Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
July 22, 2003
In the grains and oilseeds, it is the wheat sector that is providing price opportunities in early-week activity. Across the past several weeks, I have monitored the double bottom on the July Kansas City contract as we moved through harvest with the recent price dip down matching almost exactly the old $2.94 contract low, which goes back to April 30. As we start watching later contracts and think about hedging a stored wheat crop or selling wheat in the cash market on price advances, I talked last week about the possibility of a rally to the $3.30-$3.35 area on the December Kansas City wheat. Actually, this abrupt rally we have seen as the funds have stepped in and bought the wheat market, especially in Chicago, has done even better than that, reaching up toward the $3.45 level in Monday's session. I expect this is about as high as this market is likely to go, and what I am seeing on the chart shown this week is essentially a complete 62 percent correction of the last long move down in the market. I would be looking at selling cash wheat and/or hedging wheat in storage on this rally and would note that the pricing opportunities are even closer to the April highs in Chicago than they are in Kansas City. Fundamentally speaking, I don't see any reason why this market should stage a late harvest rally all the way up to the old highs. I would be a seller and placer of short hedges here, and if I were in the processing business and had long hedges in place, I would take profits on them in both Kansas City and Chicago.
There was a nice short covering rally on the December corn in Monday's session, and the late Monday reports indicated crop conditions had deteriorated slightly from week-earlier levels. But we have to keep in mind that the absolute level of the conditions, even though they are declining a bit, is significantly above conditions at the same date last year. It appears that we are on target for a 10 billion bushel corn crop or better. Any break of the steep uptrend line on the December corn I showed last week is likely to bring a rally up toward the $2.18-$2.20 level in an attempt to fill the chart gap on that December futures. Anything beyond that will run into some major selling across early June highs in the $2.25-$2.30 range, and I would treat any rally of that type as an opportunity to add to short hedge protection. This market has benefited from generally favorable weather, and odds are we are going to see a crop bigger than usage this year, especially with a spotty export picture, and that always means some pressure on price. The situation is negative given that we have seen the December corn futures as low as $2.10 just yesterday on July 21. That prices corn all over the producing belt well below $2 per bushel by the time cash-futures basis is accounted for.
At least partly because of the pressure from corn, the soybean market has moved down from the $5.88 high on the November, which was recorded on June 13, to the $5.05-$5.10 area in early-week trade. It looks as if that contract is trying to hold across the support from the early March lows, around $5.07, and the contract low is well below these levels going back to January 2002 at $4.53. Aggressive short hedgers might think about buying back short hedge positions on a selective hedging basis here in this $5-$5.10 zone on the November contract. There is still some uncertainty in front of us with regard to soybean yields, and we don't have the prospects for the huge to record high crop that we see in corn, at least not yet. We will see this market rally again, I think, as we move through late July and into early August when weather can still be a yield-determining factor in soybeans. So, buying back short hedges if you are an aggressive selective hedger in this $5-$5.10 range on the November will probably be okay. I would like to see a rally back up toward the $5.40 level, possibly $5.45, in an effort to fill the early-June chart gap before I would consider placing or replacing short hedges in this market.
In the beef sector, we still have a significant bullish sheen to this market. Choice boxed beef values are trying to find support just below $130, and prices were up on Monday. The quarterly demand index for the second quarter of the year shows a huge jump from last year's levels, and that information, although still preliminary because the numbers may change, is available to you at www.aaec.vt.edu/rilp and just click on beef demand indexes. Quarter 2 showed increased per capita availability, and therefore increased per capita consumption, at significantly higher inflation-adjusted prices at retail, and that is stuff of which demand increases are made. Cash prices were mostly around $73 last week, and in limited trade, they are starting around the $73 this week. We are likely to see more $74 cattle this week after we saw that level paid some in Kansas at the close of last week. The live cattle charts have basically recorded new highs. I would hook the lows down around $67 and slightly below from late May and early June on the August to the low at $69.45 on July 15, and let this market try to run to the upside. That is a fairly steep trend line, but as bullish as the market is with the continued uncertainty about what is going to happen between the U.S. and Canada, let this market run and place or replace short hedges only when we see a close below that trend line.
Do essentially the same thing in the feeder cattle market, where the August continues to hold above the old highs and is trying to make new contract highs. Hook a trend line to the lows down around $83.65 back in mid-June to the low at $86.32 on July 15, and extend this trend line up. Let the market go as long as it can stay above that, and donšt place or replace short hedges in summer and fall feeder cattle or take profits on long hedges you have in place until we do see a close below that trend line. This market is bullish in terms of long-term supply side cycle fundamentals and is bullish in the short term primarily based on feedlots staying current and managing the number of cattle on feed for extended days more effectively than we did last year and, very importantly, the surging demand-side picture. Demand strength is coming from both the domestic market and the export side, especially the domestic market, building on a continued stream of new quality control and quality assured consumer-friendly product lines.
The situation is relatively stable in the cash hog market with carcass-based prices in the national direct market averaging slightly above $59 on Monday afternoon. That means the live-based price is continuing to stay in the mid-to-low-$40s and to offer profitable prices for all but high-cost producers. Hold short hedges in this market because we donšt see any sign of base-building yet on the August lean hog contract. After a contract high at $69.75 back on June 9, this market closed at $61.17 on Monday, and is trading about flat in Tuesday's session. I would like to see a modest corrective rally to the upside here and leave us a low against which we might consider buying back short hedges when it dips again, but we don't have that type of pattern yet on the charts. I would hold short hedges and be patient in this market until we see some more definitive signs that it is trying to build at least a short-term bottom.
