 area in the South and more nearly $77 in the North with all prices down significantly from week earlier levels. We have a clear double top at $80 on the April live cattle futures, and short hedges placed on the second rally to that price are looking excellent at this point. Hold short hedges while the short-term fundamentals try to work themselves out. Last Thursday's dip toward $75 was nearly a 62 percent correction of the move up that started last October on the April contract and I don't expect to see the $80 level again on the April. A corrective rally back up toward $78 should be seen as a selling opportunity.
The break in the live cattle futures was accentuated in the feeder cattle. The nearby March plunged last Thursday below $74 and the earlier life of contract low on that future is $73.50. Look for this market to churn at these lower levels as the live cattle futures react to the Cattle on Feed report. Feeder cattle are being hurt by the big discount in the summer live cattle futures and the lack of equity in the feedlot complex coming off 2 years of largely sustained losses. On any dip back toward $74 by the March feeder cattle, I would buy back short hedges on any feeder cattle out through the summer months and start to place long hedges aggressively on the March, April, May, and August contracts. I see significant upside in this market from levels I clearly did not think we would see during February as we move toward seasonal strength in the March and April period and get a boost from any holding of heifers that comes from the cattle cycle as the grass starts to turn green.
Hogs are continuing to show a weighted average carcass-based price of $46-$47, about $34 to $35 on a live weight basis. April lean hog futures are $9 off the late December highs. This market recorded a head-and-shoulders top by mid-January and a number of trend line sell signals in the $56 to $58 range. Hold short hedges here. Daily slaughter levels usually run higher in March and April than in February as the fall pig crop comes to slaughter. The U.S. Department of Agriculture predicts that pork production will be down 1 percent in 2003, with beef production expected to be down 4 percent. If those numbers hold, it will be easier for cattle to hold a big premium in price to slaughter hogs. Historically, it has been hard to justify a $75 cattle market or better with live weight hog prices more nearly in the mid-$30s, and that will be a factor again this year as retailers tend to move to pork for featuring and specials. Look for a summer rally in hogs to get short hedges set again, and we should see at least a modest rally via a correction of the $9 break since early in the year within the next few weeks. Sell rallies in the April back up to the $57 area and look at the selling opportunities on the summer futures at the same time.
The February 11 USDA report lowered export estimates for corn and wheat and raised them slightly for soybeans. Ending stocks increased by small magnitudes in corn and wheat and declined from 190 to 165 million bushels in soybeans. This is evidence of the demand-side strength that had pushed soybean prices up relative to the corn and wheat across recent weeks. The nearby March is trying to rally and fill the gaps left after the bearish January report, but the new-crop November is up to the $5.35 area and appears to be ready to challenge the contract high at $5.43. Sell this market aggressively on a rally toward $5.43, and be prepared to hold those short hedges unless we see two consecutive closes above $5.43. But I do not expect to see that happen. Look at selling soybeans held in storage at the same time, especially if the cash-futures basis has improved significantly since harvest.
July Chicago wheat may show us a rally above $3.30, and I see that as a possible selling opportunity. Ending stocks were up a bit in the February report compared to January, but they are still very tight. That was the primary reason we saw a post-harvest rally in the early fall of 2002. Those excellent hedging opportunities are now gone in Chicago and in Kansas City, and if short hedges have been lifted in a selective short hedging program, I would look for rallies to replace them. The July Kansas City has resistance at $3.47. If it can clear that selling pressure, it has a chance to rally toward $3.60 or better, bringing a pricing opportunity.
Ending stocks in corn are being estimated at 924 million bushels, and that suggests an average cash price for this crop year around $2.40. The USDA range is $2.20 to $2.50, and that suggests a December futures range of about $2.30 to $2.60. The nearby March has resistance across an early January high near $2.46, but my inclination is to buy this market on dips toward recent lows just below $2.30 on the March to buy back short hedges and place long hedges to cover corn needs through 2003. Go out to the futures contracts needed to cover the timing of needs, but key off the March and be aggressive in buying on a dip back toward $2.30. If we do see lower prices, hold long hedges until we see two consecutive closes below the contract low of $2.24 on the March, and I do not expect to see that happen.
