Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
March 25, 2003
The values of boxed beef and pork are playing important roles in the livestock and meat markets this week. After backing off from highs that had reached well into the high $130s, the light Choice boxed beef values have moved back up slightly and are trading around $125. That is probably not going to be enough to get strong bids on fed cattle this week. Most analysts who are estimating beef packer margins think they are losing somewhere around $15 per head at current boxed beef values and at the $78 price level they paid for fed cattle late last week. It is going to be harder to get $78 this week even though we had a Cattle on Feed report Friday that basically looked bullish with the cattle on feed count down 9 percent from last year and the placements into feedyards during February down 8 percent. That is going to help the summer and early fall contracts but may not do much for the April. As I look at the active nearby April live cattle contract, I see the recent move up has essentially completed a 62 percent correction of the last move down from about $78.10 down to around the $72.40 level. Anything back up just under $76, which is what we saw on Monday, essentially completes that correction. If we see any signs of faltering with all the uncertainty in this marketplace, I would be inclined to replace short hedges on these April cattle. I would not want to forward price anything in the summer months yet where we have the August closing in Tuesday's session up a bit but still down at the $67.80 level and carrying a huge discount to the nearby futures and to the cash market.
The April feeder cattle that I continue to show this week is largely mirroring what has happened on the live cattle contract, and with corn relatively constant, that is certainly no surprise. We have had about a 50 percent correction of the last major move down in this contract from up around $80.80 down to the $74 level. Note that we have a mid-February high just below $78, and this market is running up against that in Tuesday's session. I rather expect this market to back off and perhaps finish a head-and-shoulders bottom with this right hand shoulder extending back down toward possibly the $75-$75.50 level. I would be prepared to buy dips back down toward the $75-$75.50 level on this contract to buy back any short hedges you have in place in the April contract. Alternatively, use this as an opportunity to place long hedges on feeder cattle needs out through the late spring and summer months, certainly through August, where I think we will see substantially higher prices as the year wears on than we are seeing in late March. Note that the August is already showing some of this possibility with Tuesday's close around $81.40.
Boxed pork values are down and packer margins are not in good shape as we have seen some increase in cash hog prices across the past few weeks. We have had, in early week trade, substantially lower lean hog futures, and we are seeing the lowest prices that we have seen since October 2002. July lean hog futures were down nearly $1 in Tuesday's session, closing at $58.95. The nearby and active April was down only slightly, closing at $51.42. The nearby April has a chance to build a short-term bottom around the $50 level, picking up some support from the lows from last October, and the pattern I see on this chart in recent trading days looks like the market is trying to form a bottom. You can hook a downtrend line across the late February and mid-March highs and catch this market in a triangle with a flat support plane near $50. Looking out a bit beyond the April time period, we should expect to see better prices in this complex, and I believe we will see rallies. If you do anything, look at buying back short hedges down here. Users of these slaughter hogs ought to be placing long hedges because, fundamentally speaking, I don't see any reason for the April to break sharply below that $50 level.
In the grain and oilseed markets, corn is down slightly in Tuesday's session, soybeans are up about 3 cents, and wheat is sloppy and pretty much constant. The corn and soybean markets are both being pressured by good moisture for this time of year in the Midwest, and corn futures made new life-of-contract lows in Tuesday's session on some sell-stop movement to the downside. Soybeans are also feeling some pressure from the harvest in Brazil moving up to about one-third complete, and the little bounce we see in Tuesday's session up 3-4 cents is primarily a technical correction of the sell-off that we saw on Monday. In soybeans, it looks as if we are putting in lower highs with Monday's surge up toward $5.80 now looking as if it's going to be another failure in this market. The old-crop May beans continue to fail up around $5.80. I would continue to sell old-crop product in the cash market or get it priced on rallies up toward that $5.80 level by the May futures. This is going to bring modest little rallies into the new-crop November. Here, I see some resistance up around $5.20 across some recent highs and some possibility of support down around the $5-$5.05 level looking across early-January lows and also last week's dip, which went down to about the $5.07-$5.08 level. Take advantage of rallies on old-crop soybeans to sell the old crop and continue to add on an incremental basis protection on the new-crop soybeans. If you get an opportunity significantly above $5.15 on the November, I think it makes sense to move up to 50 percent-60 percent forward priced if you have not already reached that level.
In corn, I wouldn't be overly concerned about the new contract lows we are making in these old-crop contracts. May is now closing below the $2.30 level, but I think we will see rallies based on crop uncertainty as we move out toward the late March Prospective Plantings report and into planting season. The weather is not likely to stay as nice as it is right now, and most of the pressure from weather has been on the new-crop December, where we have seen that market move down toward the $2.30 level. We need rallies here to sell old crop and to forward price more new crop. I would be primarily looking to buy back any short hedges you hold on new-crop corn in the $2.25-$2.30 range for December corn and continue to phase in long hedges to cover your corn needs out through calendar year 2003.
The lack of strong export activity and continued relatively favorable weather pushes the wheat market lower, with new contract lows being recorded both Monday and Tuesday on the July Chicago contract. Essentially the same thing is occurring on the July Kansas City where we moved down toward a low of $3.04_ in Monday's session and recorded a new contract low again at $3.02_ in Tuesday's session. In these markets, any short hedges that were lifted early in March on a dip down toward the earlier contract lows that came from late last December in both Kansas and Chicago should have been replaced when we saw two consecutive closes in new low contract ground. I would hold those short positions as the prospects for a large crop continue to press this market, and we have a problem also of something less than robust export activity. All of this suggests that U.S. wheat is priced a bit above equilibrium levels in the world market. Let's hold short positions until we see some signs of bottoming action in these markets. We may be able to work with a downtrend line and let it give a buy signal before short hedges are bought back if that does, in fact, occur prior to harvest.
