Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
December 2, 2003
In the grain and oil seed complex, it has been soybeans that have continued to be the bullish component in this entire sector. Wheat prices are better than we have seen in recent years because stocks at the world level are down. Corn has been dragged up in sympathy with price rallies in wheat and soybeans. In the soybean situation, the ending stock estimate of 125 million bushels for the U.S. is the smallest number we have seen in years, but at the world level, the projected ending stock for this 2003/2004 crop year is at or near record levels. Last year's price for the 2002-2003 crop year in the U.S. was well above the traditional relationship we have seen between U.S. prices and ending stocks at the world level. I am not confident that we will see an aberration to the high side in terms of prices two years in a row. I am inclined to want to sell a rally to the $6 level in the November soybeans and get at least part of the new crop forward priced. I would also think selling old crop product (or at least getting it hedged if you are holding in storage) would make sense. As we move further into the new year and move toward harvesting in the southern hemisphere, it is going to be very difficult to continue to sustain high prices in soybeans by talk of the need for rationing. I do not think there will be much rationing in the world market. I do not see an upside from the $6 level in the November contract and would be inclined to get that contract sold. Work with 25 percent to 40 percent of your new crop expectation. Remember, selective hedgers who are comfortable with that approach would be willing to buy the short hedges back if we see two consecutive daily closes above the contract high of $6.03 1/2 which occurred back on November 4.
In wheat, the old crop December Kansas City contract is trying to make new highs this week above $4, having traded as high as $4.10 1/2 on Monday. The old crop December Chicago is not making new highs, but it is moving back up toward recent highs of $4/bushel--not that far away from the contract high in mid-November around the $4.08 level. All this strength in the old crop contract is helping the July Chicago new crop contract challenge its old contract high of $3.70. Monday's high was also $3.70. I would definitely move up to 40 percent to 50 percent forward priced. Let's settle on that number (50 percent) and sell soft red winter wheat now with prices being offered up against the $3.70 level in the July 2004 Chicago contract. In Kansas City, the contract high on the July contract came in mid-November at $3.73. Friday's high went marginally above that level, and Monday's high was up to $3.75. I would be inclined to move up toward 40 percent to 50 percent forward priced in this hard red winter wheat contract as well. Any producer convinced this market has more upside can hook a trend line to the lows early in the fall (down around $3.25 on the July Kansas City contract) to just below $3.50 which occurred about 10 days ago after the announcement that China had cancelled the trip to the U.S. and monitor with that trend line. Then, sell only when we see a close below the trend line.
In corn, I continue to see a huge opportunity associated with these price rallies. The old crop December 2003 contract traded as high as $2.51 at the end of October. On Monday we were back up as high as $2.47 1/2 (within a few cents of the highs in this market). The modern contract high in December 2003 corn occurred in mid-May around $2.53, so we are close. I see this as an opportunity to sell old crop product you have held in storage waiting for a post-harvest rally. If you are going to continue to hold crop in storage to take it out into 2004 as a new tax year, I would look to get it hedged at these attractive price levels. We have a big crop harvested and any upside in price from here has to come from the demand-side of the price equation. With that new crop December 2004 corn futures having quit about a month back just under $2.50 and rallying up within 2 to 3 cents of that level twice on more recent occasions, I would be inclined to move to about 40 percent forward priced in new crop corn just under this $2.50 level in the December 2004 future. This is especially important if you are willing to function as a selective hedger and buy this hedge protection back on a major price dip and then replace it later on some rally. If you take a more conservative mode and are inclined to leave those futures in place once you sell the contract in place of short hedges or if you are doing it with a cash contract, I would move to 25 percent forward priced on new crop corn. Users of corn, who have long hedges in place, should take profits by selling long December futures in the $2.47 to $2.50 range. Look out in March and May if you have long hedges in those contracts and think about taking profits at the same time.
Cash cattle prices in early week trade were as high as $104.50 in Nebraska with very limited numbers to date. The box beef values, after having dipped significantly off the all-time highs, started to show positive daily changes on Monday and again on Tuesday morning with the heavier Choice boxes above $161. Margins at the packing plant are still iffy and in trouble. There is growing talk about packing plants cutting back on slaughter levels. There is also increased recognition that the processes I have discussed in prior letters are going forward with pork offering stable prices and ample supplies and good margins to the retailer and beef getting by-passed as these higher prices work themselves up the chain to the retail food stores and to the restaurants and other institutions. Monday's high on the December live cattle contract was $99.70, taking out the high for earlier December of $99.30. I would continue to recommend short positions in this market and in the contracts through April. I think there is definitely some downside risk here as the packers back off in operating levels, and we see other types of forced adjustments to make the cash and futures come together in these near term contracts.
Any long hedges established on the substantial dip to the downside in the March feeder cattle have worked across the past several days with trading above $94 in Tuesday's session. That is already $6 above the substantial amount of trading at the $89 area that occurred during November. If this March contract can challenge its contract high of $97.45 on October 14, I would take profits on long hedges and turn to being a seller and place short hedges in the spring feeder cattle contracts.
As the fundamentals improve, there is renewed enthusiasm surrounding the retailer's move toward featuring of pork. Lean hog contracts rallied strongly on Friday and Monday but are showing a more negative day in Tuesday's activity. I have been suggesting if we work from the December 2003 futures contract, we need to be thinking about buying back short hedges in the $49 to $50 range. I believe that is going to continue to be a good line of advice. We are lower Tuesday, and we may dip back down toward the $49 level again on that nearby contract, but I think we are putting in at least a short-term bottom. Thus, I would not want to be on short hedge positions as a producer, and packers and other users of long hedges in this market ought to be thinking about being long and getting long hedges established in the $49 to $50 range on the December. That level translates to about $56 to $57 in the April 2004 contract where we see substantially better prices and evidence of a price discovery process that sees a brighter supply and demand balance as we move into 2004.
