Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
February 24, 2004
In the grain and oilseed markets, Monday brought news that we are starting to see weather stress on yields in South American and Chinese purchases of wheat. I have been saying in recent weeks that corn and soybeans would probably need some weather-related news out of South America to push to new contract highs. March corn made new highs in Friday's session but couldn't close with those gains. Monday's action was strong with new highs in both corn and soybeans.
In corn, I show the December chart again this week. The modest correction that was recorded after the run from mid-December down around $2.40 up to the $2.77-$2.78 level was completed. When the market made new highs, it justified drawing this steep trend line. I think everyone has to be prepared to get some protection in place whether in cash forward contracts or in a selective hedging mode in the futures when we see a close above that very important trend line. Keep in mind every chart watcher in the world will see the same action at the same time and that moves virtually everyone who is trading this market to the side of selling. Users of corn who are holding long hedges in place might want to think about taking profits on a close below the uptrend line. Another approach here, given the strong fundamentals in corn as demand continues to work through this large 10 billion bushel corn crop, is to just hold long positions and wait and see what develops. This new contract high is impressive, and we might see $3 on the December.
We saw $9-plus beans on the March futures in Monday's session after a high of $8.98 last Friday. This market is making new contract highs in the old crop futures contracts and is clearing the way for new highs in the November up to $7.08 in Monday's session. There are two trend lines I would draw on the November futures. One hooks the lows from around November 25 to the dip down toward $6.33 which occurred on February 5. That is the steeper trend line of the two, but you need to recognize that chartists will also be watching a trend line that hooks the low at $6.04 on December 24 with that same $6.33 low on February 5. Use that longer-term steep uptrend line to protect you and keep sell stop orders about 2 cents under that trend line. As this market climbs higher, we may see a significant move to the downside when we do see a close below the trend line. There is every anticipation that we will see a very large crop in the U.S. with perhaps a record acreage in the March 31 Prospective Plantings Report and the South American crop will be in harvest mode by that date.
The July Chicago wheat contract traded down to the trend line that hooks the September lows to the early December lows last week and moved up off of that support and then surged Monday on news of a Chinese buy. With corn and soybeans moving higher, I expect to see this market get dragged a bit higher still this week. I repeat my advice to be an aggressive seller in the market if we can see the July Chicago move back up toward $4, and in Kansas City, I would be aggressive and sell on any move back up toward $4.05. We are seeing these prices this week. Get to 65 percent-70 percent forward pricedãeven high if you are confident about your yields.
Last Friday's Cattle on Feed report brought no major surprises. The placements in January were down 16 percent compared to early estimates and marketing's were down 10 percent. The marketing total was probably the most bullish number in the report and came closest to being above the pre-report estimates. Mexico is delaying opening the borders to full beef trade until more detailed safety precautions are in place. The cut out values for Choice boxes were below $125 in Friday afternoon's report but improved on Monday. Late trade in the cash market moved up to the $79 level last week with substantial volume at those price levels in Nebraska. We may see some $80 prices this week, but it would take a fairly favorable set of scenarios to give us anything approaching a sustained $80 market. We are just starting to get some indication of what happened to retail prices during January. As the data become more widely available, we will start to get a better handle on what the BSE issue is doing to the consumer demand. Early week trade in the February live cattle futures is around $78. We will need to see some improvement in the cash market for that market to rally from the $78 level. At the same time, the April contract is trading above $73 and the June contract is above $70 in early week trade. I see no strong, compelling reason to expect a $10 break in fed cattle prices between February and June. We do have some numbers in the feed yards that were placed in last Fall, but unless we have some continued shocks to this market, the mad cow disease phenomenon or something else to rattle the consuming public, I believe we will work higher from current levels in both April and June, and I would not be doing forward pricing here.
I think we have a better chance to see upside in the feeder cattle when corn quits going up. The post-December 23 announcement about BSE shook this market, but March feeder cattle traded as high as $86.40 on January 21 as the market corrected off the lows. I think we'll see this market move back up into that big chart gap and move higher into the high $80s. Producers might want to hook the extreme low we recorded at $78.75 on December 31 and the low at $81.85 recorded on February 12 and sketch a trend line. I would keep that trend line under the market and get some protection if you have none in place or if you had short hedges that you lifted and would be interested in getting protection against breaks in any spring and summer feeder cattle.
In hogs, the weighted average price in the major trading areas closed the week above $60. That has given a boost to the expiring February contract, and it has recorded new highs and reached the $64 level. If this cash market continues to hold at relatively strong levels and the February starts to go off the board with some strength, we will probably see the April contract challenge the high at $61.55 that occurred February 9. If we reach that level, we may then see a challenge of the $62.40 level which occurred on October 15. I would be aggressive in pricing March and April hogs on a rally to the $61.55 to $62.40 range by the April. There is an obvious trend line on this market that hooks the lows from back in late December to the lows in late January. A resistance plane across that extreme high at $62.40 which occurred on October 15 and this uptrend line captures this market in a triangle, and we need to be selling rallies up toward the highs. The more conservative trader, who is less likely to be trading on a selective hedging basis and to be willing to buy back the short hedges on a price dip, might want to wait and get these hogs forward priced when we see a close below the uptrend line on the April contract.
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