Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
February 25, 2003
The wheat market is feeling some pressure early this week from continued weak exports and the snow cover that boosted yield prospects across the southwestern part of the country. The March Chicago contract had rallied on recent occasions back up toward the early January high just under $3.40. It appears now ready to test the recent lows down around $3.10. The pattern on the July Chicago looks very similar, and I would just hold any short hedges in this market until we see a test of the January lows and adjust any strategies accordingly. The pictures on the Kansas City hard red winter contracts, which would be impacted even more by the snow cover, show the market gapping down on Monday and then an inside day on the July contract in Tuesday's session. Support is now across the recent lows down around $3.22 with resistance I have talked about on several occasions up across recent highs around $3.47. Let's let this market correct to the downside and show us some signs of buying activity along these lows before we buy back short hedges.
March corn has moved down some 10 cents per bushel across the past week and appears ready to test its January lows around $2.28. The contract low on the March futures is down around $2.24 across the lows from last spring, and I wouldn't be surprised to see those lows tested. Any dip to this price zone that is approaching contract lows, and we have seen a dip to the $2.36 level less than 1 cent above the contract low on the December on Monday, should be seen as a chance to buy back short hedges on old-crop and also on the new-crop December 2003. These markets will, I think, bounce off the lows and give us a chance to replace short hedges at higher levels. Clearly, any user of corn who needs long hedges out through the calendar year and who took profits on any long hedges on the recent run up to the high $2.40s on the December contract ought to be aggressively placing and replacing long hedges here.
The soybean market continues to look a bit better, and that is reflecting better demand in exports in this complex, but we have also heard this week about the prospects for a record soybean crop in Argentina. I suspect, when Brazil gets added, we will see a record possibility in South America as a whole. March moved out above recent lows in Tuesday's session but couldn't hold all of the gains. I would sell this market aggressively on any rally by the March back above $5.80 to price any old-crop product. This is a very interesting opportunity to get old-crop product either sold or forward priced at levels about as good as we are likely to see for the foreseeable future. The new-crop November soybeans is in much better shape relative to past trading performance than is the new-crop December corn or the July new-crop wheat contracts. Tuesday's session showed a substantial increase in that November soybean futures during the day but a close very close to the low and only up slightly on the day. That suggests to me that this market is listening to what we hear about prospects for crops in South America and any rally is getting sold. I would continue to follow that strategy. Recent highs on the November have been up around $5.35, and anything near that level ought to be sold aggressively to place or replace short hedges on new-crop soybeans. Selective hedgers would have lifted some short hedges on the early January dip down toward $5. We have had a chance now to replace those hedges 30 cents-35 cents higher. I would continue to be aggressive on placing short hedges and taking profits on any long hedges you hold in soybeans or in soybean meal on a rally back up toward the $5.35 level on this new-crop November contract.
In the cattle sector, feedyards are going to want to see more of the $80 market at which we saw active selling late last week. There is very little activity so far across Monday and Tuesday with limited sales in Nebraska at $79 and a few in Kansas at $78, but the bulk of the week's activities is yet to come. Boxed beef on Tuesday morning are up $1.20 on the day and up to $129.34 for the 600-750 lb. Choice boxes, and that is up about $3 per cwt. across the past five trading days. That suggests that the packers may have room to pay $80 for cattle if they need them to keep the lines running, but margins have not been great for the packers recently. It is possible we will see them slow the pace of activity a bit this week so they don't have to push cattle prices higher. Cattle coming out of the feedyards are back in the profit side of the equation after nearly two years of rather sustained losses, and some of these cattle are earning $100 per head profit, but it will take a while to restore the equity and restore the cash flow situation in cattle feeding and allow them to buy the calves and yearlings at still better prices. Cash hog prices are actually moving down a bit with the weighted average prices on a carcass basis for the direct trade at $45 and below. That is reflecting a tendency for daily slaughter levels to start increasing as we move toward March and on into April and the fall pig crop reaches slaughter weights.
In the live cattle futures, the nearby February backed off a bit on Tuesday as it moves toward its final days of trading. The April contract which has a double top at $80 and had dropped to $75 across the past three weeks corrected back up to about the $78.15 level, essentially a 62 percent correction of this last price decline. I don't expect to see that $80 level challenged again in this April contract and see that as a legitimate double top. This recent correction of the $5 break from $80 down to $75 that ran back up to slightly above the $78 level should have been sold as a full correction of this last price decline. Much will depend, of course, on what happens to the boxed beef values, but it is not clear to me that we are fundamentally ready yet to support and sustain an $80 cash market, and I don't believe we will see an $80 market as we move out toward April. The feeder cattle market is continuing a pattern of trade that reflects a big discount in the summer live cattle contracts and the nervousness about being able to hold the fed cattle prices that we reached during February. Tuesday's session closed down on the day by 60 cents at $76.85. This contract dipped all the way to $74 about six to eight trading days back, and I won't be surprised if we see a rechallenge of that low. I want to place long hedges in the spring and summer feeder cattle. I am watching this March and if it dips back down toward the $74 level, I think placing long hedges would be appropriate. You can construct a relatively steep uptrend line if you hook the early January highs a bit above $83 on the March contract to the late January highs just above $80, and use that as an indication some time later that long hedges should be placed.
In the lean hog market, this April contract has backed off from late 2002 levels up above $60 to prices recently that were below $52. We may be building a bear flag on this chart, and I suspect we will see a test of the lows from last October down around $50. We can construct downtrend lines on this chart without any trouble at all by hooking the highs from about January 10 to the late January high. That trend line is still above the market, and we have not seen a buy signal yet. I would hold short hedges until we see a buy signal with a close above that trend line or we see a drop to the support that I see on the chart at about $50, whichever comes first.
