Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
November 4, 2003
The livestock and meat markets are still caught up in the aftermath of the Canadian border closing. Through September, only a small part of the price increases that we have seen in the slaughter cattle and boxed beef markets had reached the consumer level. During October and into early November, that picture is changing. There is talk of 40 percent to 50 percent increases in retail beef prices in the buzz that surrounds this market, and if that is close to true, we will see the volume being pulled through the pipelines slow down as the consumer looks for a lower price alternative in the food store and on the restaurant menu. The resistance plane above $95 that we put on last week's chart and the uptrend line on that December live cattle chart will give us direction. Sell a rally to the $95.25 high on the December or on a close below the trend line, whichever comes first, and look at February and perhaps April at the same time. The announcement last Friday of a 60-day comment period on the new policy that would start the reopening of the border suggests it will be well into 2004 before cattle are flowing freely again. I am not sure that the June through August of next year with Monday closes in the $74.50 to $75.50 range have the post-Canadian price right, but when the border is open again, cattle prices will be closer to $75 than to $95. If herd building has started and the current growth in demand continues, maybe the late spring market can be $80 or better and not $75, which I see as conservative.
March feeder cattle have dipped toward $88 twice in the past 2 weeks since the $97.45 high was recorded earlier in October. If I were to do anything in this market, I would buy to place long hedges on a dip back to that $88 level. The March futures are being priced based on a slaughter market in late summer and early fall that is near $75, so do not expect to see the spring feeder cattle markets running above $100. We do have some upside here from $88 if the slaughter market in the summer months can be around $80 and that could happen. I would be a buyer of feeder cattle on dips and take profits on long hedges and place short hedges for the spring months if March can approach $95 again.
December lean hogs closed Monday at $52.65, and that is still well above the weighted average price of $45.55 in Monday afternoon direct hog prices. Slaughter levels are seasonally high, and over time, the daily slaughter rate is usually highest in November. This year is not an exception, it appears, and the market is under pressure. The December hogs had run up toward the $61 level and recorded a new high just a few weeks back. Much of that was coming with the record high prices in the cattle markets, and the supply-demand fundamentals did not support a $60 lean hog market. Hold short hedges here until we test either the $51 low from last week or, if you are more conservative in your selective hedge trading, make the market test the August low near $50 and hold there before buying back short hedges. Processors should join in the buying on a dip toward $50 to place long hedges for December and into early 2004. Keep in mind that as long as the cash market is well below the December contract, it will be very difficult for the futures market to sustain any rally.
Some buyers in the world market for soybeans are concerned about supplies and availability, and the market continues to see active buying even as prices go up. The nearby November 2003 has pushed a few ticks above $8, and that has carried the new crop November 2004 up to the $6 level. Use an uptrend line on the old crop November or January, and sell cash market beans when you see a close below the trend line. Take a hard look at the 2004 prices at the same time, or just step up and price 25 percent of the 2004 crop with the November 2004 at $6 or higher. We have the March-April period harvest in South America between us and the 2004 crop in the U.S., and I suspect that will relieve some of the price pressure on the soybean market. We are in a mode of increasing prices to ration usage to the most important uses, but some of the buying will be delayed until the South American harvest as we move into 2004.
July Chicago wheat closed on Monday at $3.48, and the July Kansas City was near $3.53. If you are not at that level, I would move up to 40 percent to 50 percent forward priced on both soft and hard red winter wheat at these levels. Part of the reason for the relatively high wheat prices is what is happening in soybeans, and I expect to see that situation soften as we move into early 2004. Wheat prices at $3.50 or so, adjusted for your basis, should be profitable. We need to remember that last year's prices were better than in recent years, and there are no limits on acreage of winter or spring wheat.
I have a hard time believing what I am seeing in corn, and I would be aggressively selling cash corn, hedging corn in storage, and starting a significant program on pricing the 2004 crop. We have a report out next week, and most expect to see the already record 10.2 billion bushel crop get bigger still as we make good progress on harvest. Last week's rally, coming mostly from fund buying and some short covering, pushed the December 2003 within 2 cents of its May high at $2.53. That surge carried the new crop December 2004 to nearly $2.50. In corn, especially in a market with big crops and big stocks, the decent pricing opportunities often come early. I would forward price at least 25 percent of the 2004 crop at $2.48 or better on the December 2004 contract. As selective hedgers, we can buy those short hedges back if we see two consecutive closes about $2.50, but I do not expect to see that happen unless we get an unexpected bullish surprise in the upcoming report. Big and record crops tend to get bigger still as we work through harvest, so I do not expect the report to be bullish.
