Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
August 5, 2003
Cash prices above $80 for better grading cattle should be more prevalent this week than they were last week. Boxed beef values have increased to help keep the packer margins in acceptable territory, with the heavy Choice boxes up over $6.00 last Friday compared to the prior Friday levels. Levels in the high $130s as seen on Monday can support an $80 or higher cattle market. Feedlots are current and the percentage of cattle grading Choice is likely to be down this week. Much of this price strength is coming from the demand side of the price equation where we saw one of the largest jumps ever from Quarter 2 of 2002 to Quarter 2 of 2003 in the quarterly demand indexes (www.aaec.vt.edu/rilp). The Quarter 2 numbers are still preliminary and could change slightly when final price and per capita consumption for the quarter are released, but the index jumped from 109.9 (1997=100) in 2002 to 114.6 in 2003. That demand surge is supporting retail prices and that support at the retail level allows the box values to get pushed up to levels that support an $80 and better cash cattle market.
The cattle market is extremely overbought. It will correct to the downside, perhaps from current levels around $79 in August live cattle and $91 in August feeder cattle. October live cattle are around $78 with October feeder cattle around $90. Producers have two choices here. One, take profits at these levels if they are unusually good and sell this futures market to lock the profits in. I would not buy a put here since the market would then have to make new highs to cover the costs of your put options. Two, wait for the inevitable correction to the downside and the subsequent rally and sketch trend lines across the lows in early June and the low that will be recorded in the upcoming dip to the downside. Expect about a 38% correction off the highs when this market does turn down in the futures pits and be prepared to then see another rally. If we do not get a shock form BSE or some such, this market will surge again. For the last year or two in presentations, I have been saying we will see record high calf, yearling, and fed cattle prices across the next few years. We are not there yet but we will go there when the industry finally gets past some weather problems and starts building the cow herd, which decreases the supply of beef and will cause per capita consumption to plunge, in the presence of increasing demand. This is the first time we have had the prospect of herd building and decreased supplies in a cyclical context in the presence of increasing demand since the early 1970s.
August hogs recorded a current year low at $56.05 on Friday and that contract came into this week on a much stronger note. This market is oversold and will continue to get some help from the bullish beef sector as daily slaughter levels start a slow seasonal climb from this point forward. Weighted average prices for hogs on a carcass basis are slipping down toward $56, not a huge break from mid July levels but lower still. I do not expect to see the recent lows in the futures taken out before we see a rally. Look for a 38% correction of the recent long decline on the October lean hogs from $59.40 to $50.75 which carries this contract back up to $54.04. I would look at short hedging opportunities on a rally back toward $54 by the October. We have a decent chance of seeing those levels when the beef market resumes surging to higher prices after it makes a correction to the downside to allow the profit taking and the relief of the overbought conditions in that market.
The weekend rains missed the western part of the production belt, but the conditions of the corn and soybean crops are expected to hold their own in this week's report. Wheat may get helped from the relatively short supplies available to the world market from other producing countries, but the corn and soybean markets will continue to face pressure from a tendency to sell or short these markets. We are looking at large corn and soybean crops and the only bullish possibility in the August 12 USDA reports is a widely expected increase in the export projection for soybeans. But that may not be enough to offset the pressure that is building due to the crop expectations. July corn futures went off the board weak and the December was pushed below $2.10 before any buying materialized. The December is now trying to do some short term base building just above $2.10 and if it can get through the chart gap above current trading levels, it has a chance to rally up to the $2.25 area. That rally might cause some short covering of both short hedge and short speculative positions and kick the market higher, but not by much. Selective hedgers who have bought hedges back down in the $2.10 area might replace short hedges on a rally to the $2.25 area and better on the December. Long hedgers can either establish long hedges with the December around the $2.10 area or monitor this market and wait for a later retest of the lows. There is not much risk associated with not having corn needs covered as we move into August with the prospects of a 10 billion bushel crop.
August soybean futures are finding support along the current year low near $5.30 which occurred on January 14. Look for a corrective rally in this market when we see the same thing start to develop in corn. Any rally has some chance of pushing the new crop November back up toward the bottom of the chart gap near $5.45 that occurred on July 9. If we see a rally that even approaches that level and gets near the high $5.30s, I would be looking to place or replace short hedges in this market and take profits on long hedges in soybeans or in soybean meal. We could still get some help from the weather in soybeans because the yields are not yet set and a dry August could still hurt test weights and yields in corn as well.
The July wheat contracts in Kansas City and in Chicago went off the board in the middle of a corrective rally to the upside. That rally has continued reaching levels that I had not expected would be seen this soon. No new contract highs have been recorded but with both the December futures back up into the $3.60 to $3.65 areas, I think we are looking at opportunities to sell cash wheat that is not stored and hedged based on expected improvement in the cash-futures basis. The only way I recommend storing wheat or any storable grain is when we can reasonably anticipate a basis improvement from past data on basis patterns that exceeds the cost of storage, and then short hedges have to be set to take advantage of that basis improvement and give downside price protection. I show the December Kansas City wheat again this week and expect to see selling pressure along the resistance at the contract highs even though the Chicago market has already pushed up through the comparable resistance on the December Chicago chart. Fundamentally speaking and technically speaking, I do not think this market can continue its current thrust to still higher prices.
