Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
July 29, 2003
The grain and oilseed markets are still playing the weather game. Crop conditions were lower in both corn and soybeans in Mondayıs report, with an even bigger decline in condition in wheat. There had been some periodic surges in export movement in corn, but we still continue to see about the same pace in soybean inspections. We do have some heat in the Midwest, but overall, conditions for crop improvement and for decent to good corn and soybean yields are in place. As we move into August and move past the critical yield-determining period in corn, some attention will shift to soybeans. But, in general, the weather patterns look favorable and we will have big crops, barring some totally unexpected calamity, in both corn and soybeans this year.
The chart patterns in the technical picture are starting to look better for corn. I have talked about the steep downtrend line on the December contract, and we have had closes across the past few days above that trend line. We have resistance, however, in the chart gap that extends up toward the $2.20 level that the market left about two weeks back, and then we have a high on July 9 around $2.25 that is going to be some resistance. A 50 percent correction of the last significant move down would put us back up in the $2.25-$2.35 range, and I would be inclined to wait on that type of rally to place or replace short hedges in this market. This week, if I were doing anything, I would continue to buy back short hedges on dips because it does look as if this $2.10 level on the December corn is going to hold in the short term. Placing long hedges this week also would make sense, especially if you get it done in the $2.10-$2.12 area.
Soybeans are almost a mirror image of the corn market except the rally that we saw Monday was a gap up from Fridayıs relatively strong close. We are seeing support across the $5-$5.10 area on the November, especially across the low that occurred back in March around $5.07. Look for this market to try to make a correction in parallel with the correction we see in corn. Something up toward the $5.40-$5.45 area would be my target unless this market falters and turns down again at lower levels. Any opportunity to place or replace short hedges in that price range would make sense. I think users of soybeans and soybean meal should be in long hedge position, especially if you get a dip on this November soybean contract back down toward the $5.10 area. We have some days to go before the soybean yields are determined, and with that type of uncertainty in the marketplace, we have a chance to get a decent rally in this complex which will help push corn up as well.
The wheat market is continuing to surprise me with the strength of the rally off the late June lows, which were down around $3.12 in the December Kansas City contract. We are trading around $3.50 now, and I see this as an opportunity to sell old-crop wheat and think about hedging wheat if you are going to hold it in storage and look for basis improvement to turn a profit. Nothing I see in the weather picture or in the world level supply-demand fundamentals justifies substantial price increases from where we are. That is especially the case given that the December wheat in Chicago has rallied across the past few days all the way up to and exceeded its May high just under $3.60. We have the very real possibility of a double top on the December Chicago wheat contract around $3.65, and that is well off the contract high of $3.83. But that $3.83 high occurred back in September 2002, so I would be selling cash wheat, placing or replacing short hedges on wheat you hold.
I have been bullish on the cattle complex for some time, and the better to record high prices that I anticipated have been slow to develop because of lots of uncertainty in the world arena. We have $90 feeder cattle on the Chicago Mercantile Exchange futures across the past few days. We have evidence that the beef cow herd is not growing and that we will see a small reduction again on January 1, 2004 in the beef cow herd. Demand in the second quarter showed the best year-to-year jump on the demand indices at www.aaec.vt.edu/rilp that we have seen since demand bottomed in 1998. We have some $80 cattle being sold in the cash market in early-week trade in the northern part of the feeding zone. Generally, though technically the futures in the cattle complex look overbought, this shapes up as a substantial, probably volatile, but long-term bull market that we are starting to see happen in the cattle complex.
On the live cattle and feeder cattle charts, we have to step back and recognize what we have. Both markets are on a sustained thrust to the upside. The August feeder cattle contract shows a low on June 19 at $83.75 that I can use to construct a trend line from that low to the low on July 15 at $86.32. I would then project that trend line to the upside and leave these late summer and fall feeder cattle contracts alone until and if we see a close below that trend line. We may see rallies to levels that create very acceptable profits before we see a sell signal, so it is always okay to hedge and take those types of profits. On the live cattle charts, we donıt have that type of well-defined trend line yet. I would let the August and October contracts and the other contracts correct to the downside from current levels, with the August above $73 and the October pressing up toward the $78 level. Let some profit taking occur and let this market correct to the downside, and then watch the charts and be prepared to hook the low that is there on July 15, the same day we had a low in the feeder cattle, at $72.20 on the October contract with the low you will get after a correction has run its course. Then, let this market run to the upside until it either approaches very attractive per-head profits or gives us a close below the uptrend line that we cannot yet put on the chart because the price move up has been so explosive.
Weighted average carcass-based prices in hogs are in the $57-$58 range, and that continues to put the live base equivalent in the low-to-mid-$40s. We are likely to see these price levels for some time to come, and there will be some seasonal pressure on price as we move toward the fall months. Technically, it looks like the hog charts are trying to find a bottom (they are oversold), and I think what is going on in cattle is going to help the pork complex as well. The contract low on the August lean hog contract is $54.70, and that occurred back in August 2002. We have seen prices within the past week on that contract as low as $56.50, and that occurred on July 24, before this market bounced for a technical rally. I would be aggressive in buying back short hedges on any dip by this August contract to that very important low at $56.50. That support emerged slightly above a low that is on the chart in early February at $56.30. I expect to see these hog markets pull some help from the cattle complex and give us a significant correction of this massive move down that we have seen since the highs occurred back on June 9. Let this market run to the upside before placing or replacing short hedges. Any firm that needs slaughter hogs for processing ought to be placing long hedges at this time.
