Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
January 6, 2004
It was a record year for the cattle markets, up and down. Cash fed cattle are around $74-$75 in limited early week trading. Cash prices were well over $100 a few weeks back riding the strength of a 9 percent or so reduction in fed cattle supplies from the BSE-induced closing of the Canadian border to cattle trade with beef demand strong in this country. Then, just before Christmas, BSE was discovered in the state of Washington. Light Choice box beef values were above $190 back in October and were at $150.43 on December 24, but by Monday afternoon they were at $137.09.
We are in uncharted waters in the cattle complex. My advice across the past several weeks has been to maintain short hedge positions in live cattle futures even if you had to pay a margin call. I did not know this BSE shock was coming, but the markets were and still are very uncertain. I would not be quick to see the rally since the live cattle and feeder cattle stopped the free fall last week as a bottom. The price plunge has been so big there will surely be short covering to take profits, and that is the source of this rally. The BSE cloud is still hanging over this market, and we are not sure yet what the long term impact on the demand side will be. I would hold any short positions and be inclined to replace any closed out short positions on any rallies later this week until we see more information on the source of the BSE and assurances to the consuming public, here and abroad, that it has been contained. If it is several months before we see significant movement into the Japanese, Mexican and South Korean markets again, there will be a big hit in export demand which has been a factor in strengthening demand for U. S. beef across the past 5-8 years.
The December Hogs and Pigs report was negative with the totals inventory up 1 percent from last year and the breeding herd only down 1 percent. The distant lean hog futures, such as the July reacting to the 2 percent larger fall pig crop, traded down on Friday but closed near the high and traded up on Monday. Cash hogs are looking higher as the packer margins are encouraging slaughter, and the weather is always a small issue this time of year when storms stop movement of hogs to slaughter. There is resistance on the February chart near $57 and again at $60 across the October-November highs. I would look at short hedges on rallies to those resistance planes expecting pork to get some continued help at retail with the uncertainty in beef. In the more distant July contract, I would watch to see if that market can take a run up toward the highs above $62 and not be in a hurry to short hedge. I like the looks of the Friday and Monday action on that chart.
Soybeans were already strong and were helped after the BSE incident with talk of a total ban on any animal-based protein in feeds. Traders are watching the weather in South America where a large crop is moving along at a normal pace. The January is trying to make a new high above the old high of $8.055 but ran into resistance on Monday. The new crop November is crawling higher, and the chart is showing such an obvious trend line to use to replace short hedges you bought back when we saw two consecutive closes in new high prices or to use if you have done no short hedging. There is new talk of a move to the upside, but I am skeptical as I continue to see the world level ending stock projection at or near record highs. The stocks are tight in the U.S., and the weak dollar is building a fire under demand for our soybeans. Let this market run to the upside if it can, but be ready to get some price protection when price levels are too good to pass or when we see a close below the trend line shown on the chart. At these levels I would not be looking at put options and would turn to cash contracts if you are not ready to use futures directly. The premiums on September and November put options look large, and you are paying for upside price flexibility which I see as possible but not likely from current levels.
Wheat prices surged last week on talk of China business later in the year and the notion that the recent sell-off was overdone. March Chicago wheat is still well below its high, but the new crop July gave us closes in the $3.80s Friday and Monday, recording two consecutive days in new higher price ground. If this market can rally up toward $4, I would definitely move to 50 percent forward priced and would look at just answering margin calls on earlier short positions. Let's not get too cute with selective hedging up near what I see as the highs in this market for the year. We have spent very little time in the history of this market with the July futures at or above $4. Kansas City looks a bit stronger because of some dry weather in the Southwest. You will have a better shot at $4 there, but the 50 percent level in pricing is again the target.
Demand is still the talk in corn with the industrial uses moving up with ethanol and exports are looking good longer term. The December U.S. Department of Agriculture report had ending stocks at 1.3 billion. There is talk in the trade about this number coming under 1.0 billion due to growing demand, but I doubt that in the presence of a record crop. Ending stocks at 1.0 billion bushels is still a huge set of stocks. The December 2004 has been able to make new highs with a $2.53 close on Monday. I would be inclined to keep short hedges in the high $2.40s in place and add to protection and move up toward 40 percent of your 2004 crop on a 10 cent to 15-cent rally from this level. That will put corn near the top of my fundamental price range for the year, and it will take weather issues in 2004 to justify still higher prices in this complex. Hold your long hedges in corn if you are a corn user. If you took profits on them around $2.50 on the December, I would not be very concerned at this date. You are likely to see the December 2004 at those levels or below again as we move toward the late-March Prospective Plantings report which should show a huge acreage given the current farm programs.
