Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
October 7, 2003
The bull markets in cattle are rampaging again. There was an announcement that circulated on Monday that BSE has been found in an animal in Japan that was less than 30 months of age. This caused rampant speculation about the possibility that the Canadian border will not be opened as quickly as had been expected. There were pending moves to start allowing any cattle under 30 months of age to move across the border, but this announcement out of Japan may cause those emerging decisions to be revisited. All of this has prompted a wild limit-up market in cattle, and Tuesday's market has traded at the limit-up level again. November feeder cattle closed up the $1.50 daily limit at $102.45, and December live cattle also closed up the limit at $89.225. The charts show the breakout to new highs that occurred both on Monday and Tuesday. Any short-term topping action that might have been coming out of the sideways patterns that were seen on the charts across the past three weeks or so are now out the window.
This unusual development (and this type of market is more likely in the grains and oilseeds where weather is a factor than it is in livestock) emphasizes again the importance of having a margin call line of credit. I have always counseled that producers should not sell futures unless there is a credit line for margin call purposes if they and their financial institution want to keep the short hedges in place and answer the margin calls. I suspect we have forced liquidation of some producers and speculators holding short positions in these markets on Monday and Tuesday. This is also testimony to the very good rule that is always there: if you sell and short these markets when it looks like it is making a top as the December live cattle appeared to be doing in the $84.50-$85 range across the past two weeks, then those short hedges should be bought back when you get two consecutive closes at new higher prices. That would have taken us off short positions in cattle before the wild surge that we have seen on Monday and Tuesday and would substantially reduce the need for margin money to keep short hedge protection in place. All in all, it is a difficult market, and I would be inclined to keep trend lines under the market, let these markets run to the upside, and sell this market until we see some more concrete signs than we have seen to date that the changes in information have run their course and the wild fluctuations in the markets have run their course to the upside.
In the hog markets, we see a substantially different pattern on the nearby charts as compared to the more distant ones. This is a function of the different messages that we had in the recent Hogs and Pigs report, which were bearish on the hogs for the expiring October contract, neutral on the December, and rather bullish when you look out into 2004. In Tuesday's action, we have December back above the chart gap that was left after the report and back to a level that has retraced about half of the price break that we saw across the past two months from the highs up above $59 all the way toward the $53 level after the report. With a fairly strong close on the December and the April 2004, for example, trying to make new contract highs in Tuesday's session, I would step back from this market and see how far those more distant hogs that reflect the size of the breeding herd in the recent report can carry this market to the upside. I believe if the April and beyond contracts in 2004 can make new highs, they will carry the December higher and possibly back up toward its contract high, which is at $59.50 back on September 11. I would definitely be a short hedger and a seller of the December hogs if they can approach that contract high again, and we will need to look at the more distant hogs at the same time to see if attractive profit opportunities are being offered.
The December wheat chart looks very negative. A lot of this selling seems to be technical in orientation this week and was prompted by Egypt turning to Australia to buy wheat and passing any U.S. offers, and that has put strong pressure on the old-crop wheat charts. The new-crop July 2004 contract in Chicago does not look as bad having moved up toward the August 18 high recently, reaching $3.45 and only 1 cent under that old August 18 high just a week ago on September 30. That was a huge forward pricing and selling opportunity for producers of soft red winter wheat, and I would hope that we are up to 40 percent or so priced on this market, which is what I have been recommending any time the market offered more than $3.40. The Kansas City charts look very similar, but I find the close on Tuesday near the high of the trading range on the day much more encouraging on the old-crop Kansas City wheat than I do in Chicago. But this market also moved down sharply from its August 18 highs, recorded a short-term low on September 19, and then corrected part of that August 18 to September 19 break. Now the market is moving lower again. I think you need to hold short hedges here in old-crop and in new-crop wheat. I see no signs of any short-term bottoming action in either the Kansas City or Chicago.
In corn, I rather think we are going to see some modest rally off of the lows from last week, and those were the lows recorded after the bearish stocks report in corn. Chances of a substantial change in the October 10 U.S. Department of Agriculture crop estimates in corn are much smaller than they are in soybeans. A selective hedger should look at buying back short hedges along here either as you sell the corn or in anticipation of some small and modest rally in the cash market after we move through more of the harvest-period pressure. I don't think corn users face any major threat of significantly higher prices, but any opportunity to buy this December at $2.20 or below with the contract low down at $2.09 is an opportunity for the corn user that should not be passed. At least, consider getting long hedges placed or replaced.
The soybeans are still volatile because there is still uncertainty about the crop size. It is too early to start worrying much about how big the acreage is going to be in South America and how much competition we will have for world demand when we get out to next March and April. This November that had moved up to a new contract high of $7.01 last week and then backed off, down toward $6.69 later in the week, is closing Tuesday at $6.87. I had recommended short hedges in market at lower prices than this, and I certainly think an opportunity to sell this market on a rally back up against $7 should not be taken lightly. I suspect that most of the discounting for the uncertainty of yields is already priced into this market. It is not impossible that Friday will bring us a report surprise that pushes November up through $7 and keeps it up there, but I rather expect that that will not occur. Anything back up toward $6.97-$6.98 probably ought to be sold to place or replace short hedges in this market as you move toward harvest.
