Weekly Purcell Agricultural Commodity Market Report

Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
April 27, 2004

The grain and oilseed markets are absorbing generally good weather in the U.S. in terms of getting corn and soybeans planted and in terms of crop development for the winter wheat region. Export inspections last week were not as good as expected in corn or soybeans, but these bearish bits of information are being countered by continued reductions by private analysts in the estimates of the South American crop. There appears to be significant long positions in the grains and oilseeds still being held by the trading funds. If and when those long conditions get further liquidated, there will be additional selling pressure. Having said all that, it appears that the market is telling us on Tuesday that the correction off the highs, which has been substantial and significant, is done. The corn and soybean markets are trading higher after recovering late on Monday and closing near the high for the day. I think we are looking at a possible retest of the highs in corn and in soybeans.

I'm showing the December corn futures again this week, because I think it is the contract that gives us the best indication of what is going on in the markets. Note that the dip from last week and again on Monday found support across the support plane across the March 29 low at about $2.97. As the market rallies again, aggressive selective hedgers who bought back across that support just under $3.00 will look for an opportunity to replace short hedges. If you are still holding short hedges, then it is a matter of finding a place to finish the pricing you want. As a user of corn, if you took profits from long hedges on those dips at the $3.00 level and below, you should be long again in today's action. There will be resistance at the bottoms of the two chart gaps that are showing on the December corn futures, but I fully expect to see this market with the fundamental picture as strong as it is challenge the all-time highs again at $3.41 1/2 which occurred on April 8. I would replace short hedges at about $3.39, and if you are holding some short hedges and looking to finish pricing for the year, I would add to hedge protection at about $3.39. If you are long again in the market with long hedges in place to protect against rising corn costs, you probably have long positions in all of the various monthly futures contracts. I would look at taking profits again just under the $3.40 to $3.41 high on the December and would key off of that contract.

The nearby May futures contract gapped higher in Tuesday's session in soybeans, and that is a very bullish sign. On the November contract, you have chart gaps below the highs much as we see in the December corn with the bottom of that chart gap starting at about $7.50. You have two $7.99 highs and a double top on this November soybean futures. Soybeans, more than corn, are going to be impacted by harvest progress and seeing South America move into the market with product for sale. Stocks are very tight in the U.S. but continue to be not far off record high levels at the world level. Users in the U.S. will bid these beans and the various products from soybeans up until the point that they can afford to pay transportation costs coming in from other points of origin. This means we have room to see a strong rally in this market again, and I would be prepared to move up under that $7.99 high and replace short hedges, take profits on long hedges, and add to short hedge protection if you have held your short hedges through these recent price dips. The major move up in this soybean market came from a low of $6.33 on February 5 and recorded $7.99 highs on March 24 and April 5. A 50% correction off those $7.99 highs would carry us down to about $7.16. The low from last week was at $7.10, so we completed a 50% correction of the major move up across the past three months. That leaves this market in a position to rally toward the highs again.

Wheat is being carried back up with strength in corn and soybeans, but I think this is more spill over strength than it is anything in the wheat sector, per se. We dropped back well below $4.00 on the July Kansas City contract and also on the July Chicago contract with the July Chicago having moved as low as $3.75 in Monday's action. My first target on the July Chicago contract to replace short hedges or to add to price protection would be the bottom of the chart gap which is around $4.12. I would sell July Chicago on rallies back up toward the $4.10 level or higher. Contract high in that market is up to $4.30, so there may be an opportunity to sell it on a scale-up basis. In Kansas City, the first signs of possible selling that I see would be across the mid-April highs around $4.15. Contract high occurred back on April 5 at $4.34 3/4. Anything in the $4.15 to $4.35 area, I would be finishing off pricing for this particular year.

Limited trade in the slaughter cattle market has been on a carcass basis with prices from $133 to $138. There has been very little trade through Tuesday at noon, and I suspect we are going to see a cash trade develop in the mid-$80s. Boxed beef values that had climbed above $162 for Choice boxes backed off late last week to around $158, but they showed stability and slightly better levels in Monday and Tuesday this week. There is talk about a framework for discussion at least in terms of reopening the Japanese markets to our beef, but that is likely to be late this year and probably after our election. Some of the more distant live cattle futures contracts are making contract highs in Tuesday's session, but I would key off the June contract. We see that market trying to climb back up toward its contract high which is $79.65 from April 13 and I would sell this market on a rally up against that high. Longer term, we may see a June market be able to hold a cash market of $80 and above, but it is not apparent from this vantage point that that will be the case. If you would rather be deliberate in your program, you can sketch a trend line across the lows from late March on this June contract and the low from Monday which allows us to draw an updated uptrend line on this chart. When we see a close below that trend line that occurs before we see new contract highs, this market is going to adjust to the downside, and we need to have short hedges in place. There is talk about the strength in the feeder cattle market pushing up the live cattle futures, but I don't usually buy that type of reasoning. The demand for feeder cattle is derived from the value of slaughter cattle going out of the feed yard after you account for corn and other costs of feeding, and I am not inclined to subscribe to a cost-push pricing philosophy on live cattle futures. These feeder cattle look very strong with the August feeder cattle contract up at $95 and better. Let this market correct to the downside and then try to rally again, and we may then be able to get a workable trend line on the August feeder cattle. At this point and time, I see no evidence that compels us to sell and be short in August feeder cattle with all the strength that it is showing.

The April lean hogs closed on April 19 at about $64.37 as we move to the June which is now the active nearby contract, we are trading lower in the $71 to $72 range on Tuesday. I would hold short hedges that you have placed on trend line sell signals in this market, and/or just because the prices offered were so profitable. We have a contract high on the June of $76.47 from April 12, but I suspect we have more down in this market before we are going to try to challenge that high again. The pattern across the past 10 days or so in the June futures looks like a bear flag to me, and I think there is a possibility we will see some down side in pork as we start to hear more talk about opening the trade channels around the world for beef which will take some of the clout off the demand-side for pork.

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