Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
January 27, 2004
The grain and oilseed markets continue to watch weather in South America this week. Exports in wheat were better than expected across the past week. Soybeans recorded a descent export number, but it is talk about weather damage to the crops in Argentina and dry conditions in part of Brazil that seem to be moving the market. There was some action taken on Monday by the Food and Drug Administration banning applications of blood and animal protein in livestock feeds, but it appears the ban was not as restrictive as had been hoped for and the soybean meal prices are backing off in Tuesday's session. There had been widespread expectations that any complete ban on animal-based protein in feeds would boost soybean meal prices in particular.
In corn, the old crop and new crop futures contracts look very similar. The March contract has exploded to the upside from levels below $2.30 on December 24 to the new contract high at $2.81 1/2 in Monday's session. The new crop December looks very similar with price advances from $2.40 1/2 on December 26 to $2.78 1/2 on Monday's session. In old crop and new crop corn, expect these markets to start a correction to the downside within the next 10 days. We will probably retrace about one-third of this move up and then start another rally. This will allow us to draw a flat resistance plane across the high that is established before the correction starts (likely Tuesday's high) and then a trend line under the market connecting the late December low and the low that is recorded across the next few weeks on the downward correction. Then producers can be aggressive in selling rallies back up toward the high or a close below the uptrend line, if you would prefer to wait and let the market top before establishing short hedges and taking profits on any long hedges that you are holding to protect against rising costs of corn.
In the soybean market, the nearby January moved out above the double tops in the mid-$7.90s in Friday's session and is recording new contract highs this week. The new crop November had been making new contract highs for several weeks and has traded in the high $6.70s and continues to offer excellent forward pricing opportunities. A trend line can be sketched across the low that was recorded December 24 on the November and the earlier low on November 24 down around the $5.72 level. This market is caught between a very bullish scenario in terms of stock levels in the U.S. and a relatively bearish scenario at the world level with ending stocks for this year projected at the second highest level on record at the world level. I would expect to see the impact of the South American crop increasingly come into price discovery processes here and constrain these upward increases unless weather in South America turns more to the dry side. I would sketch a trend line across those lows on the November and construct a trend line on old crop contracts and monitor this market to see how high it can go. It is certainly appropriate to not do anything by way of placing short hedges or taking profits on long hedges until we see some topping action demonstrated and see a close below the uptrend line on the charts.
The July Chicago wheat has backed off from its extreme contract high at $4.00 1/2 on January 13 and has traded in Tuesday's session around $3.80. I would be aggressive in moving to two-thirds forward priced on wheat if this contract high can be challenged again. The comparable high on the Kansas City July wheat was also recorded on January 13, and it stands at $4.08. If we see rallies up against these highs, move to two-thirds forward priced in wheat. The only reasonable alternative is to use the trend line sketched across the lows in early October on the July Chicago and the dips that we saw in mid-December and let this market run to the upside as long as it stays above that trend line. I do think producers will end up with a better price this year if you follow the strategy of selling rallies up against the highs, both of which are above $4.
There is a substantial inconsistency in the cattle markets. Cash prices late last week were in the upper $80's, and asking prices in some parts of the cattle feeding region are as high as $90 as we move into this week. February live cattle futures settled at $79 in Tuesday's session. Boxed beef values continue to decline, and there is clear concern that we are carrying too many cattle out of January and into February. That concern is compounded by worries that packers will slow the pace of the kill to help protect their margins. New guidelines are being issued in the BSE arena, and we are hearing talk of cattle in feed yards over 30 months of age being discounted by as much as $200 a head. To say this is a very uncertain market place is an understatement. I would subscribe to a policy of caution here and be inclined to hold short positions in cattle. If you can get acceptable price levels, get short hedges established. The rally on the February off the extreme low at $71.17 on December 31 was up to $82.87 on January 22. I would sell a rally back up toward that $82.87 recent high on this February cattle and would sell April at the same time, looking for protection in a market that is very difficult to analyze and certainly shows us some downside risk from the low $80s. If the cattle numbers are going to be pushed higher in February as much as some analysts are saying, we will not be able to hold these mid to high $80's in the cash market that we have seen across the past few days. I would want to be protected in this very volatile market.
Follow the same strategy in feeder cattle and sell any rally by the March back up toward the January 21 high at $86.40. We are several dollars off that high in Tuesday's action. I am inclined to be short in this market in the near term just as much as I would be in the live cattle futures.
In hogs, the February contract has moved above some downtrend lines that could be drawn. I look for cash prices to get better as we move into February when we normally see at least a modest seasonal rally. With February showing signs of moving higher and not closing the chart gap down around the $54 area from about 10 days back, I would suspect we would have a chance to run up toward the late 2003 highs around $60 on this February contract. That would be my first price objective. If we could run back up toward the high near $63 from last October, I would think this market needs to be sold and sold aggressively.
