Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
May 6, 2003
The entire livestock and meat complex is trying to act bullish. We had new contract highs recorded in Monday's session in the live cattle contracts, and some of the more distant lean hog contracts such as the October also recorded new life-of-contract highs. The active June live cattle contract recorded what most chart readers call a hook reversal with a new contract high being recorded and then a lower close. The only reason it was not a classic key reversal is that Monday's trading range did not constitute an outside day. While that is happening on the June, we see August, for example, finally lose some of its discount to the current markets and to the nearby markets with a close above $69. We are now $4 per cwt. off the lows around $65.50 that were recorded in February and then again in early March on this August contract. I said at the time I didn't see any reason for the huge discount in the August live cattle, and we are seeing some of that discount go away. Boxed beef values are in the $133-$134 area for the lighter Choice types and up a bit so far this week. Cash cattle sold mostly at $78, with a few high-quality cattle at $79, last week. Feedyards are looking for $79, possibly $80, this week with fewer cattle ready to go to slaughter. Early sales, however, have been at $78-$78.50, and those are limited to just a few loads of cattle. The weighted average cash prices for carcass-based hogs are up again in early-week trade, around $54 per cwt., and that is a significant improvement that continues to happen as the industry recognizes we are not seeing any signs of expansion and bigger supplies in the distant contract months. That is behind the October lean hog recording a new high in Monday's session, and we see the active June up toward $65, within $2 per cwt. of its life-of-contract high at $66.90.
I would not be anxious to sell any of these markets, especially in the cattle and feeder cattle. We may have some upside potential yet with the new life-of-contract highs in the June still $6-$7 per cwt. below cash. Sketch trend lines hooking the March and April lows on the live cattle contracts and monitor for still better prices. The August contract may run into some resistance in the live cattle pits across the $69.50 highs that were recorded in late January, but I think that market has some upside potential and is a full $10 per cwt. right now below where the cash trade is expected to be this week. The August feeder cattle continue to work higher. I would use that same trend line approach on this contract and think long and hard about being willing to sell to place short hedges and take profits on long hedges on any rally up toward the life-of-contract high at $85.70. It almost always works to sell a rally to the contract high, and I would actually put in orders around $85.55 or $85.60 to increase the chances of getting fills on either short hedges or efforts to take profits on long hedges.
Producers will sell the June hogs on a short hedge basis, and they will also be sold by speculators on any move up toward contract highs at $66.90. This market has run from $56.50 back in March all the way up toward the $65 level without any major correction. If it is able to go up through the old chart gap left last December and challenge the highs, we will see a substantial correction from that level. Short hedges and short speculative positions are likely to be in vogue and aggressive selling will happen on any move above $66.50.
In the grain and oilseeds the outlook is considerably more negative with the possible exception of soybeans. Within the past week, the new-crop November soybean contract has joined the old-crop contracts in making new contract highs, but we need to keep in mind that this is only putting the old-crop May up around $6.20 and the new-crop November in the $5.55-$5.60 range. Stormy weather propped up new-crop contracts in both corn and soybeans a bit on Monday, but that has gone away and soybeans in Tuesday's session are about flat. On the charts, use the March and April lows and sketch a trend line up on both the old-crop and new-crop soybeans and monitor this market to see how far it can go to the upside. I fully expect to see the new-crop November contract correct back down toward the $5.45 level at a minimum before it tries to go higher, and all of that, of course, depends on weather. Selective hedgers who bought back short hedges placed on a move up toward the old $5.43 contract high on the November when we saw two closes above that level should monitor this market carefully. There are going to be opportunities to get those hedges replaced at higher levels.
Old-crop May corn is in the $2.35-$2.40 range and popped up a bit Monday along with the new-crop December on the stormy weather in the Midwest. The December contract leaves a chart gap below us and that is positive. The first resistance for the December is across the April high at $2.45 and then there is more resistance across the February highs at $2.47. I would be aggressive in terms of replacing short hedges on corn on rallies up into that $2.45-$2.47 zone by the December. Users of corn who hold long hedges and are willing to be fairly aggressive selective hedgers ought to think about taking profits on long hedges at that time. I pushed hard for long hedges out through this calendar year on the dip last week down toward the contract low, which I thought to be a major opportunity for the long hedge community. I would continue to advocate that same posture in the corn market.
The stormy weather popped the wheat markets up a bit on Monday, and there is some follow-through on Tuesday with prices up about 4 cents. The new-crop July in Kansas City dipped down through the $3 support, down toward $2.94 last week and we are rallying a bit from that. There is a chart gap starting at about $3.15 and then major resistance across the January and February highs up around $3.45. I expect to see this market make a small corrective rally to the upside, perhaps getting up to the $3.15-$3.20 level, and I would be inclined to watch for opportunities to sell it there because I believe we will see it turn back down as we move into harvest. The new-crop July in Chicago is holding across its double bottom at $2.80 and is trying to rally. A reasonable rally objective there is in the $3.05-$3.10 range, and I would sell this market on any signs of weakness if it rallies back up to that level, expecting continued price pressure as we move toward and through harvest.
