Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
January 13, 2004
The January 12 U.S. Department of Agriculture reports were market movers. In corn, the ending stock estimate that was nearly 1.3 billion bushels in the December report was pulled below 1.0 billion bushels to 981 million bushels. Much of that change came from a 164 million bushel decrease in production, and we don't usually see big changes in crop production estimates in the January reports. Prices will be higher in corn than earlier anticipated because this is a significant change in the supply-demand fundamentals. The already tight ending stocks in soybeans were kept at the December number of 125 million bushels. Prices of soybeans surged with no change in the ending stocks as feelings that there need to be higher prices to ³ration² use of limited stocks continue to flourish. We need to be careful here. At the world level, ending stocks for soybeans are near record highs. The 2002/2003 crop year ending stocks are estimated at 38.74 million metric tons, and the January estimate for 2003-2004, the crop year that ends August 31, 2004, is 35.98 million metric tons, the second highest level on record. The U. S. does not dominate the oilseed market in the world, and that fact is clear when you look at why the ending stocks were still at 125 million in the U. S. The January estimate of the U.S. crush was 30 million bushels below December levels. Projected imports of soybean oil jumped in the January report to 235 million lbs from 85 million in December, and imports of soybean meal jumped from 340 thousand short tons to 475 thousand. It is the world which will provide some of the oil and meal that will keep us from running out of stocks in the U. S. In wheat, winter wheat acreage was put at 43.46 million acres, a startling 2.0 million less than expected, and wheat prices surged from already high levels.
Prices are volatile. This price surge supports the wisdom of having bought back short hedges in the November soybeans futures when it made new highs above $6 but answering a margin call and then having a chance to add to price protection at higher prices is not bad. Old crop soybeans ought to be sold on a scale up basis on these rallies to very strong profit levels in the January and March futures. We have a nice uptrend line on the November 2004 chart and can wait on a close below the line and a sell signal to do added forward pricing or to replace short hedges.
Wheat prices were pushed higher by the huge discrepancy in expectations and winter wheat acreage, and there is talk of a China delegation coming to talk about wheat. Tuesday's action on these markets show topping action, however, and I would move to 60 percent to 65 percent forward priced on wheat with July futures in Chicago and Kansas City having reached $4. We have spent very little time in the history of this industry above $4 in the new-crop July futures, and the big mistake here is not pricing some of the wheat too low when you look back, but looking back at these hugely profitable prices and realizing that you did not take advantage.
I am not sure I remember a change in corn stocks this big in any one report. If you are short hedged here and are looking at the price gaps and the price surges this week, I would not be too quick to think about buying back short hedges. With the December 2004 pushing up into the $2.60s and making new highs, we are likely to be in the top one-fourth of the price range for the year, and I believe we will see selling coming into this market. Corn is different from soybeans, however, in that world stocks of coarse grains are being estimated at 100.47 million metric tons, down 43 percent from the 2001/2002 ending stocks.
Trade in fed cattle is likely to be in the mid- to high-$70s. Boxed beef values were up strong on Monday and up again Tuesday morning, suggesting that the boxed beef to retailer interface has not self destructed. I suspect that retail prices have not come down much to date as the retailers look to get some good margins after being squeezed late in 2003 by the higher prices coming with the Canadian border closing. February live cattle traded as low as $71.17 on December 31. Profits to short hedges in place before the BSE announcement have been huge and some producers have bought back and taken those profits. If you are still short, and I don't mind that at all in this very uncertain market, watch the February correct back down toward its extreme $71.17 low and find some buying support, then look to lift hedges on the early year and spring cattle. I show the February live cattle chart this week.
Feeder cattle prices were hit hard by the surging corn prices coming from the USDA reports. The December 31 low on the March 2004 was $77.50. As this market feels some pressure from the higher corn prices, make it find buying support on a dip back toward that low before buying back short hedges or looking to place long hedges. I do not expect March to drop all the way to $77.50 before buying emerges. This might be a time to look at buying call options in the spring and summer feeder cattle given all the uncertainty surrounding the market and given the probability that we will see feeder cattle prices well above the $70s later in the year.
Pork exports should be helped by the banning of beef in many buying countries, and I have been counseling no short hedges right now in hogs and producers should be exposed to the cash market. Short hedges were bought back by producers who are selective hedgers on the dip by the February futures during December. The February has moved higher since then but was hit hard on Monday. I do not expect to see the ample supplies for early 2004 be able to offset the growing demand for pork coming over from the beef situation and would be off short hedges here and watching for rallies. I would think that packers would be looking at long hedges here and buying appeared to come back into the hog market on Tuesday.
