Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
May 13, 2003
Whether the beef complex can sustain a bull market may be up to the feedyards. There are reports that cattle that are being pulled early to meet the slaughter needs of packers are recording profits of as much as $100 per head. The feedyards need to stay aggressive. The lighter Choice box values on Tuesday morning were at $139.58, up $2.15 from Monday afternoon. The highest weekly average price for the lighter Choice boxes ever recorded was for the week ended April 19 of this year at $135.21, so we are recording new record highs. This gives the packers more room to bid higher on the cattle. There was a rumor circulating at noon on Tuesday that cattle had sold in the Plains states at $80, and we will probably see some better cattle bring $81 before the week is out. Behind the scenes, it would appear that demand is in good shape. The demand index that is posted at www.aaec.vt.edu/rilp under "Demand Indexes" showed first quarter beef demand was up significantly from last year and also above the first quarter of 2001.
Last week we showed the June live cattle futures and indicated that it is moving up through the old resistance around $73. A good approach there is to take advantage of these higher prices as they come. One can also step back and use the uptrend line that we showed indicating the market is in an uptrend and then place short hedges only when we see a close below that line. This week I am going back and showing the August feeder cattle contract because it shows the excellent opportunities that often occur when the selective hedger is patient and is willing to sell a rally to the contract high. Last Friday's high matched the late 2002 high almost to the penny. I would always place short hedges and take profits on long hedges in these markets on a rally to a life-of-contract high, especially when that price is rather obviously in the upper one-third of the fundamentally based possible price range for the year. I would absolutely hold those short hedge positions and stay off the long hedges until we see two consecutive closes at new higher contract ground, but I don't expect to see that in the near term. You can also, as I have shown, sketch an uptrend line on this chart and use that as an indication of when you want to think about being back on short hedges.
The June hog contract is about the only lean hog futures contract that is not making new highs. Monday's price pushed up into an old chart gap with that gap having been left in late 2002. We have seen no correction to the downside since this June contract started the current rally at about the $57 level in early April. I would continue to be an aggressive short hedger and seller in this market if June can push up toward its late 2002 contract at $66.90. At a very minimum we will get a substantial correction back to the downside and give the selective hedging approach a chance to generate revenues before this market will turn and try to take out its high. Longer term, the pork complex continues to look decent with less burdensome supplies than we had earlier thought, and I would not be anxious to hedge hogs out through the end of the calendar year and into 2004 just yet.
Stormy weather in the Midwest and Southwest and prospects for a bullish supply and demand report released early Monday morning brought a very quick and active rally in the wheat complex. It has been years since we have seen moves like we saw last Friday and Monday where the closes moved up some 30 cents-32 cents per bushel in Chicago and about 30 cents in Kansas City. The July Chicago contract was able on Monday to close above the early February highs just under the $3.30 level. It looks as if Monday's high on the July Chicago at about the $3.37 level and the July's contract high at about $3.55 in Kansas City will become new resistance planes and new pricing targets. I expect this market to back off from those levels, so if you are holding short hedges, you are going to see some correction to the downside if you are looking to pull those hedges. This market generated buy signals as it screamed up through downtrend lines last week, so many selective hedgers will be off their short hedge positions but may still be interested in replacing them if the weather starts to settle down as we move toward harvest and see more price pressure coming from harvest. At the world level, Monday's report showed wheat stocks continuing to move somewhat lower but expectations are for some rebuilding of stocks in the 2003-2004 crop year which starts June 1 in the U.S. That set of ending stocks is estimated at 511 million bushels as compared to 448 million in the current crop year which will end on May 31. If you are holding short hedges and didn't get them bought back before we saw this strong two-day rally, look for a correction to the downside of about 50 percent of the rally as an opportunity to buy back those hedges and then look for better prices to replace short hedges at a later date.
The reports were not as kind to corn even though corn prices did rally with the wheat across the last few days. Ending stocks for the current crop year in corn, which will end August 31, are at 1.059 billion bushels, and the U.S. Department of Agriculture is expecting an average price of about $2.30 in the cash market in the presence of that level of stocks. The first estimate in this report for the 2003-2004 crop year shows ending stocks at 1.304 billion bushels and a projected price range of $1.90-$2.30 in the cash complex, which translates to something near $2.05 to $2.45 in a new-crop December futures contract. I have been recommending selling old crop corn on a rally toward the January high near $2.50 on the July futures. The December contract did rally a bit more than I expected and took out the February high, which was about $2.47-$2.48 and ran up to about $2.52-$2.53 in Monday's session. That now becomes a target for a new pricing activity and anything back above $2.50 in this December futures contract I would definitely see as a forward pricing opportunity and as a place to lift long hedges.
Soybeans are making new highs in both old-crop and new-crop contracts. The July pushed up toward $6.50, which has pulled the November new-crop contract up to the $5.70 level. The old high on the November was $5.43, and selective hedgers would have bought back any short positions on this new-crop November contract on the second consecutive close above the $5.43 level. Now it is a matter of monitoring opportunities in this market and watching. We have some recent highs up around $5.65 on the November. We have an uptrend line hooking the late March and mid-April lows that is going through at about $5.45 up toward $5.50 across the next week. This market can be managed by either selling a rally to those highs at $5.50 and arguing that this market will not be able to move above those levels or waiting and selling a close below the trend line. This first set of projections for the ending stocks in the 2003-2004 crop year, which will end August 31, 2004, has the ending stocks for soybeans pushed up significantly to the 245 million bushel level in contrast to 135 million in the current year and 208 million bushels for the 2001-2002 crop year. With 208 million bushels in ending stocks, the 2001-2002 crop year averaged $4.38 in the cash market. I can't imagine we will see prices substantially above that level with all the competition from a record crop in South America and ending stock estimates that are moving higher.
