Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
June 17, 2003
Because Wayne Purcell is traveling, he wrote this letter to reflect the markets through June 13 and not through June 17 -- the Tuesday market -- as is normally the case.
The livestock and meat markets finished on a weak note last week as all the uncertainty surrounding the BSE issue in Canada continued to impose volatility in basic fundamentals and in prices. Boxed beef values for Choice beef that had climbed above $150 were down into the $142 range Friday. I expect to see the markets open on an uncertain tone and likely lower prices on Monday. Most cash cattle sold last Wednesday at $77-$78 and the only $80 price tags were in Nebraska in a few late sales on Friday. August live cattle matched the highs from late in 2002 around the $71.50 level about two weeks back in a first and positive reaction to the possibility that the BSE issue would reduce short-run beef supplies in the U.S. They then plummeted toward $67 on Friday as the demand side worries started to hit and boxed beef values dropped. Feeder cattle look much the same on the charts, with the price plunge less dramatic and the August still above the trend line which I show on the chart at the end of the week on June 13. There is some legitimacy to the better prices we are seeing in pork due to the BSE scare in beef, and the July lean hogs ran up to $69.15 before correcting to the downside last week.
If you placed short hedges on the rally to the old highs near $85.60 in the August feeder cattle, hold those positions. As the chart shows, we are still above the trend line on the August feeder cattle. I expect to see a correction to the upside before that trend line gets broken, and it may not be broken. If you are looking to place or replace short hedges on later summer and early fall feeder cattle, I would see a rally to the $85.50-$86 range as a short hedging opportunity. There is a lot of uncertainty surrounding what will happen to beef demand in these uncertain times, so do place short hedges if we see a close below the trend line before any rally arrives. Hedges in the summer live cattle contracts were signaled by the early June rally to the old contract highs near $71.50 on the August live cattle. By all means, hold those short positions until the smoke clears a bit and we see signs of a bottom. If you are looking for a price at which you would place or replace short hedges if you are out of the market, use a rally to the $69.50 area, about a 50 percent correction of the recent price break, to consider adding short hedges.
The lean hogs look bullish, and we have seen a $12 rally since the lows around April 1. Sell to place short hedges if the July rallies back to the high near $69 that was recorded last week. If we do not challenge that high, look for this market to dip to the $64 area across the May lows and then rally again. After that correction, we will have a new and perhaps more relevant low to use to hook to the April lows to record a new uptrend line to guide short hedge placement. Summer prices are always strong for hogs so let this market run to the upside to get to higher pricing objectives if you can and do not worry much about a precipitous break in hog prices.
There were no huge surprises in the June 11 supply-demand reports, but as the numbers were analyzed, we saw a shift away from a bullish posture, especially in wheat and in soybeans. The wheat markets closed down around 20 cents on Friday as trading funds unloaded long positions late in the trading day. Winter wheat production was up 63 million bushels from last month in the June 11 reports, and the ending stock estimates for the 2003-2004 crop years were increased by 93 million bushels. This is not the stuff of which bull markets are made or maintained, and the U.S. Department of Agriculture dropped the projected price range for wheat for the crop year that ends May 31, 2004 by 15 cents per bushel to $2.90-$3.50. The July Kansas City has now failed three times in the past month near $3.35, and the July Chicago recorded a dramatic turn to the downside after rallying to the $3.40 area, only 6 to 7 cents below the mid-May high that I have been referring to as price targets. Hold short hedges in wheat at both exchanges. If you are off short hedges, look to replace them on rallies to recent highs, or if the July Kansas City contract closes below $3.12, or if the July Chicago closes below $3.10. If the support across recent lows in these markets does not hold, we are likely to retry the lows at $2.79 in Chicago and at $2.94 in Kansas City.
There was not much new in the soybean report. World production in oilseeds for 2003-2004 is projected to be a record 344 million tons, but we knew that from last month's reports. Ending stocks in soybeans in the U.S. increased 5 million bushels to a still tight 140 million, but the situation in South America does not look nearly as positive. Huge-to-record crops in the southern hemisphere will go to the export market, and unless the U.S. dollar declines a great deal more, Brazil and other competing countries are going to be interested in selling soybeans into the world market at prices below levels we will like in the U.S. The old-crop July contract quit last week near $6.40, well off the mid-May high at $6.58. The November new-crop contract recorded one of the most dramatic key reversals we have seen in a long time in this market, with a new contract high at $5.88, an "outside day" with the price range outside the range of the prior day, and a sharply lower close at $5.60, just 1 cent above the low for the day. I always recommend selling rallies to the contract high, especially when the price levels are reasonably in the top 20 to 30 percent of the prices that would appear to be justified by fundamentals for the year. These short hedges are at excellent levels given the outlook for soybeans this year, and the high at $5.88 will not be taken out unless we get a weather surprise in July and August. Hold the short hedges and we will not look at buying them back until and if we get a major move to the downside, with something like $5.25-$5.30 on the November as my downside objective at which we might look at buying these hedges back.
Corn is trading with wheat and soybeans. The July quit last week near $2.48, a 50 percent correction of the recent price dip from the $2.59 area down to $2.35. The December recorded a little more than a 50 percent correction of its decline from $2.53 toward $2.35 but was not able to hold it on Friday. Hold short positions here as a producer and stay off long hedges for the moment if you are a corn user. The late-week correction to the upside was a chance to sell to place short hedges and/or take profits on long hedges. Let's be patient now to see if this market challenges the April lows near $2.30 on the July and just above $2.30 on the new-crop December. I will not be surprised if that happens since the frequent weather fronts will no longer be bullish due to delayed plantings but will now start to be bearish for crop development on the acres that are in the ground. The acreage planted is large enough to put us back in the arena of a crop that approaches 10.0 billion bushels if the weather patterns are good in the summer months and yields beat trend yield expectations.
