Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
March 18, 2003
There was active trade in the fed cattle market late last week at $77, and I expected that to be positive for live cattle futures as we opened the trading week. After working lower all last week, boxed beef values were also up a bit in Monday morning's session and that was encouraging. The $77 in the cash market late last week was at a substantial premium to the April futures, and it is this type of scenario with a discount in the futures that usually encourages feedlots to stay current and sell their cattle aggressively. All of that suggested we would see better openings Monday, but then concerns about war with Iraq prompted selling on the open and sell stops were triggered and the market traded substantially lower during the day. It appears we are going to see a move back down toward the recent low on the April near $72.50 that occurred last Wednesday, and that is likely to take the June back down to test its low from last Wednesday right at the $68 level. I would hold short hedges here if you have them, with all the uncertainty in this market, until we see if these lows can in fact hold. If we move down through those support planes across last Wednesday's lows in these two nearby contracts, this market may have some additional downside, even though fundamentally speaking it is hard to see why that needs to be the case. But the war concerns are much like the weather in the grains and oilseeds, and such uncertainty takes many of our tools out of consideration since these really are abnormal conditions and the normal things don't necessarily have to happen.
Feeder cattle started the week about $2 off their lows of last week, and if pressure stays on the live cattle futures, we are likely to see the feeder cattle retest those lows. Monday's strong recovery on the April questions that need and was a very positive development. If you look past the March at the April contract, last week's lows took out that early February support plane. So we need to see the April contract, for example, find support across last week's low down near the $74 level. Let's be careful and make the market show some support down there before buying it and placing long hedges or buying back short hedges. Keep in mind that we can always work with a trend line on these charts and continue to monitor the situation, and make the markets show us additional buy signals above downtrend lines before buying either to remove short hedges or place long hedges. Hook the early January and late January highs on the April contract.
In the lean hog pits, the more distant contracts look a bit more favorable than the nearby April does, but we are starting to see some gradual improvement in the cash prices for hogs. Weighted average price on barrows and gilts in the national direct hog market closed out last week just above $48 on a carcass basis, and that is about $3 per cwt. on a carcass basis above where we were just a few weeks ago. Late February highs on that nearby April lean hog futures are up around $55, and I suspect that is the next resistance plane at which we will see selling emerge. I would be inclined to think about placing or replacing short hedges on a rally toward those highs. I always advise placing your sell orders a bit below the specific high to increase your chances of getting a fill in these volatile markets.
The grain and oilseed markets are pressured by favorable weather conditions on the winter wheat crop in the U.S. and relatively favorable weather conditions for soybeans in South America. Corn is hurt by continued lack of aggressive export buying, and it appears the March corn may make a new contract low in pricing the old-crop product as it moves toward maturity and toward the time to go off the board. On the active May contract we appear to have a double bottom across the lows just above $2.30 that go back to early January and then the recent dip in mid-March back down toward that level again. I expect this market to continue to bounce off that support and try to stage some modest rallies from these lows. Since I don't see major reasons for substantial downside moves from here, I would buy back short hedges on corn held in storage or early hedges that you placed on 2003 crop and be aggressive in placing long hedges on corn needs all through the calendar year. We have had recent bounces of about 15 cents per bushel off these lows, and I think we will probably see some more of that as we move toward the end of the month and anticipate a large planted crop in corn in the Prospective Plantings report, which is released early morning on March 31.
As we approached the beginning of March, we saw the then nearby March soybean futures rally to within 1 or 2 cents of contract highs up around the $5.84-$5.85 area, and those were excellent selling and short hedging opportunities at the time. As May moves toward being the nearby contract, the May actually recorded a new high in early March trade, but was not able to close two consecutive days above the old contract high and has backed off since then. I would continue to be aggressive on selling old-crop cash product and placing short hedges on old-crop product you are holding in storage on any move back to $5.80 and above by the May. That is a 10 cent-15 cent per bushel rally from current levels on the old-crop May and that may carry the new-crop November back up toward the $5.20 level and back up under the downtrend line that you can construct by hooking the February highs and the early March highs. I think this market, with huge crops looming in South America, needs to have old-crop product sold or hedged on price rallies, and we need to move up toward a substantial position of price protection on the new-crop November contract. If opportunities in the $5.25-$5.35 are offered on that November, I would be inclined to move up toward 50 percent-60 percent forward priced on the soybean crop. I suspect that we are going to see some pressure on price as the big South American crop starts to come to market and as weather and moisture continue to look better in terms of early-year conditions in the midwestern U.S.
The wheat market continues to work lower with old-crop and new-crop contracts in Chicago making new contract lows within the last week and the July contract now back well below $3 per bushel and down to the $2.90 area at the close on Monday. Essentially the same thing is happening in Kansas City with the new lows being made on the new-crop July contract last week down around the $3.20 level. I have wanted to have this crop primarily priced for several weeks and months and would continue to hold short positions, especially in light of the new-contract lows we are seeing here. It may be the case that we will see still more downward pressure on this crop as there is apparently some need to get U.S. prices down to compete in the export market. As we move toward harvest and the weather for crop development continues to be fairly good, this situation is looking bearish on wheat even from the $2.90 level we are seeing in the July Chicago futures and the $3.12 level we see in the July Kansas City contract.
