Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
December 16, 2003
Next column will be January 6, 2004
Cash cattle traded from $93-$97 with most sales in the $93-$95 range late last week. Box beef values were looking better on Monday which opens up the possibility of somewhat higher cash prices this week with feedlots asking around $98. Tuesday morning's boxed beef level was at $159.02 on the lighter Choice boxes, up 48 cents from the better prices on Monday.
I see no reason to change recent advice in either the fed cattle market or in feeder cattle. This is an environment charged with uncertainty as we continue to wait for the policy process to reopen the Canadian border to live cattle movement. I have been suggesting short positions in the live cattle futures out through the April contract and have argued we should be willing to answer margin calls if need be to keep those short positions in place. That has not been a problem recently, because these markets are tending to work lower and I would continue to offer that same line of advice this week and would hold short positions in the first quarter 2004 live cattle futures. March feeder cattle made an all-time high back in late September and rallied to the $95+ level during November. The market gapped down from that level and has continued to trade in the low $90s. There appears to be support in this market along the $88 level across lows we saw back across several weeks. I would be inclined to sell any rally back up toward $95 in this market and would be buying back short hedges and maybe even thinking about long hedges on dips down toward the $88 level. We need to keep in mind this March contract is pricing feeder cattle for August and early fall finishes of slaughter cattle. In midday Tuesday's session, the June live cattle futures were at $75.20 and the August was $74.50, so a $90 March feeder cattle future is showing a $15 premium to the price levels at which those cattle could be forward priced. That relationship is going to constrain upside development in the spring feeder cattle futures.
Weather is disrupting moving slaughter hogs to market, but there are expectations for a very large slaughter this week. In recent weeks, I have been suggesting buying back short hedges on this expiring December down in the $49-$50 range and doing the same on the February (somewhere around the $52 level). Tuesday's action looks as if it may make a new low relative to recent trading levels, a function of the very heavy slaughter level we will see this week, but the cash market looks steady to high in some markets. I would continue to buy back short hedges and expect some rally in this February lean hog futures on a seasonal basis as we move past Christmas into the early part of 2004.
In the grain and oilseed markets, analysts are watching the Chinese delegations expected to arrive in the United States later this week. There is hope they (the Chinese) will be interested in buying soybeans, but it is not clear how much of that possibility has already been priced into the market. Corn is getting sold on rallies on a technical basis, and there is also some profit-taking going on each time the market pops up toward recent highs. Wheat was weak on Monday primarily based on wheat export information. We are starting to get news that the majority of the corn and soybean crop has been planted in South America and the wheat harvest there is moving forward. We will start to see weather in South America become a major factor in the grain and oilseed market as we move out into January and February.
The expiring December 2003 corn is trying to move out above $2.50 in Tuesday's session and is pulling the March back up toward its October high around $2.55. All this, in turn, is pulling the December 2004 back up toward $2.50. I would continue to look at selling old crop product on these rallies and would be interested in having at least 25 percent (or possibly up to 35 percent-40 percent) of the 2004 corn forward priced on a rally by that December up toward $2.50. Put your sale order in around $2.48-$2.49 to help ensure a fill. This is an especially attractive opportunity if you are willing to be a selective hedger where you would buy these short hedges back on a substantial move to the downside in this market or if we see two consecutive closes at new contract highs, which I do not expect.
In soybeans, the nearby January rallied up to about $7.89-$7.90 level back on December 9 and 10 and has backed off from that level. The fact that this nearby contract could not challenge its contract highs above $8 back in early November is revealing and is one of the reasons the new crop November contract, after making new highs, is not showing big price gains to the upside. When asked, I always argue you need to watch the nearby futures and the more distant contract, like the November 2004, in which you would take action. The inability of a nearby future to make a new contract high or a nearby future bumping up against a contract high can stop price advances in the more advanced contracts. I am showing the November 2004 soybean futures again this week. It is a useful reminder of the need to make a decision whether or not one will hold short hedges and answer margin calls or look to buy back short hedges on two consecutive closes on new contract highs. That decision will often pivot on whether or not the underlining fundamental picture is such that there would reasonably seem to be very little upside in this market after the new highs are recorded. Certainly this November contract has not run to the upside. It has worked up to the $6.20 level (20 cents above the old high), but I am not sure there is much upside potential here. I would continue to look for opportunities to have short hedges in place in this market as we move out toward the time when we would be watching development of a large crop in South America.
The March Chicago wheat is nearly 40 cents off its high which was just above $4.21 back on December 4. The March Kansas City contract is over 30 cents off its high which appeared on the same day. On the July 2004 Chicago contract, we have now seen closes below the steep uptrend line on this chart, and I would definitely want to be 40 percent-50 percent forward priced in this wheat and would certainly move to that level if we could get a rally on the July back up into the $3.70s. I started recommending pricing in this market at lower levels, but if you are not 40 percent-50 percent priced, there are attractive opportunities here. In Kansas City, anything back up to the mid-$3.70s on that July contract ought to be seen as an opportunity to get to 40 percent-50 percent forward priced as we move through the winter months and are getting some snow cover, especially in the southwestern part of the country. Unless we continue to see robust demand and strong export inspections, we could see some faltering in this market. We need to keep in mind that while the wheat stocks are relatively tight here and at the world level, this is a crop that has many potential sellers and many potential producing countries in a global context.
