Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
October 28, 2003
We have seen nice rallies in the grain and oilseed complex across the past week. The big fundamental development behind this was the sharp reduction in soybean production in the October 10 U.S. Department of Agriculture report. That's been followed by some continuing talk, and some of the talk has been confirmed, of China purchases in the grain and oilseed arena. There was talk of more active buying on the weekend. The wheat market in particular presented very attractive pricing opportunities on this rally. The December contract in Kansas City reached a price as high as $3.78 on Monday. That rally on the December pushed the new crop July Kansas City right up against its contract high which had been $3.55 also back on August 18. Monday's market opened at $3.56 and that was the high for the day. The close was down around $3.47, and the July contract showed a classic key reversal top. Whether these markets will eventually take out the stopping action in the new crop wheat contract will depend on what develops in the supply-demand picture, but selling the rally up against the old high of $3.55 is always a good way to go. Tuesday's strong closes suggest still higher prices might be coming, so we will need to monitor the markets.
Soybeans are still in a solid uptrend with Monday's action on the November recording a new life of contract high at $7.78 1/2 and a lower close on the day. There is still some expectation that the November crop report will reduce the soybean crop again, and Tuesday's new high confirms those expectations. Any activity that suggests China will either buy in the world market or be less of a competitive factor in selling in the world market is helping soybeans. Stocks are tight here and the market is trying to discover the price to ration usage to the most critically important uses of the soybean. A logical approach is to keep an uptrend line on this nearby November the key contract until we move well into that month. If you look at the November 2004 contract, we had a life of contract high of $5.86 1/2 put in place on October 2. Monday's rally pushed up through that high to $5.87 1/2. I see this as an attractive forward pricing opportunity on new crop soybeans. We need to be ever mindful of the large crop that's likely to be coming out of South America by the time we reach March and April. I would think that 25 percent of the new crop soybeans at a minimum ought to be forward priced in that $5.85 level. Thus, I would recommend getting some forward pricing done this week above $5.80 and will monitor the situation, but I suspect these are going to be attractive opportunities.
This run up that we see in corn due primarily to better price action in soybeans and wheat is, in my opinion, a gift. The old crop December contract has run up against highs and carried the December 2004 back up into territory that merits a look for some limited forward pricing. Contract high on the December 2004 corn had been $2.49 on May 12 and we saw this price move from down around $2.30 to as high as $2.49 on the October 23 and $2.48 3/4 yesterday. I would definitely have wanted to forward price 25 percent of my 2004 corn in the $2.45 to $2.50 area. This is a commodity that has shown us better prices in presence of a projected record crop, and the prices are strictly due to anticipation in the export arena and what's going on in soybeans and to a less extent in wheat. Tuesday's price is off of those highs but this is the case where it's useful to have "good til canceled" sell orders to place short hedging activity on a rally toward the old high and have the order sitting there. This is also a spot in which, if I were a corn user and had long hedges in place, I would take profits on long hedges established down in the $2.30's on the December corn.
The key to the livestock and meat complex is what is happening in the slaughter cattle market and the live cattle futures at the CME. Some analysts have talked about surge in demand bringing these price increases but the data doesn't support that type of inference. From September 2002 through September 2003, Nebraska cattle were up about 40 percent and Choice boxes were up about 41 percent. Retail Choice beef prices were up only 12.5 percent. Since July 2003 through September 2003, both cattle and box beef are up from 18 percent to 22 percent. Across this three-month time period, the retail Choice beef prices were up only 1.5 percent. Demand has not been tested because the high prices have not reached the consumer level. During October we heard talk about restaurants taking prices off their menus and institutions having to raise prices. There's going to be a limit to how long the retailer will absorb this price pressure in the form of smaller margins before everything gets passed up to the consumer. When that happens, because demand doesn't shift a great deal from month to month, we'll see less volume being pulled through the pipeline as consumers back away. That'll bring an end to these sky-rocketing prices that have pushed to record levels in feeder cattle and box beef. It looks as if the highs that were put in place at $95.25 on the December on October 14 are going to be the highs in this market for that important futures month.
In the cattle I've been advocating putting a safety net under this market especially when you look out into the early 2004 contracts when we have some small possibility that the Canadian border closing, which has prompted the vast majority of these wild price gyrations, will be open again. I would key off the December contract for the moment and hook the low at $82.30 on September 29 with the low at $86.42 1/2 on October 23 and sketch that uptrend line up and to the right. This market, in the December and the first quarter 2004 contracts, needs to be sold on a rally up toward the highs at $95.25 on the December contract or a close below the uptrend line you can sketch on this December contract, whichever comes first.
When the rampaging cattle market quit and turned volatile and started giving us something that looks like topping action on the chart, the lean hog futures really took a price hit. The December is trading down toward the $51 level. That's in sharp contrast with the price slightly above $61 on October 15. Short hedges should have been placed on the last rally up toward the old highs and I certainly hope those short hedges are in place. I would not do anything additional here until we see this market find some support and if it doesn't find it before then, the low at $49.65 which occurred back on August 18 is going to stop the lower prices in the December. We have very high weekly and daily slaughter levels and the market is just not able to move this increased tonnage through the pipelines without lower prices. The national hog market on a lean carcass basis has a weighted average price of below $46 and that puts live base prices down in the low $30's, back at a near or break even position for a lot of producers. It's going to be important to get some benefits out of these short hedges. I would advocate looking to buy back these short hedge positions in December and the first quarter 2004 contracts if the December moves down toward that recent and important low at $49.65. If you're a bit more conservative, you might wanted to wait and see if buying support does emerge before you step up and buy back the short positions.
