Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
June 3, 2003
The other side of the BSE phenomenon is showing up in the cattle markets this week. Monday's futures prices moved up sharply when it was rumored that shipments of cattle into the U.S. from Canada might be halted for some time. That takes the cattle and the beef that are produced in Canada out of the supply flows here, and the short-term impact of all that is likely to be higher prices in the U.S. But there is another side to the issue and we will see it emerge a bit later. In other countries like Japan where BSE has cropped up, one of the reactions is for people to back away from consuming beef. Canada is in the top four countries for our exports of beef, and that development would take something off the demand side of the price equation.
Boxed beef values are at record levels and are flirting with $150. Prices late last week were a solid $80 in several areas with some pens with over 80% Choice apparently at $81.50 in Nebraska. We are in a bull market in cattle and I would let these markets ride this unexpected surge coming from BSE to the upside. Short hedges placed on rallies to the old contract high should always be bought back on the second of two consecutive closes above the old high, and that occurred last Thursday at a $75.55 close on the June contract. We could see the June challenge the $80 area before running into major resistance unless new outside shocks stop the market. Keep trend lines under you and sell on rallies to profit margins you should not pass even if you have to answer a margin call or on a close below the trend line if you have no short positions when that close below the trend line comes. Follow the same strategy on feeder cattle where we are seeing the same type of surge and new contract highs on the summer and fall contracts.
More distant lean hog contracts are making new highs, getting some help from the feeder pig numbers in last week's monthly report. The June contract has a high up around $67.675, but the more distant contracts are making new highs. I would sell a rally to the contact high on the June. Cash prices are showing us a weighted average of $58 to $59, and the June is showing a huge premium to cash. I do not expect to see enough help from the spillover troubles with BSE in beef to push this market up through that high in June. On a run up to the June high, take a hard look at the profit margins you can lock in through October. The supply side of the pork price equation is largely known out through the fall months since those hogs come from the spring feeder pig crop.
The grains and oilseeds are all feeling the pressures of improving weather and crop conditions. The corn crop is going in and the opportunities to get soybeans planted are emerging. Harvest weather for wheat is not so good and the harvest is being delayed in some quarters, but the rains will improve yields in some late-planted fields. In the face of all this and nothing spectacular in the export arena, July corn futures show a possible bear flag and we should see another challenge of the late April lows near $2.30. Hold short hedges here and place them if you are unprotected on old crop corn and if we get a close below the trend line hooking the late April lows with the low from last Tuesday, May 27. The new-crop December has a trend line hooking the same lows, and short hedges should be held here or placed or replaced on a close below the trend line.
Both old-crop and new-crop soybeans are giving trend line sell signals with Monday's weak closes. The July could drop into support across lows near $5.95 or into chart gaps from early April down in the $5.90 area. As the weather improves and the exports in soybeans tend to lag a bit behind their earlier impressive pace, we need to be short in this market in old-crop and new-crop product or selling old-crop product held in storage.
Both the Chicago and Kansas City July wheat contracts are showing possible bear flag consolidation patterns around $3.25. If this is the correct reading of the chart, we are likely to see another test of the $3.00 area in Kansas City and down to the $2.90 area or so in Chicago. The recent rally back to the early May highs that were around $3.55 in Kansas City was an excellent chance to place short hedges in both markets. Last week, as I note on the chart this week, I expected a rally up from that July 27 dip but we did not get much and it was not sustained. Hold short hedges here into the harvest and do not be anxious to buy them back as a selective hedger until we see a test of the contract low in Kansas City at $2.94.
