Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
November 11, 2003
The livestock and meat markets are trying to sort out some conflicting forces. The heavy Choice box beef cut out values were stable all last week between $168.79 and a high of $170.52 which came on Friday. In Monday's action and again Tuesday morning, we see some tendency for those values to start climbing again. Futures in Tuesday's session are down hard in spite of early talk of bids as high as $105 in the cash market. All this makes it very difficult to decipher exactly where the correct prices are or will be. That has been the case in this market for some several months now.
I used the December 2003 live cattle futures last week as the chart I thought would be the best chart to watch in all this. I expected the market to have a hard time making new highs, but it did record new highs late last week and again on Monday before the turn to the downside in Tuesday's session. These futures prices are still generally below where the cash market might trade. So long as that's the case, we will see some tendency for the futures to work higher in spite of concerns about how well the beef products are going to move as you approach Thanksgiving and the fact that the market looks very much overbought after Monday's session. At some point it probably makes sense to place short hedges on rallies up against the highs, like the ones that were taken out last week, and just answer margin calls if need be while this market gyrates off its historically high levels and tries to decide what it needs to do. Longer term, we'll see continued inclinations to the downside because the Canadian border will eventually be reopened, and we are likely to see packers starting to reduce the kill unless the negative margins of the past week start to show improvement. For the margins to get better, the cash cattle prices need to get lower or the box beef values need to get higher. We may see an increased tendency for the packers to back off in terms of levels of operation.
The feeder cattle are being buffeted by what is going on in the cash cattle markets and live cattle futures. The soon-to-expire November rallied to as high as $104.72 last week, but that is well off its contract high at $107.07 back on October 14. The active March contract recorded a contract high of $97.45 on the same October 14 date, and the rallies on Monday and again Tuesday reached as high as $92.30 before this market ran into selling resistance and turned limit down during the day on Tuesday. I would hold short positions if you have them in this feeder cattle market, especially in the spring market. You need to keep in mind the March feeder cattle should be valued based on price expectations for fed cattle markets next August and October. We see those markets continue to linger in the mid-$70's, so something above $90 on March feeder cattle looks very attractive against the live cattle futures in the summer months that are showing June below $76 and August below $74 in Tuesday's session.
In hogs, the cash market on a lean hog basis is around $49, and the December has been at some premium to that and is running into selling pressure along with the cattle markets in Tuesday's session. I would hold short hedges on the December hog futures and not buy them back as a selective hedge until we see a test of the August 18 low at $49.65. At that level, I would think taking profits on short hedges would look reasonable, and I suspect that packing plants will be starting to place long hedges on the hogs at those levels. The April chart is looking substantially different with Tuesday's levels above $60 and not that much off the September highs above $62. The recent, relatively heavy slaughter levels compared to what we would have expected out of the September report suggest some lingering liquidation that may make the supply side pork price more positive by the time April gets here. I would wait and do nothing until we see the current dip to the down side run its course, then look for a rally back up toward the October 15 high around $62.40 on that April contract as a place to establish some short hedges.
The grain and oilseed markets continue to move in response to rumors of trade often involving China. The crop conditions in the wheat-producing regions are not good and are lagging behind last year's level which is giving help to wheat prices. The next U.S. Department of Agriculture report will be out November 12, and there are expectations that the corn crop estimate will be increased with pre-report estimates ranging as high as 10.48 billion bushels. On the soybean side, it appears there are fund buying and some commercial buying in front of the report suggesting the expectations in soybeans might be for a somewhat smaller crop than the 2.468 billion bushels in the October report. There's not likely to be any major market moving ramifications in the report for wheat. The weather in the southwest and what's going on in the market, especially surrounding China, seems to be driving price change.
In corn, I thought the October 30 surge by the December 2003 contract up to $2.51 and just a penny or so off the contract high was a gift opportunity to sell old crop corn and reach out into the March and May futures and get any corn in storage forward priced. In the March 28 report, I recommended 25 percent forward pricing on 2004 corn crop if the December 2004 matched its old high of $2.49 back on May 12 or better. We saw prices at $2.49 and slightly above for almost a week up through November 3, so I would hope that the early pricing is done and I would hold those short positions as this corn market backs off.
In soybeans, the October 28 letter had suggested 25 percent forward pricing on new crop soybeans if the October 2 high at $5.86 1/2 was taken out. We saw that happen with the market running up to $6.03 1/2 on November 4. This market has backed off since, and we've seen a close below the obvious uptrend lines on the old crop soybean futures. Look for this market to rally back up toward recent highs in old crop which is going to give us a chance to sell cash product or get it hedged if it's in storage. We'll see efforts to move back up toward that $6 level in the November 2004 futures and have a chance to either catch up to the 25 percent forward pricing or get some more pricing done on rallies up around $6.
In wheat, the old crop contracts rallied through the highs of two weeks back based on activity in the world market, again especially in China, and the help that comes from deteriorating crop conditions in the southwest. I have wanted to get 40 percent-50 percent forward priced with the Kansas City July above $3.50, and you certainly have a chance to do that this week with that contract. Trading up in the low to mid-$3.60's, I would get to the 40 percent-50 percent priced if you're not at that level. In Chicago wheat, I wanted to get to 40 percent-50 percent forward priced on any opportunity above $3.40 and up toward $3.50. We saw that market in the high $3.50's this week, so I would certainly catch up to the 40 percent-50 percent pricing goal in this market. Fundamentally, the wheat market is reasonably strong at the world level, but if crop conditions start to improve in the southwest and we see a bit of slacking in the export buying around the world, we have some downside potential in these markets.
