Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
October 14, 2003
The cattle markets are unprecedented. Cash slaughter cattle are as high as $110 and boxed beef values for the heavy Choice boxes were at $187.24 Tuesday morning, up $5.65 from Monday morning. October live cattle futures have been limit up for days with the cash prices above futures and continuing to advance, and the Chicago Mercantile Exchange is in the process of expanding the daily $1.50 limits. What does all this mean to producers? If cattle are not hedged, it means a bonanza. But the profit picture is not necessarily bad if the cattle are hedged. Assume mid-October cattle with a breakeven of $75 were hedged at $88. A 1300-lb steer shows a hedged profit of $169 per head. If those $88 hedges are bought back at $103, the margin calls to $103 would be about $195 per head, or 13 times $15 per hundred. Interest on $195 per head at prime plus two or 6 percent for 60 days is $1.95 per head. The realized per-head profit is still $167.25 per head or better less commissions if cash continues at or above the futures. The opportunity costs of missing another $150 to $200 per head are there, of course, and one has to have access to a margin credit line to keep the hedges in place.
How long this lasts is tied directly to the situation in Canada. Live cattle futures for February and beyond are limit down on Tuesday with April at $82.72 vs. $100.32 in the expiring October. Feeder cattle are also lower with all but the October down the daily limit. Let's watch the 2004 contracts like the April live cattle with a high of $85.55 on October 9. A rally back up toward that level might be an attractive short hedging opportunity unless we have good reason to expect the Canadian borders to stay closed well into 2004. Adopt a similar posture on feeder cattle with an eye toward the March and April futures. Cash prices for calves going into winter programs are high and we may need to protect calves in these programs if March rallies back toward the Tuesday, October 14 high at $97.45.
Lean hogs have been pulled up by the cattle. December shows a new high at $60.90 in Tuesday's session with the close down $1.27 on the day as a reflection of lower prices in the more distant cattle contracts. It is hard to ignore opportunities to price late 2003 and early 2004 hogs with the December up toward $60 or better, and I would look at placing or replacing short hedges on a rally toward that high. If you are comfortable acting as a selective hedger, a good rule to follow is to buy back short hedges if the market shows two consecutive closes at new highs. That approach will eliminate the occasional huge margin calls like those we are seeing now in the October live cattle and might make you more comfortable in selling this December lean hog contract on a rally to the contract high.
The October 10 U.S. Department of Agriculture reports brought a double surprise with the corn crop up to 10.207 billion bushels and soybeans down to 2.468 billion from 2.643 in September. Both the corn (a record crop) and the soybean numbers were surprises to the markets. Soybeans have made new highs since the report and corn has been pressed down toward contract lows.
November soybeans were up to $7.45 in Tuesday's session. Producers have a chance here to sell old crop and to start looking at pricing opportunities on new-crop soybeans. The November 2004 contract recorded a new high at $5.86 1/2 on November 2 and is trading down to $5.50 in Tuesday's session. There are clearly concerns the relatively strong cash market in late 2003 will prompt a big South American acreage with that crop now being planted. The $5.86 high will be a target for us in the 2004 crop. In corn, users should act now to place long hedges out through 2004. Producers with short hedges in place can buy them back around $2.15 this week and I would look at doing so. The contract low here is $2.09 1/2, and I don't expect to see new lows in corn with this strength in soybeans.
The key features on the wheat charts are still the topping actions on August 18. New-crop July 2004 Chicago wheat moved up to $3.45 on September 30, within a penny of the August 18 $3.46 high, and offered a superb forward pricing opportunity. Don't pass rallies to old highs when there are fundamental reasons to believe the upside potential is limited from those contract highs. I have been advising protection of up to 40 percent with the July 2004 Chicago above $3.40, and I would hold those short hedges. In Kansas City, the late September rally was not as good with the July 2004 stopping around $3.45. Hold short hedges here as well and we will look at adding protection on any rally up toward $3.45. That is not a contract high, but the market quit there in late September and seeding and crop progress has been generally good since that date.
