Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
December 9, 2003
The grain and oilseed markets are anticipating the December 11 U.S. Department of Agriculture reports. The prices we are seeing approaching the report are "pricing" in some increases in exports and corollary reductions in ending stock estimates, especially in corn. Ending stocks are already at a low 125 million bushels in soybeans, and any decrease in that already tight set of stocks could push soybean prices still higher. The big market mover here is the declining value of the U.S. dollar. The U.S. dollar index based on the Eurodollar, the Yen, and selected other currencies is down over 10 percent since August. Across the past year, the Japanese Yen has moved from $0.0080 U.S. dollars to $0.0093 (a 16 percent increase), and the Eurodollar has advanced from 1.00 U.S. dollars to 1.22 U.S. dollars (an increase of more than 20 percent).
There are, it is clear, legitimate reasons for the price advances. Having said that, the big mistake producers make in these bullish markets is to set expectations too high and do nothing in their risk management programs. We need to keep in mind that normal weather could bring a record South American soybean crop, and the stock picture is not nearly as tight in the world market as in the U.S. The weak U.S. dollar is helping, and U.S. prices can go above world prices by roughly the equivalent of prices in Brazil plus transportation costs to the U.S. In soybeans, Monday's $6.08 1/2 close on the November 2004 contract gave us the second consecutive close above the old $6.03 1/2 high. Selective hedgers buy back short hedges on this buy signal. Producers with cash contracts on 25 percent of your projected 2004 crop should forward price more on a scale up basis or when we see a close below the trend line on the chart I am showing this week. If you sold futures and do not want to be a selective hedger, answer any margin calls and be prepared to forward price more on a 20 cents to 25 cents per bushel rally. The high on the nearby January is $8.05 1/2, and we are about 30 cents below that high. A 25-cent rally in November 2004 is certainly possible.
In corn, the weak U.S. dollar is helping. Ending stock estimates on December 11 will come down but will still be above 1.0 billion bushels. March futures have quit four times in the low $2.50's since the contract high was established at $2.57 3/4 back in May. I don't expect to see that high exceeded and would continue to sell old crop corn in rallies. Last Thursday, December 2004 managed a new high at $2.50 but closed off the high. I would move to 40 percent forward priced as a selective hedger on a rally to $2.49 or so, and I would take profits on long hedges in any of the futures months on such a rally.
Kansas City July 2004 wheat rallied to $3.84 1/2 last week, and the July 2004 Chicago contract recorded a new high at $3.82 on the same day. I have been more pessimistic than this on wheat and would be 40 percent to 50 percent priced in wheat. Both contracts have a steep but legitimate trend line hooking the October and November lows. Selective hedgers will be off short hedges on the recent new highs, and all producers should step up and price on rallies to the new highs set last week or on a close below the trend lines.
Choice box beef prices appeared to be stabilizing in the $156-$157 area on Monday. Cash cattle trade will be around $100 later this week and well above the $97 close in December futures on Monday. The expiring December managed a new high at $99.92 last week, pushed up by the strong cash prices. The February contract recorded a key reversal top last Wednesday when it recorded a new high at $94.95 and then closed limit down on the day. The markets are lower again on Tuesday. I repeat general advice to maintain short hedges in this market out through April and answer margin calls if necessary. This is not a normal market, and we cannot use normal and tested selective hedging strategies in these unusual conditions.
In feeder cattle, I would continue to sell rallies to the recent $95.35 high on the March contract. Contract high is $97.45 from mid-October, but we will not see that high challenged again. Keep in mind that a $95 March future is pricing cattle into the feedlot that would finish in summer, and the August live cattle futures closed at $74.22 on Monday. A premium of over $23 in March futures is too much and cannot be sustained. Looking ahead, March feeder cattle futures will come down, August live cattle futures will trade up, or both will occur to get back to sustainable economic relationships. Tuesday's lower prices suggest the immediate need is for lower March feeder cattle.
I would continue the program of buying back short hedges as a selective hedger with December lean hogs at $49-$50 and on dips by the February to the $52-$53 area. Pork will be featured more in food stores, restaurants, and institutions as the record cattle and boxed beef prices continue to work up toward the consumer. Production for quarter four is expected to be up less than 1 percent, and the breeding herd in place suggests pork production will be near 2003 levels in quarters one and two of 2004. With demand up, we should see prices better than the $35-$36 (live base) and $42-$43 in quarters one and two, respectively, of 2003. I do not see downside risk to be a great concern from the $49-$50 area on a lean hog basis and would buy back any short hedges and be exposed
