Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
January 20, 2004
The grain and oilseed markets are facing uncertainty as we move through mid January. The soybean complex is hearing talk about a possible ban on blood meal that would help boost the demand for soybean meal. The corn market continues to trade up in response to the very bullish U.S. Department of Agriculture Supply and Demand report of January 12. Ending stocks declined significantly, and a big part of that was a substantial reduction in the crop estimate coming late in the January report. There is already talk of possible dry weather in South America, and there are some parts of the winter wheat growing area in the U.S. that appear to be dry. All of these things are swirling around the market place and its responsibility, of course, to sort out all this and discover the correct price. It appears that if we are going to continue this upward march in corn, we going to need export activity that exceeds the USDA's expectation. This week we are hearing some private reports that say the corn acreage will not be any bigger in 2004 than it was in 2003, but I have some real reservations about adopting that posture at this time. If you look at the price relationships, we are likely to see some acreage being shifted from corn to soybeans this year, but there are lots of acres in the aftermath of the old set-aside programs in the Midwest that can be planted to corn or soybeans.
March corn futures had traded as low as $2.29 on December 24, and Tuesday's high is at $2.78 (nearly 50 cents a bushel higher). The supply/demand balance in corn changed significantly in the January 12 report. The December futures were as low as $2.40 1/2 on December 24 and 26, and Tuesday's high is at $2.75. This gives us a smaller but significant move up in the new crop contract. Selective hedgers in the producing set are likely off short hedges here as this market gave us the two consecutive closes in new higher contract ground as a widely recognized buy signal. Long hedgers that took profits on those positions up against the old contract highs may be back on those positions now. In this quite volatile market, I would suggest that we will see the market continue to rally into the high $2.70s and toward $2.80 in this new crop December contract and then correct to the downside, perhaps back down toward the $2.60 level or possibly even a challenge on the chart gap that was left on January 28, the day of the report. When we get that correction to the downside, then we will be able to construct an uptrend line in this chart and let the market rally again and wait for it to either challenge the new contract highs it will establish over the next few days or give us a close below the uptrend line to consider replacing short hedges and to take profits on any long hedges that you are holding.
In soybeans the old crop January is making new contract highs. This has allowed the new crop November to move higher. In Tuesday's session we have been as high as $6.74. This is a strong market that is offering us excellent pricing opportunities. I am going to be brief in this complex this week and show the November soybean chart that we have looked at over the last several weeks. There is a very apparent uptrend line on this chart. Producers have the chance to place short hedges on a scale-up basis as this market makes new highs and offers very profitable prices or let the market run to the upside if you are concerned about missing some of the upside potential, let it turn, and then place short hedges when you see a close below this trend line.
In the wheat market, the contract high on the July Chicago wheat is $4 1/2 recorded on January 13. We are trading a bit below that this week. If we rally back up toward that $4 high (I would put my sale order on $3.98-$3.99 on this contract), I would move to 60 percent to 65 percent forward priced on this wheat. I started suggesting forward pricing on the wheat at levels back to $3.40 and $3.50 and this would be an opportunity to move to about two-thirds forward priced at levels that we have not seen with much frequency across the past 20 years. The July Chicago wheat futures have spent very little time at or above $4. I would take advantage of this opportunity and move up to about two-thirds forward priced on the soft winter wheat. In Kansas City the January 13 high was at $4.08. On any rally back up toward the $4.05 level, I would move to about two-thirds forward priced. These new crop contracts have the potential to record price gains back up against the highs because that could occur without the old crop March in either Kansas City or Chicago making new contract highs.
The markets seem to be responding to the BSE phenomenon in Washington state extremely well and this is testimony to the safety and security of the U.S. meat supplies. Prices did plunge in the days following the December 23 announcement, but we are back above $145 in Tuesday morning's session on the heavier Choice beef. The cash market from last week didn't climb up to $82 until the end of the week. When trade develops this week it may be at $84 and possibly higher. The February live cattle contract is trading above $80 in Tuesday's session after having reached a low of $71.17 on December 31. This market is retracing a substantial part of the huge price plunge that came after the BSE announcement. I think this market will crawl higher into the low $80s and start to run into difficulties there as we continue to monitor slaughter levels that are not sufficient to keep cattle numbers from swelling during February. We may be able to maintain an $80 market as we move through that time period, but I don't see much upside from here so I'd be carefully watching for signs of emerging selling and resistance in this market in the low $80s and be interested in getting short hedges reestablished on both the February and April at that time. March feeder cattle traded as low as $77.50 on December 31 and is around $85.50 in Tuesday's action. When you see any signs of resistance in selling in the live cattle futures, I would take profits on any long hedges you might have established in this March feeder cattle and turn to the short side. We cannot maintain feeder cattle and keep pushing prices up unless the live cattle period is at least stable to higher. Feeder cattle will back off with the live cattle contracts if I am right and we are headed for a bulge in supply of cattle during February that will start to constrain the price moves to the upside.
The hogs should have been helped by the December 23 announcement in the cattle sector and the February hogs did, in fact, rally and traded up as high as $56.10 on January 5. This market then backed off and gave much of the gains back down toward $51.75 at the beginning of last week and is now rallying again. This market should go above the January 5 high at $56.10 and may approach the early November highs just below $60. Replace short hedges on February and April if the $60 level is challenged.
