Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
August 19, 2003
The corn and soybean markets were helped by the August 12 reports that generally showed smaller crops than expected and smaller ending stocks for the upcoming crop year than had been expected. The markets got another boost across the weekend when the weather turned toward hot and dry and that forecast was only partly offset by rain Monday across the northern part of the corn and soybean producing regions in the Midwest. This rather late weather rally in corn and soybeans is helping push wheat higher. Weather related variability is always hard to manage and tends to distort what we can usually read from chart patterns. But the big mistake in markets that are rallying to the upside because of weather is failure to do anything, and I would repeat my advice from last week in the wheat market that suggested selling old-crop product on these price advances and getting some forward pricing started both in Chicago and Kansas City on next year's wheat crop. I wanted to get some pricing done on the July 2004 Kansas City wheat if we had a chance above $3.50, and we have seen that since the last letter at least partly because of the August 12 report. In Chicago, I wanted to get some pricing done if the July 2004 contract got above $3.40, and again we have seen that happen with a new high on this contract at $3.46 on Monday. I would formalize my advice on wheat, especially if you are comfortable being a selective hedger. I would recommend that we move to 25 percent forward priced on next year's crop whether you are working with Kansas City or Chicago at these pricing opportunities above $3.50 in Kansas City and above $3.40 on the July 2004 contract in Chicago.
Coming up with the right strategy in the presence of price volatility is not easy on corn and soybeans. As expected, Monday's report showed corn at 60 percent rated good/excellent, and that was down 5 points from the prior week's rating. Soybeans were at 56 percent good/excellent, and that was down 6 points from the prior rating. Monday's high on the November soybean futures were at $5.82, within 6 cents of the contract high, which occurred back on June 13. I see this as an excellent forward pricing opportunity at price levels above what I had expected to see. The November contract opened down about 8 cents in Tuesday's session and closed 10 cents lower for the day. We could see this market drift lower, especially if the weather patterns turn out to be close to normal across the next several days. Selective hedgers of soybeans certainly ought to be willing to place short hedges at these levels. Producers who had short hedges around the $5.40-$5.50 range should answer margins calls and give this market a chance to correct to the downside. If you have product left to forward price and still need coverage on this late year pricing opportunity, then by all means add to your short hedge positions with this market up at $5.70 and better in the November soybeans. Remember this all started in the August 12 reports when the underlying supply-demand fundamentals looked significantly more positive than had been expected. When the market is primed and looking for a reason to go up, it doesn't take much on the weather side to give us a fairly substantial price kick, and that is what I think we saw on Monday.
In corn, Monday's high was up to $2.40 on the December contract. This market opened a bit lower in Tuesday's session and proceeded to trade down significantly from Monday's lofty close and closed on the low, down 6 cents. That faltering of the price advance would be expected since any damage to corn yields from dry weather are probably going to be smaller than yield reductions related to weather in soybeans where substantial percentages of the average per-acre yield are yet to be determined. Corn producers should be moving significantly on the December corn in the high $2.30s up toward that $2.40 level from Monday to place or replace short hedges. Corn users with long hedges in place acting on a selective hedge basis will want to take profits. I would say the odds that this market will not correct back down toward the $2.25 level are fairly small.
In the cattle markets, it looks as if cash prices are going to move to below the levels at which most trade occurred last week. There was a fairly large placement total in last week's Cattle on Feed report, and the August 12 report that showed less corn than we expected makes a difference in terms of cost of gain. In the presence of that somewhat bearish outlook and sharply lower boxed beef cutout values on Monday, the market has held prices quite well, and that is testimony to how strong this developing bull market in beef might turn out to be. The October live cattle contract recorded a new contract high above $79 in Tuesday's session but was not able to hold those levels. The same thing happened in the October feeder cattle, with Tuesday's high price coming in at $91.75. All this suggests that we are starting to see the early rumblings of a bull market in beef that is supported for the first time in 30 years by some emerging tendencies toward herd building, which reduces the supplies of beef, in the presence of strong increases in demand.
In the live cattle contract and in feeder cattle, my advice across the past few weeks has been to wait for the correction that was inevitably going to be there and give you a chance to draw in a trend line that puts some fail-safe support under this market and let it run to the upside. We had that correction which was smaller than I expected on the October feeder cattle, for example, when it dipped on August 11 down to $88.70. The low on the modest correction on the October live cattle contract occurred on August 8 when the market dipped to $75.65. Since those modest corrections to the downside on feeder cattle and live cattle futures, we have seen a strong rally. I would sketch trend lines on these charts that hook the late May lows and the lows that occurred in that August 8-August 11 period and let this market run to the upside. Place or replace short hedges and take profits on long hedges for those holding long hedges in feeder cattle or in live cattle futures only when we see a close below those uptrend lines.
In hogs, I am encouraged by the fact that the October lean hog contract was able to hold back in late June when it dipped down to $50.75 and didn't go all the way down to the April lows at $49.75. Within the past week after this market made something between a 38 percent and 50 percent correction back to the upside, it dipped back toward that recent $50.75 low again and appears to be turning higher. I would have been interested in buying back short hedges in this market on this dip toward the low. The low last Friday only went to $51.30, so we saw buying emerge as the fundamentals in this market start to look a bit better. You can sketch a downtrend line across the high on July 10, which is up around the $58.90 level, and the more recent high on that corrective rally, which occurred on August 8 at $54.65. I expect to see a close above that downtrend line across the next few days. Tuesday's close was very strong. That trend line break will be a signal to place long hedges if you need to cover hog costs in this market and a signal to buy back any short hedges that you have in place if you are operating on a selective hedging basis.
