Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
July 1, 2003
The grain and oilseed markets are sorting out the June 30 Acreage report that gave an early look at acreage planted. Up to this date, the acreage expectations that were being used in discovering price were the March 31 Prospective Plantings report. Those are planting intentions, of course, and they can change. Indeed, in the June 30 report corn acreage was 44,000 acres above the Prospective Plantings report, and very importantly, soybean acreage was up 471,000 acres compared to that March 31 estimate. That is still about 105,000 acres down from last year, but the markets were more nearly trading the estimate in the Prospective Plantings report. Both old-crop and new-crop soybeans were down in Monday's session, with most of the pressure on the old-crop. On Tuesday, we see both the July and November soybean futures above Monday's levels and that market reaction is suggesting that the June 30 number was not a huge surprise. In wheat, it was business as usual with actual total wheat acreage well below, by something over 750,000 acres, the Prospective Plantings report, but that level was generally expected.
In the corn market, it doesn't look as if the July is going to close below the old contract low, which is around $2.26-$2.27. Prices have traded below that level in Tuesday's session but the close came back above the old low. The situation is not quite as attractive in the December where we have seen new contract lows recorded. This contract traded down toward the $2.20 level in Tuesday's session but is closing higher on the day. Producers who have short hedges in place, with the action we are seeing on Tuesday on the second day after the report was released on June 30, should look at buying back short hedges. Users of corn who need long hedge positions in several of the futures contracts out through the December should place or replace long hedges aggressively. Until we get well into the growing period weather, I don't see any reason why we should see further downward pressure on this corn market. I would want to be off short hedges and monitoring to see whether or not the July and other old-crop contracts record new lows and how the December is behaving. Consistent with that, of course, I would want to be on long hedges in corn as I look for at least a short-term bottom to occur and give a selective hedger an opportunity to manage exposure to this market effectively.
The July soybean futures gapped down in Monday's session and are trying to find support this week across some recent May and June lows around $6.10-$6.12 on the old-crop contract. Resistance is the recent set of highs in the low $6.40s, and that is probably going to be an area in which we will see selling if we do see a rally. The new-crop November got hurt a bit more with the unexpected increase in acreage, but we are seeing recovery in Tuesday's session after Monday's dip down toward the $5.45-$5.46 level. We have recent highs up in the $5.75-$5.80 range on November, and the contract high is just a bit above that at about $5.88. I would continue to be an aggressive seller of this market on rallies to the recent high and up toward the contract high. We have essentially made a reasonable correction across the past month of the major move up in this market from back in March when it was down toward the $5-$5.10 level up to the $5.88 high. Look for this market to rally back as we continue to face uncertainty on yields and crop development as we move through July. I would place or replace short hedges on rallies to the highs. That is especially the case if you bought back short hedges down in the $5.50 area across the past few days as this market dipped both in anticipation of the June 30 report and then after the report was released.
In wheat, nothing much has changed. I continue to expect to see the July Kansas City test its contract low down in the $2.94 area, and that market is closing around $3-$3.01 in Tuesday's session. And somewhat unusual in the trading patterns of recent years, we see this week the July wheat contract in Chicago trading at essentially the same level as the levels in Kansas City. Treat any rally back up toward the $3.20-$3.25 area by the July Chicago as an opportunity to place late short hedges, especially if you maintain ownership of your wheat. In Kansas City, a similar rally would take us back up toward the $3.20-$3.25 area as well, and there is fairly important resistance across some early-June highs around the $3.35-$3.36 level. I would be a late hedger and seller on rallies to those levels, especially if you are going to maintain ownership of the wheat during harvest and while you are making a decision about longer-term storage.
In the cattle markets, we saw a hard drop in the Choice boxed values on Monday down to about the $120 level. There is no clear indication that this market is going to find support and stop the declines in boxed values but we do see at least a hesitation in Tuesday morning's activities. There is uncertainty in this market. It will be a short slaughter week because of the July 4 holiday. With the August live cattle as high as $70.12 on Tuesday, I would look at short hedges here. I think the correction off the lows after the BSE phenomenon has run its course, and there is too much uncertainty about the closing of Canadian borders and the reaction of important buyers like Japan and South Korea.
Because of my posture on live cattle and because the August has both on Monday and Tuesday's sessions challenged the contract high up around $86.75, I would absolutely be selling the August feeder cattle to place short hedges and to take profits on long hedges. With the uncertainty we have in the beef market and in the live cattle complex, and with the BSE phenomenon strengthening all this uncertainty, I don't think we have any reason to expect to see these summer feeder cattle make new highs. Keep in mind that we don't know what the corn yield producing weather is going to do yet, and anytime we see a 10 cents per bushel increase in the outlook for corn costs, you can take about $1.25 per cwt. or $1.50 per cwt. off the prices of yearlings and light yearlings in the feeder cattle complex. The chart shows a key reversal top on August feeder cattle on Tuesday, a major sell signal.
In the hog complex, I see this July and other up-front contracts in lean hogs continuing to work lower and make a correction of the huge run-up that we saw from down toward $56.50 on the July up toward the $69.30 area during late March, April, May and into early June. This market may move down toward the $62 level, giving what we are seeing on the fundamental side, before we see this correction completed. I would hold short hedges until you see some signs that a correction is complete. One thing to watch for is a close above the relatively steep trend line that you could sketch on this July hog contract or the August, depending on which one you are watching, and use that as an indicator that the short-run correction down is complete and the market will try to rally again.
