Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
March 11, 2003
In the cattle markets, we are back into the old standoff that is often seen as market uncertainty suggests the possibility of lower cattle prices and packers try to wait and buy lower. Fed cattle moved, toward the end of last week, at $77 and there is some indication of early bids this week of $75 and possibly $76 on better cattle. But the feedyards think they can get better prices than that given that the showlists are small and the market is not burdened with excessive numbers of market-ready cattle. In the futures pits, we see a gap down in the April live cattle futures in Tuesday's session. We are now significantly and substantially below the support that I thought we would see emerge around $75 with April having traded down the limit during Tuesday's session. Feeder cattle futures are clearly along for the ride and the late spring contracts also traded down over $1. It is only the hog complex that is not in something of a selling frenzy as Tuesday's session in the lean hog pits showed stable to somewhat higher prices on the more distant futures contracts.
It is clear that the cattle markets are very nervous and part of that is coming from concerns about war with Iraq. There was a chart gap around $73.50 on the April that has now been filled as we see lower prices this week, and the next major support comes across the early October lows around $71.50. If you have short hedges in place, I would not try to pick a bottom in this market. Watch for some buying support to emerge in that $71.50-$72 range, which I think, fundamentally speaking, is a price level at which both long hedgers and long speculators are likely to step up. Any signs of buying support there could be enough for aggressive selective hedgers to buy back short positions.
The feeder cattle futures are being pushed down with the price problems in the fed cattle complex, and it appears that the March contract I have been showing in recent weeks will challenge the early February low across $74 and the life-of-contract low on this market is $73.50. On dips down into that $73.50-$74 range on the March, I would buy back short hedges on the March, April, and May spring futures and possibly August as well. I want to see a bottom formed here and see long hedging opportunities develop that will have substantial upside potential if we can get the problems in the fed cattle complex corrected and move through the year looking at the prospects of another large corn crop and cheap corn. Buying back short hedges when we see a dip to the $73.50-$74 range in March should be a relatively safe strategy. Keep in mind, if we see two consecutive closes on that March or the April, since we should be watching the April now as it becomes the actively traded contract, would be a sell signal and would argue for lower prices even though fundamentally speaking I am having difficulties seeing any reason for that type of downside move.
On the April lean hog futures, producers who have done nothing in this market have a very apparent downtrend line that they can sketch across the early January and late February highs. This market seems to be finding buying support every time it dips down toward the $50 level in the April, which corresponds with some lows that go back into October. Cash markets are starting to climb a bit higher. Weighted average prices on the carcass-based cash market are up around $47 and better in Tuesday morning trade, and that is $1-$2 better than we have been generally seeing across the past several weeks. I would not lift short hedges until we do see some buying support coming around the $50 level on the April. That would be a clue to think about buying back short hedges on futures out through the summer months. Alternatively, you can sketch the downtrend line on the April and hold short hedges until we see a close above that line.
In wheat, the prices in the futures pits are down 1-2 cents again on Tuesday, and we have some of the lowest prices in the wheat complex that have been seen for several months. Export outlook and continued lack of export activity is a problem, and there is definitely improvement, although improvement is spotty, in the growing conditions for the winter wheat crop in the southwestern states. The July Chicago contract is trying to hold across the last December low just below $3, and if that gives way, then there is no support on the chart until we get to the contract low just above $2.80. The chart pattern on the July Kansas City is similar with a late January low around $3.22. If we see a close below that low, we are probably headed to contract lows in this market as well, which occurred last May at the $3.02 level. Aggressive selective hedgers are buying back short hedges in this market in anticipation of some weather problems as we move through the growing season, and I would not object to that strategy if you do it on a dip toward those recent lows in the July Chicago or the July Kansas City.
The old-crop May corn futures have a definite double bottom at about the $2.31 level across January and early March lows. That support zone is only about 2-3 cents above the contract low, which occurred around the first of May 2002. On dips down toward $2.30 by the May old-crop contract, I would be aggressive in buying back short hedges you have on crop you are holding in storage and short hedges you have placed in the December 2003 on part of your 2003 corn crop. The December contract has some recent lows around $2.36-$2.37, and there is going to be support there, but I think the buying support will emerge first on the old-crop May contract. The contract low on the December is $2.355 and I see clear reasons to buy back short hedges in this market complex and be aggressive in placing, on price dips to the lows, long hedges all through the calendar year 2003. This is a superb opportunity to get corn costs pegged at historically favorable levels for the user of corn.
The old-crop soybean futures have, across the past two to three weeks, rallied to within a few cents of the contract highs that were recorded back in September. The contract high on the May soybean futures contract, for example, has a September high at $5.88, and about 10 days back this market rallied to the $5.84 level. I have been suggesting aggressive selling of old-crop cash product and/or pricing soybeans you are holding in storage on rallies toward these highs. The new-crop November contract looks substantially different with the mid-February rally reaching only about the $5.35 level and the contract high from back in September is $5.43. This new-crop November has also backed off substantially from the recent highs and I would be an aggressive seller in this market to place or replace short hedges if the May contract can rally by about $.15 and get back up toward the $5.80 level. I don't think a rally of that magnitude would carry the November back up to its mid-February high, which is around $5.35, so key off the May contract and when it runs into trouble across those recent highs, sell the November to place or replace short hedges on the 2003 soybean crop.
