Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
June 10, 2003
Weather is moving the grain and oilseed markets in Tuesday's session. The Wednesday U.S. Department of Agriculture supply-demand reports are expected to show higher ending stocks in wheat, but wet weather that is interfering with the harvest is helping to boost the market. Tuesday's higher prices came on a round of trading fund buying with some buy stops being hit as the market moved up through recent highs. We have seen a fairly quick dip below the consolidation patterns on the wheat charts that I called bear flags last week, and now we are above those consolidation levels as weather influences these markets. Soybean prices are up about 10 cents in Tuesday's session, with position squaring before Wednesday's report the primary reason for the modest rally. Corn is up a bit and going along for the ride with higher wheat and soybean prices. What I see in wheat is another good opportunity to watch a rally on the July Chicago, for example, back up toward the $3.45 area, which is the top we saw about a month back. That is going to create what I consider an excellent opportunity to place short hedges, and processors and others will be taking profits from long hedges on a selective hedging basis. On the July Kansas City contract, we have a bit less impressive rally under way this week. Past highs here are in the $3.55 area and, as is the case with the Chicago-based wheat trade, I would be an aggressive seller and hedger on rallies up toward the high $3.50s and would be taking profits on any long hedges.
Corn is trying to form some sort of bottom around $2.35 on the active July contract, and we see efforts to hold recent price levels in the $2.34-$2.35 area on the December. Note that the thrust down across the past week on the new-crop December corn is nothing but movement down into the chart gap that was left back in April when this market started to surge. If the markets can hold and we get a rally back to the upside, anything back up toward the $2.52-$2.53 highs we saw several days back on the December new-crop corn should be seen as an opportunity to place or replace short hedges. Keep in mind that there is a chart gap when you look at the prices in the regular daily trading session on the December corn futures in the high $2.40s. I think there will be aggressive selling on a rally by this new crop December back to the bottom of that chart gap, and you might want to formulate your price plans accordingly.
The active July soybean contract has made, in Tuesday's session, about a 50 percent correction on this last move down from the high $6.50s to the $6.10 area, and we are trading in the $6.30s. I think anywhere along here from where we are today up to the $6.55 area on the old-crop July ought to be seen as an opportunity to sell old-crop product. On the new-crop November, we see a similar pattern, but we are closer to the high that we put in on May 20 at $5.85. I would be an aggressive seller in this complex if we can get a rally back up to challenge that $5.85 high, and we are likely to see that this week. Tuesday's high was $5.77 -1/2. Keep in mind that it always makes sense to sell rallies to contract highs, especially if that high is reasonably in the top one-third of the range of price expectations for the year. You can always have a backup position in the form of being willing to buy back short hedges if we see two consecutive closes above that old $5.85 high. I don't think the weather has bothered soybean planting sufficiently to allow us to move above those levels.
The beef market has been in the hands of the BSE phenomenon across the past few weeks. After a limit down break the day the BSE observation in Canada was announced, the markets then turned and rallied strongly, moving back up through the preannouncement trading levels of $73-$74 and recorded a high above $76 a few days back. The market has backed off since then and it seems to be registering the short-term impact of some reduction in beef supplies in the domestic market. Choice boxed beef prices during that same time period set records and went above $150. Most cash cattle were at $80 last week. This is very little trade so far this week with some early preliminary trade at $78-$79 in scattered market areas. I doubt if we are going to be able to hold the $80 market since we are in a period with relatively high slaughter levels. Sell rallies back to the high up toward $76.90, which was put in just a few days back on the June live cattle contract. Sketch a trend line hooking the low that was recorded after the BSE announcement and last week's low, and recognize that this market has to come out of the triangle formed by that flat top across the contract high and that upward trending line. More conservative traders might wait until we see a close below the trend line to place short hedges, but I would recommend being more aggressive in placing them on rallies toward the contract high at $76.90.
Feeder cattle have been trading with the live cattle futures, and the pattern on the August looks very similar to the pattern we saw on the June live cattle. We have a new contract high recorded on June 2 at $86.80. Sell aggressively on a rally back up toward that level and, as was the case on the June live cattle contract, you can hook a trend line across the post-BSE announcement low with Monday's low of this week and monitor this market. My inclination is to be aggressive and sell rallies to the high because I think that is at or near the top part of the fundamentally justifiable price range for the year on these late summer feeder cattle.
In the lean hog pits, all of the contracts after June have been making new contract highs across recent trading days. The June has a contract high prior to Tuesday's session of $67.675 recorded back on May 20. We made a new high in Tuesday's session, but I am not at all convinced that this market is going to be capable of closing above that old high and moving up from here. Tuesday's close was $67.475. I would always sell rallies toward a contract high when it looks like it is the upper portion of the fundamentally based price range for the year, and I would be selling this rally. Buy those short hedges back only if you see two consecutive closes above $67.675 on the June contract. Cash prices are getting better and will get better as we move through the summer with reduced daily slaughter levels, but up around the $67-$68 level translates to $50-$51 hogs on a live hog basis, and that is very profitable. It is not as if this emergence of profits is going to prompt a dramatic increase in the breeding herd and give us more hogs by the end of the year, but we will see seasonal increases in daily slaughter levels as we move beyond the summer months. So, it is time that we started looking at the more distant contracts and thinking about price risk management in the August and December for later this year.
