Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
July 15, 2003
The corn market is pounding profit possibilities as the weather continues to be generally favorable. I talked last week about not being quick to buy back short hedges even at these very low prices and anticipated that we might see some base building around the lows near $2.18 on the December corn. But that hasn't happened, and we are below that price level this week. On the December corn chart I show this week, there are several interesting possibilities. A trend line drawn from the late April low and hooking either the low on May 27 or the set of lows around $2.35 in early June would have generated sell signals in the $2.35-$2.40 range and should have prompted the placing of short hedges. There is also a rally that culminated on June 13 that moved to the bottom of the chart gap from a few weeks earlier that starts around $2.48. This market was not able to challenge the contract highs because selling pressure at the bottom of that chart gap helped to turn it lower. Short hedges should be in place, but I understand it is difficult to pull the trigger on establishing price when prices look lower than we would like. The downtrend line I am also showing on the chart is relatively steep but I would use it. Hold your short hedges until you see a close above that trend line, and users of corn should not replace long hedges on summer, early fall, and late-year corn futures until we see the buy signal that is generated when we have a close above that downtrend line.
In the wheat market, I have been keying off the contract low on the July Kansas City contract around $2.94. In last week's letter, I suggested that short hedges should be bought back around $2.95 on that July contract. In spite of the intense pressure on the corn market and lower corn prices across the last week, we have seen the wheat market rally. If the basis is weak in your market area and is justifying storing this wheat, we will need to start watching later contracts for signals to pricing actions. The December Kansas City contract has a pattern much like the one we see on the July but recent lows are a few cents a bushel above the contract lows, and this market is trying to rally. About the best I suspect we will see on this December contract on this current thrust is a rally to the $3.30-$3.35 area, and if the market runs into selling pressure there, I would consider placing short hedges on wheat you are holding in storage. If you are not planning long-term storage but are looking to sell in increments in the cash market, consider selling some cash product on that type of rally. On the December Chicago, we have already seen a rally as high as the low $3.30s. That rally brought out some selling, and it appears that this market may turn lower again. I would hold any short hedges you have placed on stored product until we see an upturn in this December Chicago contract again, and we need to monitor the developments in Kansas City at the same time.
In soybeans, after last Tuesday's price on November futures had traded up from the low recorded on Monday, I thought it was appropriate to sketch a trend line across the Monday low. If you did that, you saw a sell signal very quickly coming on Thursday of last week. I would hold short hedges in these new-crop soybeans if you placed or replaced them. The Wednesday rally last week was the rally up into the old chart gap, and once again we see a tendency for this market to run into selling when it moves up in an attempt to close chart gaps. I see nothing in Tuesday's action in this market with lower prices to indicate we have a bottom in place. There is a small chart gap around the $5.21 level, and maybe that will provide support, but the major support now is across the lows from February and March that are down in the $5.05-$5.10 area. Hold your short hedges until we see a challenge of some important support planes, and if you have no short hedges in place, be patient and let's see if we can get at least weather rallies to get us back up to the $5.35-$5.45 pricing opportunities we saw last week to place or replace short hedges.
The cattle markets' run to the upside that came early last week happened because there had been no announcement of opening the Canadian border. This market in the August live cattle contract made and recorded two consecutive closes above the old contract highs, but the lack of any substantial reason for the chart rally showed up quickly last week. That market has been as much as $3 off the highs. Boxed beef is hanging around $130 for the Choice types, and it appears we are going to see $73 be the prevalent market in cash sales this week with $73-$74 last week fairly common. August rallied on Tuesday to above $70 and is still showing some discount to the cash. We will have a chance, I think, to either sell this market on that rally back up to $71 and better, or we will be able to let the market move to the upside and sketch a trend line under the market as soon as we get a turn to the upside. That would be my strategy, and I would prefer to sell this market on any rally back up toward the recent highs above $72, and I would be inclined to sell it even quicker than that. If you wait on sell signals coming from the uptrend line, they typically tend to come at somewhat lower price levels.
Not surprisingly, the pattern on the August feeder cattle looks similar to what we see in the live cattle contracts. This market recorded new contract highs above $88 on the BSE-related phenomenon. I would be an aggressive seller of August feeder cattle futures, and I would move into the fall months at the same time, if this market can approach the recent high just above $88 again. Tuesday's strong closes suggest we will see that happen. Alternatively, if we don't get that rally, sketch a trend line across the extreme low that we saw back in early May that came with the BSE announcement and the lows around $83.50 that occurred in late May and early June. Be prepared to be short in any feeder cattle futures that you need to be short in on a close below that trend line. If you have long hedges in the feeder cattle markets, take profits on that sell signal.
Cash hog prices are down a bit in early-week trade, and we have a weighted average price on a carcass basis of around $58 per cwt. in the national direct market. That translates to $43-$45 on the traditional live basis, and while that is profitable for the larger, more efficient operators, it is about breakeven or a bit better for some of the smaller producers. July lean hog futures are trading down toward the $62 level, and that is a full $7 off the highs we saw back in May. The August futures closed below technical support in Monday's session and the same thing is happening in October in Tuesday's session. The August is trading below a rather obvious trend line that hooks the low on April 15 to the low on June 30. I would hold short hedges that should have been placed on a sell-stop order during the Tuesday's session on this contract, and that should have been a solid indicator that the fall and late year hogs needed to be forward priced against further downside risk.
