Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
June 24, 2003
The meat markets continue to try to sort out the implications of the BSE issue in Canada. There are talks this week with Japanese officials about how well separated the Canadian industry is from the United States. Any concerns on the part of Japan or South Korea about BSE in the U.S. product will hurt our export demand. The industry is watching and expecting a satisfactory and successful conclusion to these discussions with some of our important buyers. Last week's Cattle on Feed report helped the distant cattle contracts since placements were a bit below pre-report expectations. In the face of all this, the live cattle market has been much more vulnerable and has traded down compared to feeder cattle. The hog market has traded off the recent highs and has completed a correction to the downside that will allow us to construct a better and more effective trend line.
Last week I showed the August feeder cattle chart and indicated that I didn't expect that market to trade down and close below the trend line, and indeed it has not. If this market can rally up toward the contract highs around $86.80, then late summer and fall feeder cattle ought to be forward priced, and those holding long hedges should take profits. If we do get a close below that obvious trend line on the August contract before we challenge the highs, then short hedges need to be placed or replaced and profits need to be taken on long hedges because that trend line break would suggest a significant dip to the downside. That is not the scenario I expect, however, since this market is in decent shape fundamentally speaking.
This week I am showing the August live cattle contract to reaffirm and repeat a message I have offered on many occasions about the importance of being willing to sell rallies toward contract highs. That is especially an attractive opportunity when the old contract highs are reasonably in the top 20 percent-30 percent of the likely price range for the year. Note the rally in this market before the BSE occurrence matched or exceeded by a few cents per hundredweight the late 2002 highs near $71.50. This market is now trading in the $67-$68 range and has been hit hard by all of the concerns surrounding BSE. Boxed beef values that had been above $150 for the Choice types are trending lower, around $134-$135 in Tuesday's session, and are not providing the support we have seen in the recent past. If you have short positions in summer and fall live cattle futures, I would hold them until we see better signs of bottoming action in this market. If the $67 lows can hold on the August live cattle, we are likely to see a rally back up to the $69-$69.50 area again, and that type of correction of this recent price break would give a chance to place or replace short hedges.
Cash hogs on a carcass basis are down as much as $2 in some markets in Tuesday morning trade, but they are showing weighted average prices from Monday of $64-$65, which puts live-based prices in the highs $40s and at very profitable levels. The summer and fall contracts have corrected to the downside recently, and we can now construct a better trend line off the April lows and the low from last Thursday, June 19. Place hedges on rallies to the contract highs, which are just above $69 on the July lean hog contract, or on a close below these newly constructed trend lines, which I think are much more valid than the steeper trend lines that the charts would have allowed before last week.
Relatively tight supplies in old-crop soybeans and possible buying interest from China are pushing soybeans prices up slightly in Tuesday's session. I would be an aggressive seller of old-crop soybeans out of the bins if the July can challenge its contract high at $6.58. I would be willing to sell soybeans on a move to the low-to-mid-$6.50s just to make sure you don't miss this opportunity. If we get that type of rally, we will get the new-crop November pushed back up toward its high, which is $5.88 from about 10 days back, and I would certainly be an aggressive seller and placer of short hedges in new-crop soybeans on that type of rally. This market has dipped on several occasions and flirted with trend lines, but on the new-crop November, if you hook the March lows with the low from the third week in June, you should have a very functional uptrend line and any close below that line certainly ought to be seen as a selling opportunity. Keep in mind that the same trend line drawn on the July old-crop contract across last week's low would be extending through about the $6.20 level across the next several trading days. If the market doesn't challenge the highs and closes below that trend line on the July, then you should act on old-crop beans and on pricing of new-crop soybeans as well.
I have been expecting the wheat markets to re-challenge the late April lows, and it appears the Kansas City market is ready to do that. We have traded down sharply during May from the rallies up toward the $3.57 level then corrected about 50 percent of that price break. We are now below the early-June low around $3.12, and I think we will see a test of the $2.95 lows with Tuesday's close near $3. Aggressive selective hedgers might want to think about buying back short hedges on a dip toward $2.95. But, remember that if we see two consecutive closes below the contract low of $2.94, short hedges need to be placed or they should be held just in anticipation of such a move until we see a bottom in this market. The Chicago contract is not quite as weak, but Monday's trading levels pushed down below the early-June low as well, and we are going to challenge the $3 level and lower in this market on the July futures. The contract low at $2.79 is a bit less likely than is the low in Kansas City, and I would be an aggressive buyer and buy back short hedge positions if this market does dip down toward the $2.80 level.
There will be a June 30 supplemental report from the U.S. Department of Agriculture to give us early information on planted acreage, but some private analysts are expecting to see increased acreage in both corn and soybeans. The July corn contract after trading down from its early May high near $2.60 dipped to $2.35, has corrected to the upside, and is now trading in a relatively large triangle or wedge. On the new-crop December, the market has slipped below the large triangle and the next support is near $2.30. Hold short hedges and be prepared to place them if you get a rally back above the $2.45 level on the December. I expect to see a choppy market until we get more information on acreage and also start to move into the growing season and see what type of weather we have during July for purposes of getting those yields established. So, on a test of the $2.30 area by December, I would consider buying back short hedges and placing or replacing long hedges.
