Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
February 17, 2004
It appears after the close of the markets on February 13 that weather and crop prospects in South America and bird flu in the northeastern United States are starting to exert more influence on the grain and oilseed markets. As we get within a few weeks of the start of harvest in Brazil and Argentina, the soybean market is showing signs of topping. The old crop March futures recorded a new high last week above $8.60, but the Friday close was $8.29. After recording $6.78 highs twice during January, the new crop November gapped down in late January and closed Friday near $6.53. The tight ending stocks in the U.S. at 125 million bushels in the January and February reports are being offset by the upcoming harvest in South America and the near-record ending stocks in the world market which went up again in the February report to a big 37.47 million metric tons. That is about 1.37 billion bushels. We will continue to see imports of soybean meal and soy oil into the U.S. In both the January and February reports, imports of meal were at 475,000 short tons and imports of soybean oil were 235 million lbs. Those numbers are up from 166,000 tons and 46 million lbs in crop year 02/03. The meal imports are about 20 million bushels in soybean equivalents, and the 235 million lbs of oil imports are nearly 30 million tons in soybean equivalents. There may be some pressure against importing soybeans from South America where many fields are contaminated with rust, but that is not likely to stop imports of meal or oil. The November futures will rally again and on any move up toward $6.65 or better, I would move up to 50 percent forward priced if you are comfortable with a selective hedging approach in the futures. In cash contracts or in a hedge-and-hold strategy, 35 percent to 40 percent might be enough at this point. You can access a PowerPoint presentation on soybeans at www.ext.vt.edu/news/periodicals/purcell.
Old crop and new crop corn made new highs last Tuesday. Usage rates are suggesting strong demand and a 10 billion bushel corn crop is being used up. I had wanted the December to make a bigger correction before drawing a trend line, but the new highs suggest the correction has been completed. I show the December chart again this week and suggest selling old crop corn and moving to 50 percent forward priced on new crop corn if the December challenges the Tuesday high near $2.87. I would move to 50 percent priced in either cash contracts or in the futures. If you are convinced the market will go significantly higher, and I am not, then wait and price at least 50 percent on a close below the steep trend line. With fewer calves to move into feedlots, concerns about the bird flu decreasing feed demand in poultry, only minimal expansion in hogs, and the big acreage we are very likely to see in the March 31 Prospective Plantings Report, I would look at locking up some of these very profitable prices before the South American crop starts to hit the market. The higher prices will choke off some of the usage the way the marketplace is supposed to do, and I do not expect to see prices on the December futures near $3 at harvest. From 1980 through 2002, only about 15 percent of the closes of December corn futures were at $3 or higher, and many of those were recorded in the unusual markets of 1995 and 1996.
In wheat, less than 18 percent of the closes on July Chicago wheat since 1980 have been above $4, and many of those were also recorded in 1995/96. Both the Kansas City and Chicago have offered $4 this year, with the highs coming in the first half of January. Hold short positions you have in both markets, and I expect sell signals again quite soon in this market. An uptrend line hooking lows in October and late December has been in place on the Chicago July contract for some time. A steeper trend line can now be sketched across the late December lows and the low from last Monday, and the same pattern is there on the Kansas City. Be quick to sell any rally above $3.95 in Chicago and above $4 in Kansas City if they come, but I expect we will see a close below the trend lines first. No matter which sell action you take, get to 65 percent 70 percent forward priced on these excellent and profitable prices.
Most cash cattle sales in the cattle feeding areas were at $77-$78 last week, and that is helping pull the February and April live cattle futures out of bearish chart patterns. The Choice boxed beef values appeared to be finding support in the mid-$120s at week's end, and stability here will help boost cattle prices. If the live cattle and the feeder cattle can turn higher at this point without having to test the post-BSE lows in late December, this sector will breath a sigh of relief. But watch for selling on a 50 percent correction of the recent price dip from $82.37 on January 22 to $73.50 last Tuesday on the February live cattle and do the same math on the April. That correction would be up to about $78.20 on the February, and unless beef cutout values can climb, that is about all we might get before time to set short hedges again in this very uncertain market. March feeder cattle are in better shape and may challenge the mid-January highs near $86.50. If the fed cattle and the live cattle futures are not more bullish when we see that rally in feeder cattle, I would look to selling this market as well. Longer term, after eight consecutive years of smaller cattle inventories on January 1, I am very positive about light cattle prices in particular. We still feel the uncertainty of the BSE phenomenon in this market, and we will not get retail prices until about February 20 which will tell us what may be going on with the consumer.
February lean hogs blew right through the important high at $63, and I see this as testimony to my frequent observations that pork will get helped from the BSE and the world market closing actions that has been going on in beef. The April and later futures do not look nearly this strong, and the chart patterns are sharply different from the February. Usually, it is a good idea to sell the April when February pushes up toward contract highs, but April was languishing this week when the February was roaring higher. The recent high just above $61.50 on the April would be my first pricing objective, and I would not hedge summer hogs at this time. Cash hogs averaged about $60 on Friday and the July futures closed at $60.35. A seasonal increase into the summer months when daily slaughter levels are the smallest of the year is very reliable and predictable. The fall pig crop was up 2 percent, but I do not think that will be enough to keep the summer hogs below $60 on a carcass basis or below about $44-$45 on a live basis in the summer months.
