Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
August 26, 2003
In the livestock and meats, it is important that we understand the fundamental supply-demand picture that prevails at the moment. This is the first time since the early 1970s that we are approaching a herd-building phase of the cattle cycle, which means the heifer will be kept out of the slaughter channels and beef supply will decline, with demand for beef also increasing. This scenario has been on the verge of occurring for the last two years since demand bottomed in 1998, and it is the drought, pasture, forage, and hay problems that have kept the herd-building phase from starting. We are likely to start building the herd during 2004, however, even if the January 1, 2004 inventory numbers do not show any increase in beef cows. That is going to create a scenario that I have been suggesting would lead to record high prices in calves, feeder cattle, and slaughter cattle. Interestingly, we have seen the new highs in the feeder cattle futures, even though the current contract is a heavier average weight than the older contracts, with a $96.85 high on the August on Tuesday. That takes out the prior record high of $95.15 that occurred during April 1979. In the live cattle futures, the all-time high occurred during March 1993 at $84.30. We went to $83.60 during February 2001, and this week the highs on the nearby August cattle have been at $83.40. It's a matter of time now before we record a new high in the live cattle futures, and if it doesn't occur during this current surge, it is likely to occur relatively early in 2004 as the supply side cyclical influence starts to boost price. Boxed beef values for the Choice types have climbed back above $140 in Tuesday's session, and all of this adds up to a strong bull market in cattle. We did see a key reversal top in the October live cattle contract on Monday, but I have seen key reversals in cattle before that only prompted a modest setback before the bull market resumed again. I suspect that is what we are going to see here. I show the October live cattle contract this week and the classic trend line drawn on it that I had been waiting to draw after the correction that occurred during July and into early August. I would use this trend line approach on all the live cattle and feeder cattle contracts and sell this market and take profits on long hedges only when we see a close below that trend line. Keep in mind that we are not likely to see a huge downside in price even then. Be alert as selective hedgers for opportunities to effectively buy back short hedges that get established when the market does penetrate the trend line and get long hedges established again at more favorable price levels.
The situation in the pork complex is much less bullish, of course, because the supply side numbers are substantially different in relative terms. The October contract that dipped under $51 during mid-July rallied toward $54.75, and then dipped again has climbed back into the $53.50-$54 range. I would be inclined to continue to sell this market on any rallies up into the $54.75-$56 price range, which would be at least a 50 percent correction on this last move down in the hog complex. We should see increasing daily slaughter levels on a seasonal basis as we move through August into September and October, and I don't think even the bull market in cattle is going to pull this pork complex much higher. Keep in mind also that when we see corrections to the downside in cattle we will get no help from the cattle complex and any price advances in hogs are likely to falter. So, I like the idea of keying off this October contract and see anything back in that $54.75-$56 range as an opportunity to place short hedges and take profits on long hedges.
In the grain and oilseed markets, there is no question that we have a late weather rally in the corn and soybean markets with hot and somewhat dryer weather coming in time to have some impact on yields. Keep in mind that this influence is coming in the presence of an August 12 set of U.S. Department of Agriculture reports that showed surprisingly large decreases in projections for corn production and soybean production. Thus, we had the fundamental picture shift significantly toward the less bearish or more bullish side and then we get some of the weather impacts with some deterioration in crop conditions showing up each week as temperatures moved above 90 degrees and the western part of the producing belt has continued to be relatively dry. What this does, of course, is give us better pricing opportunities than I had expected. Instead of something below those levels, we can forward price the corn crop with the December futures trading up to $2.43 in Tuesday's session with a weak close near $2.36. In the soybean market, the November contract opened sharply higher at $5.97 in Tuesday's session after the report on Monday afternoon showed some deterioration in crop conditions and that opening also turned out to be the high for the day. The market was not able to hold that strength and closed near the bottom of the trading range for the day with a classic key reversal (new high, outside day, lower close). What I see in corn and soybeans is a strong inclination to be willing to replace short hedges and take profits on long hedges at these levels. As we move past August and into September, especially with some weather relief in the northern part of the western part of the producing region this week, I am not sure we will see a continued ability to move these markets higher on the basis of weather. We are going to have something close to a 10 billion bushel corn crop, and we won't miss 3 billion bushels all that much in soybeans, and that is the reality the markets will come back and deal with as soon as the market stops discounting for the uncertainty in weather. The way it discounts the uncertainty, of course, is to offer a higher price, but after Tuesday's performance in soybeans, these markets are going to be sold.
In the wheat markets, the December Kansas City that ran all the way up toward $4 and better last week has backed off significantly and left a one-day island reversal top on the December chart. That same failure to be able to sustain higher prices prompted a scenario in which the new-crop July 2004 Kansas City wheat was able to trade out above its old high from the mid-May around $3.50, but was then unable on this recent price surge to show two consecutive closes in new high-price ground. That market had backed off from the extreme high of $3.55 that was recorded on August 18 and is now rallying trying to challenge a chart gap around the $3.48 level. In this $3.50-$3.55 level I would continue the line of advice I started for the past two weeks: You ought to be thinking about selling old-crop wheat and being up to 25 percent forward priced on the new-crop 2004. If you can get the July Kansas City above $3.50 (that has certainly been possible this week), get to 25 percent forward priced on the new crop in the July Chicago above $3.40. In the Chicago market the July 2004 wheat made a new high at $3.46 on August 18, last Monday, and has given several opportunities to place short hedges and sell above $3.40. I would repeat that line of advice this week. Get to 25 percent forward priced on 2004 wheat with the July Kansas City above $3.50 or if you are in the soft red winter wheat region, when the July Chicago is above $3.40. Given the island reversal tops that we have seen recently on both the December Kansas City and the December Chicago, I would be strongly inclined to sell on any rally and think about selling old-crop wheat and getting out of storage programs, especially if you are holding them as a cash market speculator and not in terms of a hedged program counting on basis improvement.
