Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
March 9, 2004
Last week I focused attention on getting pricing protection in the 2005 and even the 2006 grain and oilseed crops while we are near record highs. Since that letter, the markets have all traded down from the recent highs, but I'm not greatly concerned. If you have not forward priced much of your 2004 crop and have not done anything on 2005 or 2006, especially in soybeans and corn, these markets are fundamentally strong. There is a real possibility that we will see an even further tightening of stocks in the March 10 U.S. Department of Agriculture reports. The discovery of another case of flu in the poultry flocks on Monday, export inspections that were below estimates in soybeans, and the general pressure that is going to start coming from the South American crop as we move toward harvest were all involved in Monday's lower prices. The ability of the soybean markets to close well off the lows recorded during the day is testimony to the continued strong supply-demand price picture. I see no reason to expect quick and dramatic declines from these levels unless we get a bearish surprise in the USDA reports. The more likely scenario, especially in corn and soybeans, is that these markets will try to trade back up toward the recent highs again. This creates the scenario, especially in corn, where we can sketch a resistance plane across that all-time high near $3 in the December 2004 contract and then redraw a trend line that looks a bit flatter and more reasonable. Said another way, I don't anticipate that producers have completely missed opportunities here in corn and soybeans and would expect to see these markets rally again. It may be a bit harder for wheat to rally as we move toward some critical yield-establishing times in the winter wheat crop with generally favorable moisture conditions. If you followed my advice, you would have started well below the highs in terms of forward pricing wheat and, with this recent rally back up toward $4 in both Chicago and Kansas City on the new crop contracts, would be up around 65 percent-70 percent forward priced at this point. I would hold those positions.
The December corn chart this week shows exactly what I would expect in a strong to bullish market based on supply-demand fundamentals. The recent price dips off the key reversal top that occurred early last week gave us closes below the steep uptrend line and generated sell signals. In a market that is fundamentally strong, however, we are likely to take another run back up toward the highs. It appears we are going to be able to draw a trend line off the December lows and Monday's low which dipped down toward the $2.85 level. Producers are going to have opportunities to price back up toward the high again. Users of corn should be patient and hold long hedges in this complex. If we get no surprises, either to the bullish or bearish side in Wednesday's USDA report, I think we will see strong selling on any rally back up toward the contract high which is fractionally below the psychologically-important $3 level.
In the soybean complex, I suspect we are going to be able to sketch a new, rather steep trend line off the January lows and yesterday's low on the new crop November 2004 futures. We now have last Tuesday's high at $7.61 as a potential resistance plane for soybeans, and I would have the same strategy here as I would suggest in corn: get to at least 50 percent forward priced in this market for 2004 and look out into 2005 and 2006 time periods following the procedure I laid out last week. If you are reasonably sure about yields in your producing region, you might want to move up toward two-thirds forward priced on rallies back to the $7.61 high in November soybeans and the high around $3 on the December corn. I think there is a decent probability that they will turn out to be at or near the highs for the year. Keep in mind the important Prospective Plantings Report is coming out on March 31, and by that time, we will be into harvesting corn and soybeans in South America and starting to see new product available to the marketplace which will make it more difficult for us to sell in the export market. The fact that the U.S. dollar appears to be trying to put in a bottom is also reinforcing the possibilities that we may see last week's highs turn out to be at or near the highs for the year.
In wheat, both the July Chicago and July Kansas City showed us closes yesterday below major trend lines on these charts. The July Chicago contract is showing what the chart reader would call a double top using the high just above $4 on January 13 and the high that ran up to exactly $4 on February 23. I would hope that producers are two-thirds priced in this market, and some who see these sell signals and this apparent topping action in the marketplace might want to go higher than that if you are relatively sure of yields in your area.
Boxed beef cut-outs for the lighter Choice boxes have advanced over $3 per hundred across the past five business days through Monday, and that market is up again by $1.11 on Tuesday morning. This has put the packers margins back at small black levels and away from some of the losses that were showing up across the past week or two. Cash cattle sold as high as $85 last week, up significantly on the week. Across recent weeks, I have been counseling patience in these markets from a short hedger viewpoint expecting them to rally, and we have seen the active April move back above the $80 level within the past week. The June contract, which after the BSE announcement had dipped down toward the $66 level, is in the mid 70s. If these price levels in April and June offer decent profits, you might want to look at short hedges. I think this current surge in price has probably pushed about as far as it can. The June contract has essentially closed the big chart gap that was left after the December 23 BSE announcement, and the April has moved up into the top parts of that gap. I expect a correction to the downside on these charts across the next 10 days or so, and then we will probably try to move higher again. The selective hedger who is fairly nimble can go short here and get those short hedges bought back if the market does drop down by $2 to $3. If you are more conservative, you might want to hold where you are and wait until we see more concrete evidence in both the live cattle futures and in the feeder cattle futures that we have sell signals in place and the tendency to move higher off of that post-BSE low have, in fact, been exhausted.
The weighted average in the cash hog market on a lean hog basis is about $62.50, and that constitutes improvement across the past two weeks. The April lean hog contract recorded a new contract high at $63.17 on March 2 and bounced off that high to as low as $59.60 just two days later. This week we have the very real possibility that we will move back up toward that $63 high. If that happens, I would move up to full coverage in terms of short hedging on the March and April hogs. Be aware you can sketch a trend line across the low on December 31 and the lows in and around February 13 and 14. Use that as protection under the market while you are looking to sell a rally back up toward the old high.
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