Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
May 20, 2003
Tuesday's limit down closes prompted trend line sell signals on both feeder cattle and fed cattle. Reports of a confirmed case of BSE or mad cow disease in Alberta, Canada rocked the markets in early afternoon. August feeder cattle had challenged the $85.70 high almost to the penny six or seven days back and ran into the expected selling pressure. June live cattle made new highs above the old $73 levels but is back well below $73 at the close on Tuesday and is generating sell signals with a penetration of the trend line that hooked the early March lows to the mid-April correction low near $70.20. The light Choice box values are at record highs above $42, but Friday's cattle on feed report was seen as slightly bearish. The market was already nervous about a media story for Tuesday night that looks at use of growth hormones in cattle before the BSE story. Profit taking started the sell-off but it picked up momentum as lower prices ran into sell stops and the BSE story quickly brought limit down moves.
Hold short hedges placed on rallies to the highs in feeder cattle or to the new highs in live cattle and if no pricing was done on those rallies, the trend line sell signals on Tuesday should have prompted short hedges and profit taking on long hedges. Hopefully, sell stop orders below the trend line were filled as the markets went limit down on the BSE news, but there is no guarantee of that in a fast market. Keep in mind that if the sell stops were not filled and are not cancelled, they might be filled at the open on Wednesday and that could be sharply below Tuesday's limit down closes. I was not sure that we can hold these high box values before the BSE shock. As the increases in box values work their way up to retail, movement will slow down and consumers will look to lower priced pork and poultry alternatives. The $80 live cattle market that was seen on occasion late last week will now disappear. If the BSE phenomenon is quickly and effectively isolated, and U.S. Department of Agriculture officials say that is the case, we could see rallies again as the grilling season boosts demand. But the $85.70 recent high on August feeder cattle and the $74.87 high on June live cattle will now be formidable resistance planes and selling objectives.
June lean hogs joined the later contracts in making new contract highs on Monday but were getting hit with selling on technical grounds in Tuesday's session before the BSE story in cattle. Hold short hedge placed on recent rallies to above the old December high near $67 and watch any downward correction in this market. When it runs its course somewhere near $63 and starts to rally again, and the BSE story could help boost pork prices, then sketch a trend line across the April lows and that correction low to $63 or wherever buying comes out. I would tend to go ahead and sell a rally back to the new high of $67.50, however, since the market has quit there once and quit after making a new high which is usually a very revealing failure.
The bloom is off the grain and oilseed markets with sharp losses on Monday. Planted acreage in corn is on pace with normal, and the weather uncertainty has diminished somewhat. The first estimate of ending stocks in the recent supply-demand reports put stocks in corn back above 1.3 billion bushels, and prices do not do well in years in which ending stocks are being increased. Last week, I saw the higher prices in corn as less than deserving and the rallies to $2.50 and better in the old crop July and the new crop December as selling and pricing opportunities. Friday's failure by the December after rallying to the $2.53 area is a clear signal that this market will have problems going to higher prices unless we get unexpected shocks. Stand ready to sell rallies in the July toward $2.60 and clear out old crop corn or look at selling call options or futures you might have bought after selling cash corn and deciding you were willing to be a speculator in futures this year. Get back to at least 50 percent to 60 percent forward priced on new crop corn on any rally by the December above $2.50. Consider taking profits on long hedges at the same time.
The wild rally in wheat that started on May 9 ran out of gas. This market has been consolidating across the past week. Tuesday's prices are restoring part of Monday's big losses, but I do not expect to see a repeat of the recent rally unless the weather is very unsettled. Treat rallies toward the $3.55 and $3.45 areas on the July Kansas City and Chicago contracts, respectively, as pricing opportunities. It will be hard for this market to take out the recent $3.56 high in Kansas City and the $3.46 high in Chicago. Stocks are tight in the world market but anytime we see a rally in our markets, we are not competitive with other sellers and the export pace slows again.
Soybeans have a more positive look in spite of the huge crops in South America. Unlike corn and wheat, where export movements lag last year's pace and may not even meet the reduced USDA expectations, exports in soybeans are holding up nicely. Starting from a more depressed price level relative to recent years, the soybean rally during April and May has gained some traction and is starting to benefit from the slow pace of plantings. Monday's losses were smaller than corn and wheat in relative terms and buyers have stepped in on Tuesday to buy the dips. Sell old crop product on these rallies on a scale up basis, but don't be anxious to push sales in the new crop November where prices are still well below $6. I would sell a rally toward $6 or connect the late March and late April lows and use the uptrend line to allow this market some room to rally and hope that the eventual close below the trend line and the related sell signal will not come until prices are well above $6. This has become a good example of the wisdom of buying back short hedges placed on rallies to the old high of $5.43 when there were 2 consecutive closes above the old high. That second close was around $5.47 and if the hedges were bought back there by selective hedgers, they now have another $0.30 price advance while they have been exposed, by choice, to the risk in the cash market.
