Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
February 10, 2004
The U.S. Department of Agriculture's February 10 report tends to clarify the fundamental supply-demand outlook for grains and oilseeds. Ending stocks in wheat were reduced by 25 million bushels from the January report with the change coming from increased exports. The U.S. wheat stocks are relatively tight, but the USDA did not change its price outlook and just narrowed the projected price range for the cash market in the U.S. for this crop year to $3.30-$3.40 per bushel. At the world level, the ending stocks picture continued to tighten. Two years back, ending stocks in the global wheat market were around 200 million metric tons and that declined to 165 million metric tons in the last crop year. We are down to 125.95 million metric tons this year. That is a relatively small set of stocks with not much buffer against weather problems around the world. The tight set of ending stocks in soybeans in the U.S. was kept at 125 million bushels, but the picture is radically different at the global level. The already high set of ending stocks of 35.98 million metric tons in the January report was raised significantly in the February report to 37.47 million metric tons. That is the second largest ending stocks at the global level on record; second only to the 39.27 million metric tons at the end of the 2002/2003 crop year. Ending stocks (U.S.) in corn that were pulled down over 300 million bushels in the January report to 981 million bushels, came down again to 901 million bushels in the February report. This change is reflecting growing demand for corn in the feed sector and especially in the export arena and in industrial uses where ethanol use has grown. At the global level, ending stocks in corn are put at 67.23 million metric tons, down significantly from the 102 million metric tons in 2002/2003 and the 128 million metric tons in the 2001/2002 crop year. In the middle of all of these changing fundamentals in the grain and oilseed complex, we have news of the detection of bird flu on a farm in Delaware. Monday's market was expected to open down sharply based on that development and the related concerns that there would be reduced demand for corn and soybean meal, but the market shrugged off the news during the day and closed stronger in front of the early morning USDA report on Tuesday, February 10.
In the soybean complex, the nearby March is trying to make a new contract high in Tuesday's session but is struggling. The new crop November traded up some on the day but is settling just above Monday's close and off the high of the day. I wouldn't change the recent advice here and suggest that forward pricing on new crop soybeans and selling old crop beans as a possibility ought to be considered if we can see this November rally up toward $6.65. Contract high on the November contract is $6.78, but I don't think we have enough clout in this market to run back up and challenge those levels. The reports were not a surprise in soybeans, and it appears the very tight set of U.S. ending stocks at 125 million bushels is going to be mitigated by importing soybean meal and soybean oil. That is what is being suggested in the USDA January and February reports and is the logical thing to expect in what is an increasingly global marketplace.
In corn, old crop and new crop futures are making new highs in Tuesday's session, but it appears the strong closes we saw Monday had anticipated the reduction in ending stocks and had already registered any bullish elements in the report in the discovered prices. December on Monday went as high as $2.84 1/2 and closed at $2.83 1/2. Prices in Tuesday's session have been as high as $2.86 1/2, but the market was not able to close up on the day and recorded a hook reversal top closing down over 3 cents at $2.80 1/4. This reconfirms my tendency to place short hedges in this market. Given what we have seen this week, you can also use the very steep uptrend line you get by hooking the mid-December lows down around $2.40 to the lows that occurred in January in the $2.65-$2.70 area. I show the chart this week. That trend line is steeper than I like but after the new contract highs on Monday and Tuesday, I think it's the legitimate line. Producers who have no price protection in place ought to look at getting up to 50 percent forward priced on this new crop corn on a close below that trend line. If you are a user and holding long hedges, I would hold those positions until we see a close below the trend line and take profits at that point expecting a correction to the downside.
Wheat is getting a little bit of help from the 25 million bushel reduction in ending stocks and the confirmation of relatively tight stocks at the world level. Contract high on the July Chicago is $4.00 1/2 from the session on January 13. More recently that market has failed and left some highs around $3.90. I would get to two-thirds forward priced in this market if we see a rally back into the $3.90-$4 range in July Chicago. In Kansas City where we have a contract high at $4.08 from early January, we are looking at more recent resistance across highs at the end of January around $3.93. Anything back into the $3.93-$4 range before the market even challenges that extreme high at $4.08, I would want to be 60 percent-65 percent forward priced on hard red winter wheat as well.
In the beef market, the Choice boxed beef cut-outs showed positive day-to-day changes on Tuesday morning. That stops a long string of price decreases. The February contract showed a low just under $74 last week, and we put in another daily low at $73.95 on Monday. Tuesday's weak close is below those lows and suggests we are going to insist on testing the post-BSE announcement extreme low at $71.17 which occurred on December 31. As we move deeper into February, we need to start watching the April. The April was down the limit at the close on Tuesday. All of the price outlook in the beef sector is uncertain as we continue to work through the aftermath of the BSE issue and continue to watch pork replace beef in a lot of the export shipments and in other ways adjust to what was a huge shock to the beef complex. Hold short positions as we appear to be headed for a retest of the low. Follow the same advice on feeder cattle and hold short positions.
In the pork complex, I have been suggesting we would see strength in hogs especially given the difficulties in the beef sector. The weighted average price for hogs on a carcass basis is above $60/hundred weight and is certainly making the current trading levels of the February contract look consistent. Although I would have started pricing earlier, I said in recent newsletters that we might see a rally up to the October 15 high at $63 on that February contract. We actually recorded a high of $63.10 on that same contract in Monday's session, and there is clearly selling pressure as producers place short hedges, those holding long hedges take profits, and speculators either take profits or sell this market in anticipation of a correction to the downside. I would be aggressive on getting hogs priced out through the March/April time period with this February futures in the $62-$63 range, and I see this as an excellent forward pricing opportunity.
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