Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
November 18, 2003
In the grain and oilseed markets this week, I am showing the November 2004 Soybean Futures chart. We are seeing developments in the soybean complex chart patterns that I've used many times across the years in the weekly letter‹a type of chart pattern that I like and one most producers can manage well. The nearby futures in soybeans, such as the November 2003, are starting to falter and show signs of topping. The November 2003 contract moved in early November up to prices as high as $8.01 and traded around the $8 level for about a week. Then it backed off, and after a price as low as $7.31 on November 10, tried to rally again. This is starting to look like topping action in the old crop contracts whether you look at the November, the January, or the spring futures contracts. If that is in fact what is starting to develop, that should increase our interest in looking out and getting forward pricing done on next year's crop. The November 2004 contract ran as high as $6.03 on November 4 and then backed off as the old crop contracts started to run into selling pressure. We have seen November 2004 as low as $5.75 on November 12. This price dip allows us to sketch a flat resistance plane across the contract high and draw a trend line on the chart connecting the lows in mid-October with the November 12 low of $5.75. Across the next few weeks this market will have to come out of a triangle on the chart one way or another. I would be inclined to get some initial forward pricing up to 25 percent and possibly 35 percent in place on a rally up against the high or on a close below the trend line, whichever comes first. This approach is most appropriate for a selective hedger who is willing to place short hedges on a sell signal, and then if the market goes either higher than expected or dips, would be willing to buy back those short hedges at some later date on a buy signal that emerges on the chart. If you're doing this in terms of cash contracts or will establish the short hedge positions in futures and hold them until harvest, I would be a bit more conservative and stay at about 25 percent priced and would only do it on a rally up toward the highs around the $6 level.
We could probably say thanks to fund buying in the corn market for the huge opportunities that we have been presented. The December 2003 futures ran up to the $2.51 level on October 30 and bumped into selling just under the May 16 high of $2.53. That carried the new crop 2004 corn up to $2.49 3/4 on October 30 right at the May 12 high on that contract of $2.49. This was a huge and unexpected opportunity to sell old crop corn or get corn you are holding in storage forward priced by selling May futures against it. It also gave us an excellent opportunity to get up to 25 percent-30 percent forward priced in new 2004 corn with that December 2004 contract up around the high of $2.49. I would hold those short hedge positions. This market has tried to rally across the past few days but is showing substantial weakness in Tuesday's session, and I suspect we're going lower from here. Those short hedges, for the foreseeable short-term future, should be held firmly in this market. Any rally back up toward those same price levels ought to be seen as an opportunity to sell old crop corn or to get some pricing established on 2004 corn if you didn't do it on the prior rally. Users of corn have likely taken profits on long hedges on a rally up against that high. I would stay out of this market and let it correct to the downside to prices substantially below what we are seeing in Tuesday's session before I would think about replacing those long hedges.
The wheat market continues to get moved by weather in the southwest and confirmed (or rumored) trading activity by China in the world market. I recommended in earlier letters to get up to 40 percent - 50 percent forward priced in this market with the July Kansas City above $3.50, and we certainly have those opportunities with that market having traded up as high as the low $3.70's within the past few days. As for Chicago soft winter wheat, I would want to be 40 percent - 50 percent forward priced above the $3.40 on the July contract, and we've had those opportunities there and prices even better than that. If you're not up to 40 percent 50 percent priced, get there this week. We have seen a nice run up and a nice pricing opportunity in these markets with the July Chicago having dipped as low as $3.19 on October 15 and then trading as high as $3.70 on November 13. These markets are not expected to continue to go up without any correction to the downside, so I would be using prices this week to get up to 40 percent priced if you've not already reached that level in 2004 wheat.
Price discovery continues to be very difficult in the beef market. Asking prices for cash cattle are as high as $105 this week with little or no trade today. Box beef cutout values are moving up again with the lighter Choice types above $167 in Monday afternoon activity and up again to $169 on Tuesday morning. The big unknown is how the consumer is going to react at the fresh meat counter and in the restaurants as these sharply higher cattle and box beef values continue to work their way up to the point where the consumer will start to feel the impact of high prices. In live cattle futures, I would continue to advise selling rallies back to the recent high especially in any contracts beyond February. In Tuesday's session, most of the futures are up in the 1.50 daily limit with April as high as $83.02 and June trading up on the day at $75.90. There is clear indication that expectations are for the Canadian border to be open again before June. I think as the policy process runs its course and we get closer to an announcement, there is some downside in these markets, and I would continue to be inclined to place short hedges and lock up profits on rallies up against the highs in all of these nearby futures in both live cattle and feeder cattle.
In the lean hog complex we have seen dips across the past few days and as late as Monday down toward the August 18 low at $49.65 on December futures that I've talked about on several occasions in recent letters. We had a dip as low as $49.85 on November 13. I would buy back short hedges on the December futures around the $50 level and expect this market to rally before replacing short hedge positions in February and April and later contracts. I don't see major downside risks from here, and I think the slaughter numbers that we have seen are telling us that we have no significant supply expansion coming during the 2004 calendar year. We usually see some seasonal weakness in April, and Tuesday's close in April 2004 futures was near $60.10, more than $9 above the December close of $50.80.
