Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
July 8, 2003
The word in the grain and oilseed markets is weather. The special U.S. Department of Agriculture report on June 30 indicated that we have planted acres at numbers that could generate very large crops in corn and in soybeans. There are, in fact, private estimates being released that have the corn crop above 10 billion bushels. The weather was good across the long holiday weekend and looks favorable for crop development during the rest of the week, and the markets have been pushed to the downside in action so far this week. Much of the pressure is coming on soybeans and on corn. Wheat, as the harvest moves ahead, is trading with the soybean and corn markets.
Looking at wheat first, with the July Kansas City sitting right at contract lows in the $2.95 and just below in Tuesday's session, I would buy back short hedges. Users of wheat should be placing long hedges, not in the July contract but in later contracts. This looks like the very real possibility of a harvest-period bottom, and I think we are likely to see a sideways to higher market develop as we move through the summer with what prices we can hold in wheat depending partly on what happens in the corn sector. The July Chicago contract is not at contract lows and is trading in Tuesday's session around $3, a bit above the low around $2.94 of a few days back. I suspect it will be the Kansas City contract that drives the wheat market for the next few weeks as we watch the harvest. Aggressive selective hedgers might consider buying back short hedges in the July Chicago contract on any dip down to that mid-$2.90s level and across the recent low. There is some downside possibility still, of course, on the July Chicago contract, but I think the odds of significant downside moves from here in Kansas City are relatively small.
The corn charts are very negative with new contract lows having been recorded in the old-crop July down toward the mid-$2.20s both last week and again in Monday's session. I suspect this old-crop contract is priced about where it needs to be in anticipation of a relatively large developing crop, and I wouldn't expect to see significant downside movements from here. But this market has already shown more weakness than I expected this early in the growing season. Buying back short hedges in this market on both the old-crop July contract and the new-crop December has to be done with care. I would rather wait on the new-crop December and let this market rally off the low around $2.18 that we saw in Monday's session and make a correction to the upside. We can then sketch in a downtrend line. Short hedges will need to be lifted when we see a close above the trend line that we ought to be able to sketch on this contract within the next 2-3 weeks. That, of course, would also be a chance to place or replace long hedges. The last clear trend line sell signal on this December corn chart came around the $2.35-$2.38 level in early June and broke an obvious trend line that was hooking the low around $2.31 back in April with a correction low down to the $2.35 area in late May or early June. That sell signal occurred about 15 cents-.20 cents per bushel above the levels we are seeing this week, and we should hold those short hedges until we see signs of a bottom and/or a trend line buy signal in this corn complex. Don't place or replace long hedges with the markets working lower which favors the user of corn in livestock, poultry, and dairy programs.
In the soybean complex, the old-crop July is still holding above several lows in the $6.10-$6.15 area and trading in the $6.15-$6.20 range in Tuesday's session. The new-crop November gapped lower in Monday's session after we came back from relatively favorable weather across the weekend. At the price levels down toward the $5.34 range reached by the November on Monday, with Tuesday's session showing prices just above that level, this market has made a rather complete correction of the run-up that started earlier in the year and ran up toward the $5.88 level. I believe after the end of the session on Tuesday, we will be able to sketch a trend line across those February-March lows and the low recorded on Monday and look for this market to go back up and try to fill the chart gap and make a more complete correction of this recent break. There will be better opportunities to place or replace short hedges in this market than we are seeing this week, so let's give the market a chance to rally and use the trend line as a safety net.
In the cattle markets, it is not economics but world-level politics and closing of borders that are driving the market sharply higher. We saw a hard move up on Friday with limit-up moves in cattle and August live cattle futures moved higher again in Monday's session trading up to and above the $72.50 area. The August reached $72.65 in Tuesday's session. Even those price advances are a bit below the cash market, which started the week around $74, with an occasional pen of high-quality cattle bringing $75. The key driver in the futures complex is that an announcement about the Canadian border being opened for movement into the U.S. was expected over the weekend by some analysts and it didn't happen. Driving the futures up is coming because of supply-side support if the border stays closed. On the demand side, the boxed beef values are back above $130 for the Choice types in Tuesday's morning trade, and that looks encouraging, so we may be able to sustain a $74-$75 cash market across the next few days. It is risky trying to assume what will be done with regard to the politics of the Canadian/U.S. border, but I would be inclined to be short in these live cattle futures at these relatively high prices. The market is still vulnerable to some downside possibilities because of the BSE phenomenon as it relates to Japanese and South Korean buying and to the attitude of the consumer in the domestic market.
Feeder cattle are going up with the live cattle contract, and this is one of those unusual occurrences where a major resistance plane just under the $87 level has been taken out with two consecutive closes above those highs. The rule is that on the second consecutive close above the old high, and that is Tuesday's close, short hedges should be bought back. There is upside in this market if live cattle futures continue to trade up and if cash prices can continue to hold above the trading level in the futures. But there is a great deal of uncertainty surrounding all this coming not from just the normal uncertain supply-demand considerations but also the politics of the situation.
In the lean hogs, the August contract shows a contract high from about a month back at $69.75. This market had backed off from that level down toward $63.50, and Monday's session reached as high as $67.50 and, I think, completed a correction of the last move down. Prices are down in Tuesday's session. We can put a trend line under the market by connecting the April lows with the lows from last Monday. You can expect resistance below the contract high at $69.75. I would key off the August and be active and aggressive in placing short hedges on any move back up toward the $69.50 level and better. If we don't get that and later in the year we see a close below the uptrend line, those short hedges on a trend line sell signal will be placed at profitable levels for any but the higher cost producer.
