Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
September 9, 2003
Record highs are again the rule rather than the exception in the cattle complex. The relatively newly established September live cattle contract has recorded a high of $89.30 in Tuesday's session and closed at $89.25. The September feeder cattle contract has traded as high as $99.50 as we move within 50 cents per cwt. of the magical $100 price level for feeder cattle. Early week trade in the Choice boxed beef pushed up to $154.96, and prior to the past few days, we have never seen $150. This market will run too far, too fast, and too high and then correct, but it is a roaring bull market made up of continued reduced flows of beef from Canada, the anticipation of heifer hold-back to build the cow herd (which will mean a cyclical reduction in beef supplies), and increasing demand. Second quarter demand was up 4 percent-5 percent from the second quarter last year, resuming the strong pattern of growth we had seen from 1998 through 2001. It turns out that 2002 was an exception with some lagged influence from 9-11-01 and the BSE problems in Japan at least momentarily stopping the significant increases in demand. With record highs occurring, I would repeat the advice from last week on both live cattle and feeder cattle futures. Use trend lines for downside protection, and let this market run to the upside before you think about establishing short hedges or taking profits on long hedges. The markets are overbought and they will correct to the downside, but it possible that we will see a correction that stays above the uptrend line on the chart. We really don't have much of a historical perspective with regard to current markets because we are approaching beef supply reductions due to holdback of heifers to build the herd in the presence of increasing demand. As I have noted in the letter in recent weeks, we haven't seen this combination of herd building on the supply side and increasing demand for beef since the early 1970s.
At least partly because of what is going on in beef, as the beef product moves to higher prices and pork becomes a more acceptable alternative to many consumers, the hog sector is staging a counter-seasonal price rally. Slaughter levels are not showing the seasonal increase we would normally expect as we move through September and into October. Cash prices have jumped significantly across the past several days. Wholesale and retail prices are getting better, and we are seeing new contract highs recorded in the lean hog futures. I certainly didn't expect to see the sharp rally of the last few days as we approach the fall months. This may be taking us into uncharted territory again because we have seen such dramatic increases in cattle prices with the cash market in cattle possibly as high as $88 this week. And we may be anticipating a surge in retailer interest in buying and featuring pork. Whatever the reasons, we have seen $60 and better on the October lean hog contract in Tuesday's session, and I think this is clearly an opportunity for producers to look at short hedges and think about locking in what would appear to be very nice prices. The old life-of-contract high on the October, which I see as the key contract to be watching, was $59.60. I am not sure we are going to see two consecutive closes in this contract above $59.60 given the selling pressure that I expect above that level. Even if two consecutive closes above $59.60 do occur, I don't see significant upside from here. I do think we have substantial risk to the downside from these current price levels, especially when the roaring beef complex falters. I would be inclined to look at the fall and winter hogs with these attractive prices being offered this week and recognize that we have seen a $5 advance within the last three to four trading days which is not likely to be sustained.
The corn and soybean ratings were down another 2 percent in terms of good to excellent status from last week's levels. One of the questions is whether or not the rather lofty levels that we see in new-crop corn at $2.40 and better and new-crop soybeans up around $6 have already anticipated reductions in the crop estimates in Thursday's U. S. Department of Agriculture reports. All analysts are expecting some reduction given the significant deterioration in crop conditions we have seen across the past 20-30 days. World grain stocks are all fairly tight, and it doesn't look as if the U.S. is going to rebuild those stocks in any substantial way this year. On something other than the positive side of all this, some late moisture is continuing to stabilize yields, and it looks as if South America is going to be larger in all competing crops. Also, there is strong competition for markets in wheat and corn around the world. It is interesting to see China, which many were hoping would be the salvation of the grain industry in the U.S. and bring back the golden years of high prices, competing strongly as an exporter in corn this year. None of the buying countries seem very concerned about stockpiling early on and tend to be waiting and buying on an as-needed basis and that doesn't suggest sharply higher prices from here.
It is hard to anticipate accurately what the USDA reports on Thursday will say, but it is my inclination to believe that much of any price advance that will be justified based on the report numbers is already in the market, especially in corn and soybeans. I would be inclined to add to short hedge protection here. The odds favor sideways to down action as we move toward harvest and get away from the uncertainty about yields which always tend to prop up the market. In the December corn contract, we have a similar situation with an old high of $2.69, which occurred back in March. But this market seems to be paying attention to a later high of $2.47-$2.48, which occurred in mid-June. The recent advance has faltered along those mid-June highs, and this market is showing some signs of short-term topping action. With this December corn giving us opportunities on occasion in the mid-to-high $2.40s, I would again be inclined to be a seller and placer of short hedges as compared to waiting and expecting this market to run still higher. Users of corn who hold long hedges who operate on a selective hedging basis can take profits here. It is highly unlikely that we will not see this market correct to the downside from current levels because I don't think we will get that much of a bullish surprise in Thursday's USDA reports.
I talked last week and in earlier letters about the one-day island reversal top that we saw on December wheat in both Chicago and Kansas City on August 18 up around the $4 level. That topping pattern is very much in place, and across the past several days we have seen this market move down about $.40 per bushel from those levels. Last week, this market gapped lower on the basis of some weak export news and some faltering in the upside thrust in corn and in soybeans. I have been recommending getting old-crop product sold on rallies, especially if it is unpriced, and wanted to move to at least 25 percent forward priced on the 2004 crop with the July Kansas City contract around $3.50 or better and the July Chicago contract at $3.40 and better. We are well off those levels this week, and I think we are now completing a correction of this last June to August price surge. Let's back out of this market and not do additional forward pricing or selling of old crop until we see some support develop and see a later rally back to better prices. The stock picture at the world level continues to favor somewhat better prices than we may be seeing at the current time, and I would hold the 25 percent priced in the new-crop wheat and would hope that most of your old-crop product was sold on the recent price surges. We are likely to see better prices for next year's crop in both Kansas City and Chicago than we are looking at this week.
