Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
August 12, 2003
The August 12 U. S. Department of Agriculture reports were generally bullish for the grains and oilseeds, especially for corn and soybeans. Crops are not going to be as big as had been expected and price expectations are moving higher as the stock picture starts to look a bit less bearish. In corn, for example, last month's estimated production was 10.27 billion bushels based on trend yields of 142.7 bushels per acre and expectations of harvested acreage given early measures of planted acreage. That number drops to 10.064 billion bushels in the August 12 estimate primarily because, based on a survey of crop conditions and expectations, expected yields per acre go down from the 142.7 bushels to 139.9 bushels. So, we still have the prospects of a 10 billion-bushel corn crop, but it is not as ominous in terms of building supplies as we had earlier expected. The USDA raised its projected price range for the 2003-2004 crop year by 10 cents to $2-$2.40. I see that as legitimate because all of these dynamics worked around puts us at 1.184 billion bushels in projected ending stocks for the 2003-2004 crop year, and that is down significantly from the 1.339 billion bushels of last month's report. So, what we have, and there are similar changes going on in soybeans, is the legitimate prospect for a bit higher price but we still are down toward $2 on corn and still down toward $5 or lower on soybeans. The basic fundamental scenarios have not changed very much. It is just that the prospective crop sizes have come down a bit. The soybean crop estimate, for example, was at 2.62 billion bushels in the August 12 report, and that is down 23 million bushels from a month ago.
What all this means is that we are going to see and have already seen in Tuesday's session sharply higher prices in soybeans and in corn. But as the session moved toward closing on Tuesday, it was becoming apparent that we were not going to be able to hold the higher levels that we saw at the opening or the intraday highs. December corn and November soybeans backed off and closed in the middle of the trading range for the day. The highs put in on Tuesday, just above $2.32 on December corn and at $5.50 on the November soybeans, are likely to become resistance planes along which we would expect selling on any rally back to those levels. Overall, my reaction is to recognize that these markets have gapped up and then were not able to hold all of the price strength in Tuesday's session in corn or soybeans. Expect these markets to meander lower across the next few days, make a correction, and possibly fill the chart gaps because the fundamentals have not changed all that much. Then these markets will start to rally from prices well above the July lows and move back up toward Tuesday's highs. That, I think, is going to be a significant opportunity to sell these markets and to place or replace short hedges in corn or in soybeans, and probably a chance for the selective hedger who is a corn user or soybean or soybean meal user to take some profits on long hedges.
In wheat, the stock pictures are getting smaller in the U.S. and at the world level, and the crop sizes are coming down in the U.S., but much of the news in the August 12 report for wheat that might look bullish had already been factored into the markets. December Chicago wheat made a new contract high in Tuesday's session at $3.82, but closed off the high and down for the day, which makes this chart look like a hook reversal top. Tuesday's session high on the December Kansas City was at $3.78, but again, the market could not hold that price strength on the day and closed near the bottom one-third of the price range for the day and well off the high for the day. I would be selling old crop product at these higher prices and looking to start a pricing program relatively early for next year's wheat crop. The high on the July Chicago contract recorded on Tuesday was at $3.43. It would not be a bad idea to start a 10 percent-25 percent price protection program on opportunities with that July 2004 above $3.40 in the Chicago wheat. Look at the hard red winter in Kansas City at the same time, even though the July Kansas City contract is still very thin and not trading very much. The contract high there is $3.50 from mid-May and Tuesday's high was $3.48, an attractive price to start 2004 pricing. Generally in wheat, use these strong prices as a chance to sell old-crop product and let's start thinking about getting some protection at attractive and profitable prices in the 2004 crop.
Across the past few trading days in the cattle markets, we have seen a modest correction in both live cattle futures and feeder cattle. I have been talking about waiting on these markets to correct to the downside so that we could draw in a new uptrend line that would help guide our hedging decisions. This correction is smaller than I had anticipated, and indeed is not even a 38 percent correction (the smallest correction we look for) of the massive rally from mid-June down around $68 on the October live cattle futures all the way up toward the $77-$78 level a few days back. Nonetheless, I would use these lows that were put in on Friday and Monday and sketch a trend line on these contracts. Either sell a rally to the contract high or, because this market is so bullish, just opt to wait and take short hedge protection in live cattle futures and in feeder cattle futures only when we see a close below the relatively steep trend lines we will be able to draw in this week. Boxed beef prices on Tuesday morning are back above $141 and nearly up to $142 on the heavier Choice types. I believe we have an $80 market in place and likely to stay with us, and we have a chance to see prices better than those levels. Monday's plunge in the futures complex based on talk about reopening the Canadian border seems to have been absorbed with considerable strength and resiliency in this market, and Tuesday's prices look impressive in that context. I do believe that we are starting to rally and will challenge the highs from 10 days back again either later this week or next and would adopt the trend line strategy that I have discussed and let this market run to the upside if it can.
Not surprisingly, the lean hogs get caught on the other side of the Canadian border reopening issue. Pork and hogs had been helped with the strength that we were seeing in the beef market and in cattle, and when it appears that cattle will start moving across the border again, the somewhat bullish bubble we had seen in the lean hog contracts across the past two weeks was deflated. Looking at the October lean hog contract, the high that was recorded last week at $54.65 on Friday was more than a 38 percent correction of the last break we have seen in this market, and Monday's prices held that fairly well, but we see significantly lower prices in Tuesday's session. I would hope that some short hedges got placed or replaced on this corrective rally, and sometimes calculating the 38 percent, 50 percent and 62 percent rallies are the best move you can make when there is no obvious resistance plane on the chart. I suspect now we are destined to see a retest of the lows, which are down toward $50.75 on the October, before this market tries to rally again. Seasonally speaking, we are now likely to see increased slaughter levels on a daily basis as we move through August and into the heaviest daily slaughter levels of the year which usually occur during October and November.
