Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
November 25, 2003
The process of finding a balance in the beef business continues this week. For the week ending November 22, beef production in the United States was down more than 14 percent. This is evidence of an adjustment process that I have described in earlier letters as the higher prices at the cattle and box beef levels work their way up to the consumer. Demand doesn't shift that much in a matter of a few weeks, and with the demand curve essentially stable, any substantial reduction in available quantity of product is going to prompt a sharp increase in price. That, of course, means the consumer is not as anxious to buy, and we need less product coming up through the system. As the price impact works its way back down through the system, we find packers only operating four days a week or in other ways trying to help restore some decent operating margins in an environment that is clearly unusual and very distorted in terms of any historical comparison. The heavier Choice boxes were as high as $168 across the past week, and Monday afternoon's quote was $162.50--down $2.18 from last Friday afternoon. All of this is evidence of the different ways in which the system is adjusting to some very unusual circumstances.
Limited trade on Monday was at $98 in Texas and prices increased northward with $100 being paid in Nebraska. Across the past several weeks, I've been suggesting any cattle finishing during February and possibly even April ought to be hedged. If you have to pay a margin call, I would be inclined to keep short positions in place because there is a downside risk here until we hear something in terms of when the Canadian border will reopen. December live cattle closed on Monday just above $96 and the June, which appears to be the contract expected to be beyond the reopening of the Canadian border, closed at $75.65. I would want to be on short hedges out through February, possibly even April, at these elevated prices, but I would not be selling June futures at $75.65. I expect to see prices better than that as we approach the late spring months. In feeder cattle, we see a different picture. The March contract has been trading between $88 and $92 for the past month. The high on this contract is above $97, and we had some late September lows around $85. If this market dips toward the $85 level, I would place long hedges on the spring feeder cattle futures. If it can rally up toward recent highs of $92, and certainly if it makes any stab toward the contract high near $97, I would want to place short hedges. We may see the opportunity up around $92 across the next few trading days.
In the lean hog market, I've been recommending producers take profits on short hedges on dips by the December down in the $49-$50 range, and we've seen that across the past week. I would continue to stay open to price risk in this market and not have short hedges in place as long as the December contract is trading below $50. I do expect to see a rally from that level and would not be inclined to be on short hedges. I think the packing firms will be buying the hog futures on these dips to place long hedges. If we look out, the June contract is $63-$64. I think we need to see rallies on that market before we place or replace short hedges. Any dip toward $62 will find buying. If that does occur on the June, it ought to be seen as a chance to take profits on short hedges. I don't expect to see this market under major cyclical pressure as we move out into 2004.
In the corn market, I pushed the late October early November rally as an opportunity to sell old crop product or hedge a product you are holding in storage and recommended getting 25 percent price protection for new crop with the December 2004 futures being pushed above $2.49. We've seen another rally up to $2.48 across the past 10 trading days and another chance to get some pricing done on the new crop contract. The market is back down into the low $2.40's, and basically, we are in a range now from the mid-October low below $2.34 up to the late October high at almost $2.50. Let's leave this market alone as long as it's trading in the middle of that range. Be prepared to place short hedges and take profits on any long hedges you're holding as a user of corn if we see a rally back up toward $2.48 to $2.49 in the December 2004 contract.
In wheat, the July Chicago contract is certainly giving us chances to get up to 40 percent-50 percent forward priced on this contract at prices well above the $3.50 level. The July 2004 contract has shown us a $3.70 high across the past two weeks and is now back down into the low $3.50s. On any rally back up to $3.60 or better if you're not at 40 percent-50 percent forward priced, I would get there. In the Kansas City July 2004 contract, the recent rally carried up to the $3.73 level, but across the past week, this market has gapped to the down side. That occurred when the market was shocked by China canceling a trip to the U.S. after the U.S. imposed some barriers to imports of textile products from China. The concern of reciprocal penalties and actions by China still has this market nervous. Any rally back above $3.65 on this July 2004 contract in Kansas City ought to be seen as an opportunity to get to 40 percent-50 percent forward priced in this market. On both the Chicago and Kansas City July contracts, we are starting to see an opportunity to sketch a trend line on these charts that hooks the mid-October low with the low from last Wednesday, which was the plunge after hearing about the Chinese trip being cancelled.
All the talk about the difficulties with China is certainly not helping the soybean market. After a long sustained move up in this market from early August to late October, we saw some signs of topping above $8 on the January contract. This market has corrected to the downside and closed at $7.37 in Monday's action. On the new crop November, the rally about three weeks back carried that market as high as $6.035 with Monday's close at $5.73 (about 30 cents off the high in this market). In terms of chart patterns, this market lends itself to an uptrend line and a resistance plane across the high. I showed this same contract in the marketing letter last week. We have continued opportunity for producers to monitor the situation and as long as the market can hold gains and rally toward the highs, let it go. I would always prefer to sell rallies to the resistance plane rather than wait for a close below the trend line, but that may be preference with different producers. Remember, if we do sell a rally up toward the $6.03 high, and we see two consecutive daily closes above that level, then the selective hedger will buy back short hedges and let the market run to the upside if something is happening that opens up the possibility for still higher prices. I like the approach of managing exposure to the risk and not just staying on short hedges which take the gains away from you in a market as volatile as the soybean market has turned out to be with ending stocks estimates the lowest we've seen in many years.
