Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
May 27, 2003
After the BSE scare last week, the cattle markets were quick to recover and go back to reflecting the basically strong and positive underlying fundamental position of the markets. I was concerned about sell stops that didn't get filled as the market plunged limit down the day the BSE announcement broke. Those market orders, if not filled or cancelled, would have been filled at the very low opening the next morning. The look of our charts in both the feeder cattle and the fed cattle market has changed because we have that hard plunge down. On the June live cattle, for example, that market went all the way down toward $71 and in Tuesday's session, we are trading up strong and back up above the $74 level and appear to be ready to challenge the highs up around $74.87. With the live cattle futures trading higher in Tuesday's session, I would hold any short hedges that you might have placed, either intentionally or by way of the BSE scare, until we see this June contract challenge its recent contract high at $74.875. If we see two consecutive closes above that high, then I would buy those short hedges back, but I suspect this market will run into selling just under the $75 level and correct to the downside again.
Boxed beef values for the lighter Choice types have been above $144 this week, and we are setting new record highs in this market. That suggests a behind the scene demand level in beef that is strong and destined to show a second quarter performance that will indicate demand up significantly from second quarter last year. We need to be placing short hedges on a selective basis when either profits are too good to pass up on a per-head basis or up against contract highs like the high at $74.875, and then be prepared to buy those short hedges back if we see two consecutive closes at new higher ground.
The picture is very similar in the feeder cattle complex. We saw a sharp break on the BSE announcement in the middle of last week, and these markets have come back up toward the levels we were seeing before the BSE announcement was released. The contract high on the active August is $85.70, and I would be inclined to place short hedges on a move up against that level. I am not sure that the live cattle contract can make new highs, and I am a bit apprehensive that if this boxed beef surge to the upside falters, we may see the packers start to reduce slaughter levels a bit to try to get margins in better shape. At any rate, I wouldn't expect to see this August feeder cattle contract go roaring through that $85.70 contract high until we get turned back for at least a short-term correction to the downside. If you are holding long hedges, I would be inclined to go ahead and take profits on a rally up toward the $85.50-85.60 level.
In the hog market, we are seeing the correction to the downside that I have talked about and expected in the June lean hogs. We are probably going to dip down toward the $62 level before this current little price plunge is over. Cash hogs coming into the week are flirting with the $60 price level on a carcass basis, and that is, of course, in profitable territory for virtually all producers. We do need to get cash-futures basis in line, and that is part of what is going on with some backing off in the June from the $67.675 high that was recorded about five to six trading days back. There is no indication that cash prices were going to surge into the $60s to justify a higher futures price as we move into and toward the first of June. Let this market correct to the downside before you buy back any short hedges on a selective hedging basis. If you are primarily interested in hogs later in the summer and fall and are watching the June chart as a messenger of the marketplace, let this correction to the downside get complete and have a day or two of higher trade and then sketch in the trend line that would hook the lows down below $58 with the bottom of the correction that we are now going through. Then you can be prepared to forward price late summer and fall hogs when the market runs back up toward the highs we recorded a few days back or let this market trend to the upside and place short hedges only when we see a close below the uptrend line on the chart.
The better weather is allowing the corn crop to get planted. Closes on Tuesday are off the lows, and I suspect that this market will be up a bit Wednesday unless we get a bearish surprise in the crop condition reports coming out from the USDA later today. If we do see a higher day tomorrow, we will have an opportunity to reconstruct trend lines on these charts hooking the lows back in late April with the low today or the low tomorrow (or whenever this little correction to the downside runs its course) and sketch an uptrend line. I would do that on the July and watch for signals and also do it on the December where we will be able to sketch a similar trend line and will have resistance up around the $2.52-2.53 level. If we have no short hedges in place, we can sit back and place them and take profits on long hedges on a rally to the highs or we need to place short hedges and take profits on long hedges when we see a close below this newly constructed trend line. The wheat market looks a bit better than corn, and we are going to be able to work essentially the same strategy. Tuesday's session has showed lower prices but the closes for the day are up 3-5 cents. Sketch the same type of trend line as on the corn. We have highs up around $2.53-2.54 on the Kansas City July as the rally objective and the point of resistance and selling pressure. The chart picture in Chicago is a bit more bullish, with the high around $3.45. Let's adopt the same strategy of replacing short hedges on rallies toward these recent highs in these July contracts or on a close below the uptrend lines that we will be able to construct, I think, after Wednesday's action is complete.
The soybean prices on Tuesday were being pressured by the several consecutive days of good planting weather in the Midwest. Early prices were down primarily on the basis of those improved weather conditions. Good export data are lifting the market well off the lows, and the close on the day is not nearly as negative as might have been anticipated earlier in the morning. We had trend line sell signals in this complex, especially in the old-crop contracts like July, where we also had a hook reversal last week when the market traded up to $6.58 and then reversed on the day. I would pay attention to that $6.58 resistance that is now sitting above us on the July because rallies back up to that level are likely to get sold as the technicians look for a possible double top on the chart for old-crop soybeans. If that occurs, we will see the new-crop November lifted back up toward its May 20 high of $5.85, and I would be an aggressive seller and placer of short hedges in this market if that November can rally toward $5.85.
