Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
April 15, 2003
The cattle markets are definitely nervous in early-week activity. Boxed beef values have continued to improve and are moving back up into the mid-$130s for the lighter Choice types. Thursday's Cattle on Feed report is expected to show placements during March 105.3 percent of last year with a range in those expectations of 103.7 to 108.0. Cash cattle were $79-$80 last week and some feedyards are asking $82-$83 this week, but I don't think they will get it. Packer's margins do appear to have edged back out of the red and into the black, but packers are going to be very reluctant to bid up cattle. Showlists in the feedyards are likely to be bigger than last week. On the bullish side, of course, there is a continuing dearth of Choice type cattle, and that could contribute to some better bids on the better pens of cattle. If we see an $80 market or better this week, we will have a $2 premium to the expiring April contract and that could pull the April back up toward its $80 highs. If that occurs, the June will take a run toward its $73 high, and I would be an aggressive seller just under $73 on that contract. The markets are likely to get sold by speculators and hedgers, and we will have speculators and long hedgers taking profits on long positions as well on a rally by the June up toward $73.
If we get one more thrust in the live cattle futures, we will probably see the August feeder cattle contract get pushed up toward its January highs, which are in the $83.30-$83.40 area. I would be inclined to forward price those summer cattle on a rally to that level because I do believe that will be the point at which we will see a correction to the downside, and I have been waiting on that as a chance to sketch in a better trend line that is not so steep. So, I expect the August feeder cattle contract to rally above $83 and then correct to the downside, perhaps down toward the $81-$81.50 level. For those who prefer this approach, we will then be able to sketch a trend line under this market and let it trade up if it can. There is resistance across those January highs, but the contract high on this chart is up above $85.50, coming from late in 2002. The April chart I show again this week has the same pattern. The feeder cattle contract will correct to the downside and give us a chance to place long hedges and work with uptrend lines before it goes sharply higher.
The hog market is continuing to struggle in terms of cash valuations, and we are just now starting to approach the point at which daily slaughter levels should work seasonally lower. The nearby April has traded down toward $48 recently then rallied above $51. It is now gyrating around $50, and I expect to see this market find support in this area and not trade lower. Those price levels are consistent with the $46-$47 weighted average prices on a carcass basis we are seeing in the cash market. So I would be inclined to look at lifting short hedges on anything out through the early to mid-summer on dips down toward $49 and lower by this April as it moves toward expiration. On the June contract, there are recent highs just above $60 and then fairly substantial resistance above that in the $62-$63 range. I would definitely be an aggressive seller of these lean hog futures if that June contract can rally back to the $62 level and above. That puts the live-based hogs back in the $45-$46 range and definitely puts them back in profitable territory with continued relatively low priced corn.
Ending stocks in corn in the April 10 U.S. Department of Agriculture reports were at 1.004 billion bushels, slightly above the 1.0 billion bushels that the March report had shown. We continue to see a price range that is focusing in on $2.25-$2.35 in the USDA reports in the cash market for the current crop year that ends August 31, 2003. The nearby May futures have rallied to the February highs recently just above $2.45 and corrected to the downside a bit. They have left a chart gap as the market rallied, coming after the somewhat bullish Prospective Plantings report at the end of March. Basically, I think we are in the process of base building in this market, and I continue to watch for rallies as a chance to sell old-crop and to do some forward pricing on new-crop. I would be inclined to sell old-crop corn and look at adding to some price protection on new-crop when the May rallies into the $2.35-$2.40 price range. We are not likely to see anything much more than that to the upside in the very near term, and if we can get that type of rally, we are probably going to see the December new-crop contract try its recent high just above $2.45 and maybe even challenge the early February high, which is around $2.47-$2.48. I would be moving up as a selective hedger toward 50 percent-60 percent forward priced on the 2003 corn if we can get a rally up toward those levels.
In wheat, ending stocks are down from 465 million bushels in March to 445 million bushels in the April 10 report. That continues to show relatively tight sets of stocks in the U.S. and at the world level. The USDA's projected price range is getting quite narrow now at $3.55-$3.65 in the cash market for the current crop year. Of course, that includes some sharply higher prices last August, September, and October because those cash price ranges are well above the levels at which we see Kansas City or Chicago July futures trading at this point in time. I believe the July Kansas City is going to build a bottom around $3 and rally from here. I think the July Chicago is going to try to build a bottom in the $2.75-$2.80 range, and we are not likely to see downside moves through those levels unless we start seeing very positive weather patterns. I would be lifting short hedges in wheat and looking for substantial rallies of 30 cents or so from these recent lows to replace short hedges. Users of wheat ought to be thinking about long hedges since I see relatively modest downside risk and we have lots of opportunity for this market to rally as weather inevitably becomes a factor as we move through April, into May, and into the important yield-determining period.
Ending stocks came down from 160 million bushels to 145 million bushels in the soybean complex. This is the market in the broad grain and oilseed complex that is showing some price strength, with the nearby May futures making new contract highs in Monday and Tuesday sessions. This price strength in old-crop is coming in the face of a record crop in South America that is moving on through harvest period and into the export market. There are two recent highs around the $5.35-$5.36 level on the new-crop November and the contract highs are up at $5.43. I would be an aggressive hedger and seller of new-crop November in this $5.35-$5.43 range. Selective hedgers should sell this market and hold short hedges and consider pulling them off only if we see two consecutive closes above the contract high at $5.43. I do not expect to see that happen with all the competition from South America in the world market. This is a pricing opportunity in soybeans that I believe should be taken advantage of in terms of moving up to 60 percent-70 percent forward priced on the 2003 crop, especially if you are willing to manage your exposure to this market as a selective hedger and would be willing to buy these short hedges back if we see two consecutive closes in new high contract ground. If you hold long hedges in soybeans or soybean meal, this rally by the November up in the $5.35-$5.43 range is an opportunity to take profits on those long hedge positions.
