Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
September 16, 2003
The September 11 U.S. Department of Agriculture reports set the fundamental picture for grains and oilseeds for the year. The corn crop was estimated at 9.944 billion bushels, down from 10.064 in the August report and a higher level than had been expected for the September report. Ending stocks for the 2003-2004 crop year that just started were pegged at 1.064 billion bushels, down from the August report but still a relatively large set of stocks. The price range for the year was raised by 10 cents per bushel on each end of the range to from $2.10 to $2.50. The soybean crop is now estimated at 2.643 billion bushels, down significantly from the August estimate of 2.862, and this reflects the deteriorating crop condition across the past 30 days that has been so widely discussed. By the time we work down through the various usage categories and look at the ending stocks for the 2003-2004 crop year, down to 135 million, and that is significantly below the 220 million that we had seen in August. The price range was raised from an August estimate of $4.55-$5.55 to $5.25-$6.15 for soybeans. There was little change in the wheat numbers with reduction at 2.292 billion bushels, ending stocks remaining at 644 million bushels, and a modest tightening of a price range from $3.10-$3.70 down to $3.10-$3.50.
It is clear that the biggest bullish surprises came in soybeans. The November new-crop contract gapped up after the report. In Tuesday's session, we are dipping back down into that rather large chart gap and back down toward $6.10 per bushel. Short hedgers who answered margin calls to keep hedges in place should hold those positions because I don't see upside potential from here. Any deterioration in crop condition as we move through the next few weeks is going to have minimal influence on the market and we are going to start discovering a price for soybeans that would be appropriate for a 2.6 to 2.7 billion bushel crop. Keep in mind that as we move into the harvest period, planting will be starting in the Southern Hemisphere and we can anticipate with these improved prices huge crops in Brazil and Argentina. I would hold those short hedges and watch this market and if you still need price protection, use any rally back up toward the recent highs in the November in the $6.20-$6.30 range to add to short hedge protection.
As a general rule, the right thing to do in these weather induced price surges is to let price run up toward contract highs or up into levels that the fundamentals are not likely to support and sell the market hard and place short hedges. That has certainly been the correct thing to do in the corn market. Instead of the gap higher that we saw in soybeans, we saw a hard day down on September 11 after the corn crop came out bigger than expected. After having moved up recently in front of the report to the $2.47 level on the December corn contract, we are now trading in the mid-$2.20s and over 20 cents off those highs. This break on the report day on September 11 came down through uptrend lines and sell-stop orders under those lines should have short hedges in place and should have removed long hedges and taken profits on those positions. Look for this market to dip down toward the $2.20 level and completely close the chart gap from about a month earlier associated with the August report and we will then probably chop sideways and move into harvest and see what type of yields we actually get. I wouldn't want to do anything but look to find some short-term bottoming action to buy back short hedges and think about replacing long hedges in this market across the next several days.
The wheat markets are still very much in the aftermath of that major topping action that we saw on the charts on August 18, the topping action that I have talked about in recent weeks. I was encouraging getting old-crop product sold if it was not forward priced, and looking to move to at least 25 percent forward priced in Kansas City and Chicago with the July Kansas City at $3.50 or better and the July Chicago at $3.40 or better. We have had those opportunities and I would be in a mode of holding those short hedges at this point in time and watching to see when we can find some short-term bottoming action and the possibility of a corrective rally to offer additional short hedging opportunities.
Across the past few years in presentations around the country, I have been predicting that we would see record high cattle prices in the near future as we move toward holding heifers and starting to rebuild the cow herd as the hay and pasture situations start to show some improvement. I understood the cyclical expansion that was going to reduce beef supplies would be coming in the presence of increasing beef demand. We haven't had herd building to reduce beef supplies and increasing beef demand occurring together since the early 1970s, and I expected that we would be going into uncharted waters. The BSE situation in Canada and the inability of Canadian cattle to come across the border has accentuated the situation, but we have seen over $90 in the futures and cash in the fed cattle market and over $100 in futures and cash in the feeder cattle market. Those numbers are almost unbelievable and they came in the presence of record high boxed beef prices with the heavier Choice boxes reaching levels of $160.80 in Tuesday morning's trade. The modest corrections to the downside that occurred on Friday and Monday in the October live cattle contract is still occurring above the trend line that we can show on the chart if we hook the late May and the late July lows. I see the same pattern on the October feeder cattle contract where a trend line hooking those late May and late July lows is well below levels at which we see this market trading. I would repeat the advice of recent weeks in the letter. Stay out of this market from the short side until it shows us some topping action. Let's make the market show us a top and do some churning and then give us something to work with on the charts before jumping back into this market and placing short hedges. If you are fortunate enough to be holding long hedges in feeder cattle or in live cattle futures, you might move to sell and take profits a bit more quickly because you are anticipating that we are at the upper end of the fundamentally based possibilities.
Things are a bit more normal from a risk management viewpoint in the pork sector. It is always important to watch the nearby contract, and I am generally very much inclined to want to sell and place short hedges or take profits on long hedges on a rally to the contract highs. That is especially true if that past high is about as favorable in terms of pricing level as you can reasonably support from the ongoing supply-demand fundamentals. We had a high on the October lean hog contract back in May at $59.60, and we have seen one close above that level at $60.375 last week on September 11, but we have not seen the two consecutive closes in new contract ground that suggests prices can go on up. Thus, I would definitely hold short hedges you placed on a rally up toward that old $59.60 high. Make this market show us two consecutive closes above $59.60, and I still think that old high is relevant, before we think about buying these short positions back or in any way adjusting our risk management plan. Obviously, this market has been helped by the rampaging situation in beef, but beef will not run continually higher, and as we move into the fall months we should see some seasonal pressure coming on these hog markets.
