Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
April 13, 2004
Short term market tops are in place in corn and soybeans. This does not mean that we could not see a weather-induced rally in the summer that will take December corn and November soybeans to new highs, but I believe it will that time of year before we have a decent chance to see another challenge of the contract highs. Weather problems in getting the crops planted could bring a rally earlier, but those planting-problem years do not happen very often. On the bullish side, estimates of the South American soybean crop continue to decline, and stocks are still very tight in soybeans and tight in corn and wheat here in the U.S. Better weather will be bearish for the winter wheat crop, but Monday's USDA report did not show significant improvement in crop conditions.
Trading funds are said to be taking profits from long positions in soybeans and corn, and if they push liquidation of long positions harder, we will see still bigger downside corrections. A close below the trend line on the November soybean futures gave a sell signal today (Tuesday) seen by everyone in the world who watches charts, and December corn futures gapped lower at the openings on Monday and Tuesday. Hold short hedge positions in corn and soybeans until we see signs these markets have completed a correction. My first downside objective on the November soybeans is the high $6.70s in the February chart gap and across the January highs. On December corn, the March 31 chart gap and then the March 29 low near $2.97 are reasonable objectives, but we do not have to make any decision on when to buy back short hedges yet. Let's watch and see when these markets uncover buying as they dip to lower prices. Users of corn and soybeans should be lifting long hedges on these sell signals and watching for signs of bottoming to consider replacing long positions if and when these markets start another major rally.
This year's wheat should be fully priced with both Chicago and Kansas City July contracts having pushed back above $4.00 recently. The July futures in both markets for 2005 pushed up toward $4.00, and I would hope 50 percent or more of your 2005 crop is priced. We have spent very little time in our crop history above $4.00 on the July futures, and in recent years, prices have been trending lower as we bring cost-reducing technology on line around the world and crowd the market with big supplies. I cannot imagine any likely set of circumstances that would mean July 2005 wheat futures will be near $4.00 one year from now, and I have seen this recent rally as a tremendous opportunity that producers should not ignore.
Choice boxed beef cutout values are above $160 in Tuesday morning trade, up nearly $15 since April 6. Cash cattle are as high as $140 in the beef in Nebraska with limited live sales in Texas at $86 and in Iowa direct trade at $88. Live cattle and feeder cattle prices exploded to the upside on Monday, with the June live cattle up $2.30 and the market is showing gains in some contracts in Tuesday trade. Monday's close in the June live cattle was above the old contract high of $78.75 from back in October of 2003 and making new highs could open up this market to still higher prices. I have been questioning the big discount to the cash and to the nearby futures in the June live cattle for weeks, and would not be anxious to move to short hedges here. If we see cash cattle trade in the high $80s to as much as $90 across the next few weeks as appears likely, I would expect this June to climb higher. No precipitous break is likely barring another BSE announcement or some such, and the re-opening of the Canadian border to bring more cattle into the slaughter mix is not imminent. Let's watch this live cattle market for better pricing chances later and the same advice is there for August feeder cattle. The August feeder cattle contract is moving up with the strong live cattle futures and cash market and with corn showing some signs of topping in the short run. The August should be able to approach the November highs near $93 and the contract high of $93.25 from October 14, 2003. It is interesting and encouraging, and perhaps a sign of continued strong beef demand, to see these feeder cattle markets challenging the highs that were recorded before the December 23 BSE announcement.
April lean hog futures had pushed up to $68.15 on March 29 and then dipped to $62.22 on April 7. Tuesday's action is above $64, about in line with a direct cash trade that has weighted average prices above $61. Anticipating a summer rally, the July had continued up and recorded a new contract high of $74.60 on Monday. Tuesday's prices are sharply lower, perhaps due to profit taking by speculators and selective long hedgers in this market. Lift short hedges in the April as you sell the hogs, and let's watch the June and July for signals to hedge the late spring and summer hogs in the June and July futures respectively. Contract high on the June is Monday's $76.47, and I expect this market to continue Tuesday's correction to the downside from that high. We have not had a significant correction in the June or the July since this rally started in late February at prices some $12 lower. After a correction, this market will try the highs again, and I would have short hedge sell orders just below the $76.47 high on the June and place hedges on summer hogs in the July and August contracts at the same time.
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