Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
September 23, 2003
Bull markets in the cattle complex are always hard to kill, and the current case is no exception. We have feeder cattle making new highs in Tuesday's session. This market will top and I think it will top close to current levels in the short term with some rather predictable factors bringing the rampaging prices to a halt. We are starting to see some reduction in kill levels by some of the major packers for cattle, and those reductions reflect weaker operating margins for the packers. There will also be a lagged reaction to the record high prices we are seeing in beef. Given a few weeks, the impact of all this will start working itself up to the retail market, and retailers will start featuring pork, chicken, and other alternatives to beef. All that will add to the resistance that the retailers will have to paying still higher prices for the boxes, and somewhere in this give and take process, these roaring record markets will slow and show us a bigger correction than anything we have seen to date.
The October live cattle contract had made a high at $88.30 on September 11, and then across the past 10 days, dipped back down toward the $85 level. Tuesday's session is trying to show higher prices again, reflecting the very current inventories in the feedlots and the ability of the Choice boxes to move to the $162 level in Tuesday morning trade. I see the possibility of a double top as this market rallies in Tuesday's session and moves back up toward that September 11 high of $88.30 in the October. I would be inclined to place what should be very profitable hedges on the remaining cattle in September and early October here. If you are convinced this market can go still higher and recognize, as I do, that the market is still above the logical trend line on the October and December charts hooking the May and July lows, you can carry the risk and look for still higher prices without huge concerns of any big break in this market.
The November feeder cattle contract has a number of highs across the past two weeks at or just below the $96.50 level. Given the anticipation of some slowdown in the fed cattle side of this market, I would be inclined to place short hedges on these October and November feeder cattle up toward the $96.50 level on the November contract. If you are fortunate enough to be holding long hedges in this market from substantially lower price levels, I would look as a selective hedger to take profits. I don't believe this feeder cattle market can sustain prices up toward $100 as we begin to see some faltering of the bullish momentum in the fed cattle cash market, in the live cattle futures, and face the expectation of more featuring at retail shifting to pork, chicken, and other alternatives.
In the lean hog market, we have weighted average prices around $59 on a carcass basis, and those prices have held up surprisingly well. We have a hog and pig report coming, which is likely to show 2 percent to 3 percent smaller breeding herd, but many analysts are starting to think we have already seen much of the impact of that somewhat smaller breeding herd and that we are in for somewhat higher daily slaughter levels as we move into October and November. I would share that sentiment and recognize that this market has backed off from and is still trading below the $61.20 high that was recorded back on September 11 in the nearby October, and the high on that same day on the December was $59.50. I would definitely look at placing short hedges on these fourth quarter hogs if that December can rally back up toward that past high. Given the tops that we see across more recent days that quit in the $58.50-$58.65 area, I might lower my sights a bit and look at getting these hogs hedged if you don't have them hedged on anything back up toward the $58.50 level or better on this December lean hog contract.
In the grain and oilseeds, the talk is still about the soybean complex, and there is consistent discussion of yields being lower than expected. This has propped up the soybean market in terms of price outlook for the next few months, and I see higher prices on the charts than I had expected to see. Another result of these higher prices in soybeans with the tight stock situation that is developing as the U.S. crop expectations have been decreased will be substantial increases in South American soybean acreage. There is already talk of an increase of at least 10 percent, and if we have a higher price umbrella to offer some market protection or encouragement to Brazil and Argentina, we will see their soybean acreages increase and we will see the supply side start to grow by next March and April. These possibilities have to be considered in looking at the price expectations for the U.S. crop. The November soybean futures have staged another rally that has moved up through the post-U.S. Department of Agriculture report high at $6.30 on September 11. After backing down and doing some chart filling across the past several days, this market moved up through that high last Friday and closed at $6.38, and we are trading in Tuesday's session up in the $6.50 area. Producers who placed short hedges late on this post-report rally or placed them on the recent rally back toward the post-report high would want to answer margins calls, I would think, and expect to see this market show some topping actions. Much will depend on what the actual yields turn out to be as we move through harvest, so there is still some uncertainty. It is a market in which profitable prices are being offered, and I would be inclined to take those good prices.
The picture in corn is decidedly different, and this market has, as I had expected, dropped down on the December futures chart to close the chart gap that was left back on August 12 when the market opened well above the August 11 high and left a gap in the $2.23-$2.26 range. Last week, the December dipped back into that chart gap, closed it, and started to find some buying support, and I had expected to see that occur. Look for a correction to the upside now in spite of the weak close on Tuesday in the December. We are going to have a crop up toward 10 billion bushels, and we have far less of the yield concerns in corn it appears than in soybeans. I would think that we will see some post-harvest pressure in this market, so it would make sense to look for pricing opportunities on rallies. If the market closes later this week below the September 19 low of $2.22 1/2 , hold short hedges because the market is going lower.
The wheat markets continue to drift lower off the highs that occurred back on August 18 in both the old-crop and new-crop contracts. We are well off the highs in the December Kansas City contract and well off the high on the same day on the new-crop July contract. I had recommended moving to at least 25 percent priced on 2004 wheat in Kansas City with July at $3.50 or better, and we have had chances across the past several weeks. It probably makes sense now to lower the price expectations a bit and be a bit more aggressive in this market, but we can look for a rally off of last Thursday's low. The markets are reacting to some improved export activity in the world arena and the prospects that the recent dip in the U.S. dollar will improve export demand. Be prepared to move to a higher level of pricing in both Kansas City and Chicago, and we will watch these markets carefully recognizing that in Chicago chances to get the July sold at $3.40 and better have been there on several occasions. We saw prices on Monday of this week as high as $3.35, so we will have opportunities to get some pricing done above the trend lines we can now sketch on the chart and use those trend lines as a safety net in case the markets plunge.
