Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
September 30, 2003
The grain and oilseed markets moved in diverging directions in Tuesday's session after the release of the U.S. Department of Agriculture's stocks report. Soybeans had been making new highs across the past several days based primarily on continued expectations of relatively poor yields. The soybean stock estimate was for 169 million bushels, and that was 21 million above the average pre-report guess. There was a bigger shock in corn where the stock numbers were above expectations and what we saw in Tuesday's session is soybeans trading sideways with mixed impacts coming out of the stocks report, corn trading down, and wheat trading strongly higher. The wheat stocks came in at the low end of expectations, and while the planting phase is ahead of the normal and there is talk about some rain in Australia, etc., the basic fact is that stocks in the world wheat market are still relatively tight. This is all it takes to get somewhat better prices and we saw nice rallies, especially on the new-crop 2004 wheat contracts in Tuesday's session.
The old-crop wheat contracts in Kansas City and Chicago are making corrections of the major break since the much-discussed topping action that we saw on all the charts back on August 18. With improvements in the fundamental outlook, we have the July Chicago 2004 closing at $3.45 in Tuesday's session, and that is only 1 cent off the August 18 high of $3.46. I believe Chicago's new-crop July contract will make a new high. Tuesday's close on the July 2004 in Kansas City was at $3.42, and that is 13 cents per bushel off the August 18 high at $3.55. I think it is very possible that this July Kansas City 2004 contract might try to challenge its all-time high at $3.55 from August 18. I would back off that $3.55 high just a bit down in the $3.51-$3.52 area and be an aggressive seller of this market on a rally up to those levels, and I would be inclined to sell the new-crop Chicago contract at the same time. If you have held the short hedges for 25 percent forward pricing that I advised earlier, I would look at moving up to 40 percent-50 percent forward priced if we can get a rally up toward that $3.55 high on the July 2004 Kansas City.
The December corn chart looks very negative at the close on Tuesday. This market had backed off from its most recent high up around $2.47-$2.48, which occurred in early September, and closed the old chart gap in the $2.20s. But the surprising information on stocks triggered more selling in this complex, and Tuesday's close was a very weak close near the low and is threatening to go to lower prices. If you have short hedges in place, hold them. If you have lifted them across recent action, I wouldn't be in a rush to replace them here. I don't want to price on these relatively low prices and I would carry the risk in the cash market for a few days until we see what develops. As a corn user, if you have no long hedges in place, stay away from this market and let us see how much lower it can go before you replace those long hedges. I think we are likely to see the market go down toward, at least, the $2.12-$2.15 area on the December.
In the grain and oilseed complex, it is soybeans that are somewhat like the live cattle contract that I have talked about in recent weeks, where a bull market is hard to kill. This bull market in soybeans has kept getting some fuel as yields have not come in as favorably as expected. But we had a hook reversal top on this new-crop November contract in Tuesday's session with a new contract high and a lower close on the day. It is not as formidable as a key reversal top because Tuesday's trading range did not constitute an outside day compared to Monday, but this may stop this rampaging soybean market for a bit. Let's watch and see if we can get a correction to the downside and look for opportunities to think about buying back short hedges or to improve your position as you move toward harvest. Right now, I don't see anything on the chart that indicates that I would want to take any further action in terms of hedging this crop, especially with a continuing stream of news that suggests that yields are not going to be a good as the USDA had expected in its last substantially lower crop estimate. There may be lower estimates yet to come, and the soybean crop may get smaller as we move through harvest.
After running to record highs with some reports of $94 cattle in the cattle feeding regions last week, the market seems to be taking a bit more relaxed attitude this week. We have seen a few cattle trade in Nebraska at $90 and a few in Texas at $87. Boxed beef values Tuesday morning for the Choice types were not at the record highs up into the $160s but were holding around $160, and that leaves room for cattle to be priced at the feedlot level at $90. October live cattle futures have turned choppy across the past two weeks in the $85-$88 range, and I rather expect to see that continue. Given a few more days, I think we will see more of the influence of retailers starting to turn away from beef in terms of specialing activity, and I have suggested in recent letters that this may be what puts at least a short-term top in place. I would not object to seeing short hedges against the highs that we have had on this October live cattle contract, and I would extend those out into later months if you need protection and have nice profits. We have a high on the October on September 11 at $88.30, and that high was almost matched on September 24 at $88.20. Tuesday's close was strong at $87.60, so we are not very far off those highs. I would think hedging cattle up around $88 would make sense. I don't see much upside from here fully recognizing that we have seen a cash market above this level, but I don't think we will hold those levels. There is obviously considerable downside risk in case we get some unexpected development including an announcement of a recall or some such problem in the market.
The contract high on the October feeder cattle is just a bit above $100, and I would certainly argue that there is nothing wrong with pricing cattle up against this unprecedented $100 level for feeder cattle. The September 24 high on the November feeder cattle contract is $97.30, but I wouldn't necessarily insist that this contract approach $100 before I would get some pricing done on these fourth quarter feeder cattle. Key off of the active and nearby October as we move into the month and price cattle in the fourth quarter and out into early 2004 when that October approaches its high around the $100 level.
Last Friday's Hogs and Pigs report only had some of the key categories about .5 percent above last year's levels, but that was enough to take a bit of the bullish bloom off this market. Anything from December and out traded down very hard in Monday and Tuesday's sessions. We have a huge chart gap left on the December lean hog contract that is from about $55.50 all the way down toward the $54.25 high that was recorded on Monday. Tuesday's big trading range shows a close in the middle at $53.60, and if you have short hedges placed $5 per cwt., for example, above these levels on the lean hogs, given what I see in Tuesday's session, I would take a look at buying those short hedges back. I like the middle of the range close on Tuesday, and that reveals some signs that we are finding buyers. If you prefer to hold short positions and think about being ready to add to them on corrections, then anything back up toward the top of this big chart gap on December around $55.50 would certainly be a target.
