Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
February 3, 2004
Important pricing decisions are just ahead of us in the grains and oilseeds. The chart patterns are similar on all commodities, and I use July Chicago wheat this week to demonstrate. Contract high is fractionally above $4, and I see where major resistance and heavy selling will emerge. An uptrend line can be drawn by hooking the $3.51 low on December 30 and the January 29 low just under $3.74. Within a matter of days, the market will have to come out of this triangle. I would sell rallies to the high and would put sell orders around $3.98 to increase the chances of getting the orders filled. In Kansas City, put the orders around $4.05 since that market has a high of $4.08 from January 13. I would be aggressive in getting to 65 percent to 70 percent forward priced in wheat. For those who feel this market will go higher, you must extend the trend line and get price protection when the entire world sees a close below the trend line.
The high on December 2004 corn came on January 27 just under $2.79. A key reversal top occurred that day (an outside day, meaning the trading range had a higher high and a lower low than the prior day and then a lower close to complete the key reversal). Since the topping action, the corn market is developing a price correction to the downside that is not yet complete. When the market shows us a corrective daily low and then trades up from that for two days or more, then we will have the second low to connect with the low just above $2.40 that occurred back on December 26. The trend line may be steeper than the one we see on the wheat chart, but it will be valid and the same strategy can be employed: sell a rally toward the high with sell orders around $2.77 or sell a close below the yet-to-be-drawn trend line if that occurs first. Keep in mind that selective hedgers who sell a rally toward the high will look at buying back the short hedges if we see two consecutive closes above the $2.79 high. Alternatively, one can just answer margin calls and that makes sense if you feel, as I do, that the $2.79 level is near the top end of the price range for the year and that we are unlikely to see $3 on the December corn futures this year. There was rain in Argentina over the weekend that prompted Monday's sharply lower closes in corn and soybeans, and we are only four to six weeks away from the South American harvests getting underway. Any country in the world market that is buying corn or soybeans to rebuild stocks will start to wait on the South American harvest and the expectation of lower prices to do their buying.
I still see analysts who are saying the soybean market has not yet rationed usage and that we will have to see still higher soybean prices. Higher prices are possible but unlikely in my opinion as we head toward the harvest of a South America crop that is substantially bigger than the U S. harvest. The December U.S. Department of Agriculture report had imports of soybean oil and soybean meal about double those levels of recent years, and the January report increased the estimate for imports of soybean oil from 85 to 235 million lbs. That increase of 150 million lbs is the equivalent of 18 to 20 million bushels of soybeans, and smaller relative increases in imports of soybean meal accounted for another 5 to 6 million bushels. It appears the domestic market will do what we would expect and import in a global market to keep from running out of soybeans. Keep in mind the estimate for world ending stocks in soybeans is 25.98 million metric tons, second largest level on record.
Soybean prices are well off the highs near $6.78 on the November 2004 contract. We have seen a close below the trend line on that chart that hooked the low above $5.71 on November 25 and the low of $6.04 on December 24. I do not expect a price plunge here and this market is likely to rally back up toward the highs again on weather reports out of South America. If you have no protection, consider pricing 50 percent or more of 2004 soybeans on rallies toward the bottom of the chart gap at $6.65 on the November futures.
In cattle, we have bids in the high $70s and offers in the low $80s and no trade. Boxed beef values were down hard on Monday on significant volume of trade and down again by more that $1 Tuesday morning. Slaughter levels are lagging, and we have the specter of holding cattle into February and seeing weights start to increase. Hogs are selling better and the futures were up nicely on Monday, a reaction to the BSE issues in beef that I have been expecting. My recent suggestions to hold short hedges in live cattle futures were right but not aggressive enough. February live cattle have a three-day congestion pattern through Tuesday that looks like a possible bear flag, and I would want to be short this market. If this is just a short covering rally, and I believe it is, we could see a retest of the lows near $71.17 on the February chart. All this is very uncertain because we do not know yet what the BSE issue has done, if anything, to erode consumer demand. People are telling me "nothing" because consumption is staying up but that is all wrong. Consumption is a measure of how much product we have since we consume what we have. It is the price at these consumption levels that will determine what is happening to demand. It will be past the middle of February before we get out first look at January retail prices. I have concerns and would want to be short.
The same message is there for feeder cattle. Feeder cattle charts look more positive because of the lower prices that appear to be coming in corn, but in the final analysis, March feeder cattle will have to reflect what we see in the late summer and fall live cattle contracts. I would be inclined to set short hedges in spring feeder cattle if you do not have them on a rally toward the January 21 high at $86.40.
Hog futures are strong this week. Cash prices are getting better on a seasonal basis and I continue to expect to see some help in pork from the BSE issue in beef, especially in export sales to countries like Japan. Across recent weeks, I counseled lifting short hedges in hogs down around $51 on the February and to carry risk exposure to the cash market. I had thought the early January highs near $60 on the February chart were reachable on a rally and had set that as my first pricing target. We have traded above $59 this week and if we do approach the $60 level, I would look to replace short hedges on hogs out through the April contract.
