Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
April 8, 2003
Cash cattle sold as high as $80, with an occasional blip up toward $81, in the northern half of the feeding zone last week. Boxed beef cutout values are looking better as this week gets underway with the lighter Choice types at $131.67 Monday afternoon. Some improvement in the boxed beef values is going to be important to maintaining anything approaching an $80 cash market because packers have reportedly lost money across the past few weeks. Better boxed beef values would give some relief and stop the reducing of slaughter levels that we are already starting to see as a reaction to packing profit margins in the red. Cash hogs are coming into the week a bit higher with the weighted average price on a carcass basis moving back up around $47. The cash feeder cattle market is looking a bit better with emerging strength in the fed cattle complex and in live cattle futures. It appears that we are in an uptrend for the time being in these markets, especially in the beef sector.
The April live cattle futures are approaching the late February high just above $78, and I expect to see rampant selling emerge here. It is the case that if the cash market stays as strong as it is and gets stronger in terms of cash-futures convergence, we will need to see the futures trade up. But I think this market is going to have a difficult time getting through that resistance just above $78. I would be placing and replacing short hedges on that type of rally. The life-of-contract highs are showing a clear double top up around $80, but it is not apparent to me that we will see a retest of that $80 high unless we see improvement in the fundamentals and see packers' margins get in better shape fairly quickly. If you look out a little further to June, that contract is up around $72 and just slightly below the late January and early February highs at about $72.30 per cwt. Life-of-contract high is $73. I would be a bit more patient on the June but would definitely sell this market aggressively to place short hedges on a rally toward the $73 life-of-contract high. Longer term, we may see the June above that, but we will surely see a major correction to the downside before prices above $73 are likely to occur.
All the spring and summer feeder cattle contracts are showing the same pattern we see on the April this week. The recent advances on the April don't appear to have resistance until the late January highs just below $81, but the May and later contracts will run into resistance across prior highs before the April gets to $81. I would look out toward the May and sell the late spring and summer feeder cattle futures on any rally up toward the $80.50-$80.75 price range on the April futures contract. We may see that before we see any substantial correction to the downside to allow us to draw an uptrend line.
In the lean hogs, I would suggest selling any rally of $2.50-$3 per cwt. from current trading levels. There is resistance on the April just above $53, and we have comparable resistance compared to current trading levels on the later contracts such as the July near $62 across the mid-March highs. I would sell the late spring and summer contracts aggressively if the July can, in fact, mount a $3 rally from current levels and approach the highs just below $62.
The grain and oilseed markets got some help in Monday's session from the weekend storms in the Midwest. It is too early to be talking about weather keeping farmers out of the field, but that is exactly what that rally was on Monday, and we have seen modest to small gains again in Tuesday's session. The May soybeans are making new highs out above the prior high that was just under $5.90. We are up around $6 on this contract, and I would be taking advantage of these rallies and selling old-crop product. We are probably going to see, with the November closing around $5.30 in Tuesday's session, a rally to the recent highs around $5.35, and the life-of-contract high on the November is $5.43. I would be an aggressive seller to move up toward 50 percent or more of 2003 crop forward priced on any advances into that $5.35-$5.43 price range. Keep in mind that we have an opportunity here to price up against the high, and if we see two consecutive closes in new higher ground, those short hedges as a selective hedger ought to be bought back. I don't expect to see that happen. It would be later in the year and riding the momentum from a substantial weather problem before we need to see new contract highs in this market, so I think we have a selling opportunity here.
If you look at the corn, we find the nearby and active May trying to rally up across the mid-February high, which is just above $2.45. There is then an early February high just below $2.50. I am not excited about doing anything in this market except holding long hedges and being exposed to the cash market after having bought back short hedges. I would start to take profits on long hedges and start thinking about getting some pricing done on the new-crop December only if we see a rally sufficient to push the December up toward its early February high, around $2.48. That is getting back up to what I believe will be the upper one-third of the eventual range in prices we will see in that December contract. I would think about doing, on a selective basis, some hedging at that level and move up to at least 50 percent of the crop. If this market backs off, it will be an opportunity to be a selective hedger, buy back the futures, and improve the cash flow position. Longer term, look for a downward correction and then a rally to let us sketch in an uptrend line.
In wheat, the markets in Chicago and in Kansas City are trying to get up off the floor. We had about a 5-cent gain on the July Chicago in Monday's session, but it lost almost 5 cents in Tuesday's session. The contract low here is $2.79 and we are not that far from it with a close just above $2.89 in Tuesday's session. I wouldn't be surprised to see a dip back down toward that contract low. I would be inclined to buy back short positions in this market on a dip toward $2.79. This market has already honored the earlier low from last May, which was around $2.80, and I look for it to do it again, especially if we get some continued upside movements in the short term in corn and soybeans. The pattern on the July Kansas City contract is very similar with a low at $3 and the market closing Tuesday at $3.095, only 10 cents off the lows. I think this is an opportunity for users of wheat to be placing long hedges on a dip back toward $3, and I would expect to see a bounce off that low based on weather as we move further toward harvest and start getting storms interrupting harvest, etc. Let's don't do anything other than buy back short hedges down around $3 on the July Kansas City and then look for a rally to replace short hedges or to do some selling in the cash market.
