Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
March 2, 2004
There is a different orientation to the letter this week. I want to emphasize the importance of taking advantage of the current and continuing strength in corn, soybeans, and wheat to forward price part of your 2005 and 2006 crops. The current high prices will prompt supply increases here and around the world. What economists call economic rent--prices above all costs of production--will not and cannot last in commodity agriculture. There are no supply controls in the United States and no barriers keeping producers from growing as much as they can. Monday's closes were near $2.68, $6.35, and $3.69 on December 2005 corn, November 2005 soybeans, and July (Chicago) 2005 wheat, respectively. All prices are well above costs of production. Whether you use cash contracts or price direct in the futures, take a look. Keep in mind that trade in futures that far out is thin, and you should use a limit price sell order that specifies the price you will accept, never a market order. Cash contracts can be offered by your normal buyers since we have trade in futures that far in the future that allows them to hedge their risk exposure. If you want to price part of your 2006 crop, the best way is to put the bushels in an active contract such as the December 2004. Then plot the spread between December 2004 and December 2005, and before December 1 this year, buy back those 2004 short positions when the December 2004 is as low as you have seen it against the December 2005 and sell the same number of bushels in the December 2005. You can keep "rolling out" the positions until you get short positions in the December 2006 corn. You cannot get this year's high price that way, but you can get better prices than we are likely to see in the harvests of 2005 and 2006.
Corn and soybeans are making new highs, and wheat has challenged life of contract highs recently. You are answering margin calls on the early corn and soybean short positions, or you bought them back on the recent surge to new highs when we recorded two consecutive closes in new higher price ground. Either way, monitor the corn chart and be ready to replace short hedges when we see a close below the trend line. I will continue to watch this chart with you until we get a sell signal to help everyone see how this works. With no sell signals recently in corn, users should be on long hedges, and I would hold those positions until we see signs of topping. The coming South American harvest and the March 31 Prospective Plantings report will be important in these markets.
In soybeans, the surging November will correct at least modestly across the next few weeks as we approach harvest in South America. Weather has been one of the reasons for the strong rally into new highs. When a downside correction is started, and it may have started today (Tuesday), we will have a new high to use as resistance. When the correction is complete as it is already on the December corn, we will be able to sketch a steep trend line to watch for sell signals. If the new highs push up toward $8 before any correction, then I will likely advice pricing on a later rally to the new highs. Keep in mind the same strategy as noted above to get 2005 and 2006 soybeans priced when this current surge starts to correct. The prices for 2005 are moving up toward $6.50ãsome $1.50 above costs for most efficient producers. That will not last unless weather problems are major across the next two years.
In wheat, the rally up to $4 by the July Chicago contract was within a half cent of the contract highs from January 23. You should have at least 65 percent of your wheat priced on this last rally and go to 75 percent if your crop looks like you will have good yields. This is a huge opportunity we do not want to miss, and again, look at the 2005 and even the 2006 at this same time. In Kansas City, the contract high from January 13 is $4.08, but the February 23 rally only made it up through $4.01. The weather is looking good for this crop in the U.S., and short hedges should be in place.
Choice box beef values have added nearly $10 in the past week and are up into the high $130s. Cash cattle prices moved up in concert with a major advance last week to the $82.50 level and even some $83 cattle in Nebraska. Asking prices this week are as high as $83 to $84, but the delay in opening trade with Mexico again is negative to the market. I have been counseling patience in this market and suggesting that April and June will move higher. That price increase is happening, and I would continue to watch the chart developments for a correction of the price surge across the past week that will allow us to get normal trend lines on the charts. Do the same thing in feeder cattle. The March and August contracts have been trying to trade higher in spite of the rampaging corn market, and that is a good sign. We will have better prices to place short hedges and to take profits on long hedges than we are seeing at this time in feeder cattle.
Weighted average cash hog prices on a carcass basis are holding above $60. This market is helped by the export difficulties in beef and in poultry. The February futures closed on or near their contract highs, and the April is trying to take out the $62.40 high from October 15. I advised placing short hedges on a rally to that high, and I would hold those positions until we see if the April can give us two consecutive closes above that old high and, even then, I would suggest just answering margin calls. If the boost from the export markets starts to diminish as some of the beef trading connections start to get opened again, this market could hit some modest price pressures as the fall pig crop starts to come to market and daily slaughter levels increase during March and April. I would not be short in the summer hogs. The July futures are challenging their old highs as they trade up to $64 this week, but we should see better prices later in the year as the seasonal strength in the summer months starts to heat up.
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