Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
April 29, 2003
It looks as if the next move up that I have been waiting for in the cattle markets started in Tuesday's session. Boxed beef values that had backing off a bit were up 89 cents at noon on Tuesday, and that puts the lighter Choice boxes essentially back near $135. If this positive pattern continues, and it appears the futures complex thinks it is going to, we could see cash prices a bit better than the $78-$78.50 that was paid toward the end of last week. There is talk about short covering in both the cattle and hog pits in Tuesday's session, and if you look at the August feeder cattle contract that I show this week, you see illustration of what is occurring in the livestock complex. Hogs have not pushed out above recent highs yet, but the feeder cattle futures have. It is clearly the case that the August feeder cattle contract is moving up through resistance across recent highs instead of closing below the uptrend line on the chart, and that is what I have been expecting. I would let these markets run to the upside now and see what they can generate before being too anxious to either take profits on long hedges or to place short hedges if you are already own the cattle. Clearly, the trend line that is apparent on the August feeder cattle and the comparable trend line that you can draw on the live cattle contracts will give us guide to action.
Let's watch the feeder cattle and recognize that Tuesday's close also moved out above the late January highs. The next solid technical resistance on this chart is up toward $85 across the late December highs, and while I am not suggesting that we will go there before we consolidate a bit, that would be an obvious upside objective to think about taking profits on long hedges and placing short hedges. The August live cattle contract did not close above the early April highs, but it did close above a downtrend line that could be constructed hooking the January highs to the early April highs. We will see some resistance at about $68.50 as that contract tries to rally to the early April highs. The next resistance is then at $69.50 across late January highs, and that would be my first pricing objective. You can protect yourself in the event we don't see this much strength by using an uptrend line on the August live cattle contract that is configured exactly like the one we are showing on the August feeder cattle.
The supply-side numbers in the hog complex continue to run about 3 percent below last year's levels, and we are seeing new contract highs recorded in anything beyond the August lean hog futures. The nearby May contract has resistance across late January and early February highs around $60, and we see that same resistance on the June contract just above the $63 level. June is still well below its contract high, which is up around $67, and I would certainly be an aggressive seller on these late spring and early summer hog futures contracts if June can challenge its contract high in the $66-$67 range. That is not likely to happen in the very immediate future, but if we see continued strength in the cattle complex, that is going to help in pork as well. Keep in mind that the weighted average price of these hogs on a carcass basis that I have been talking about for weeks that had been languishing in the $45-$47 range is now above $52 in afternoon trade on Tuesday. The Monday afternoon average was $52.94, so we are clearly seeing some strength in this complex.
The wheat market turned decidedly more bearish in Tuesday's session. The continued improvement in crop condition and the prospects for a relatively large winter wheat crop has pushed that July Kansas City contract down into a new life-of-contract low at $2.96, and the close in Tuesday's session was down over 5 cents and very near that $2.96 low. That spells some additional downside in this market, and if you have lifted short hedges in the Kansas City July contract on recent dips down toward that $3 level, the rule is to replace those short hedges if we see two consecutive closes below the old-contract low. So, this situation needs to be monitored in Wednesday's session and appropriate action taken if we do see another close below the old $3 low. In Chicago, it is not as negative with the close at about $2.825, slightly above the contract lows that were tested in late March. With the pressure on the hard red winter contract in Kansas City, I rather expect to see new lows made in Chicago as well and follow that same rule of replacing short hedges if we see two consecutive closes below the existing contract low in July Chicago contract at $2.79. Keep in mind that when the fundamentals change significantly, prices will change. That appears to be what is happening, with some evidence this week as France buys wheat from Egypt, that our product is still priced above the world market. Now with the good crop conditions, we will see lower price possibilities in wheat.
Soybeans recorded nice gains Tuesday, ranging up to over a 16-cent gain in the July contract. That pushes the new-crop November up into new life-of-contract highs, and this apparently is coming from diminishing concerns about the impact of SARS in China on the soybean market, continued decent export movements from last week, and, I suspect, a considerable amount of short covering as the market staged a late rally. This is a market in which I have been recommending selling old-crop product on rallies and getting new-crop product priced on any move up toward the old-contract high of $5.43. Tuesday's close at $5.451/4 on the November records a new contract high, and remember the rule here: If we see another close by that new-crop November in Wednesday's session above the old contract high at $5.43, I would be inclined to buy back short hedge positions you are holding because this market is telling us that it is going higher. We can then construct a trend line on the November hooking the early April and the late April lows and extend it upward and let the market run to the upside until such time as we see a close below that uptrend line.
In corn, planting progress is basically ahead of normal, and we see pressure being registered in this market. The old-crop May contract has dipped to the low $2.30s, and the contract low is $2.271/4. On dips down to that low, I would use this as a signal to place long hedges out through the calendar year. This dip may turn out to be a huge opportunity for the long hedger reaching out to the new-crop December where the contract low is $2.301/2 and we have this market closing at $2.33 in Tuesday's session. I would be an aggressive placer of long hedges and I would be lifting short hedges in this market because I don't see downside risk from these levels until after we get through the planting period. This is a big opportunity as I see it to place long hedges, and I would be aggressive down against these contract lows in all the futures contracts out through the rest of the year into December.
