Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
May 11, 2004
The grain and oilseed markets are responding to a host of potential market-moving factors. The U.S. dollar is getting much stronger in world markets as the U.S. economy gets ready for higher interest rates. Rainfall across the weekend helped corn, soybeans, and some parts of the wheat belt more than had been expected. With South America now starting to dominate world trade activity in soybeans and soybean products, weekly export inspections in the U.S. in soybeans, corn, and wheat are lagging. It appears that fund selling is showing up in these markets again, especially in the soybean complex. In general, producers should be on short hedges in all three of these markets, and users should be off long hedges having taken profits on recent rallies or on recent selling signals on the charts.
The December corn chart shows the chart damage. The trend line that hooked recent lows that I showed on last week's report has been violated with closes below that line. We also see the advantages of being willing to sell a rally in a market like corn instead of waiting for a trend line sell signal at lower prices. This week I am sketching on the chart the very real possibility of a head-and-shoulders top in this December corn. A projection from this chart formation would suggest that prices could fall to the $2.50's, and that would not be a surprising development if we get normal weather this year. There are private analysts that are estimating as much as a 2-3 million acre increase in actual planted corn acreage compared to the 79 million acres in the March 31 report. Stay short in this market and stay off long hedges until we see signs of buying support emerge as this market tries to struggle with exactly how big the crop will be and what we will see in terms of changes in Wednesday's important USDA reports.
In soybeans, the recent rally that quit on May 5 recorded a daily high of $7.89 on the November futures contract, exactly $.10 per bushel below the two contract highs at $7.99. This market is still above the long term trend line that you can draw by hooking the low on February 5 with the $7.10 daily low on April 21. The stock picture in soybeans is tighter than in corn, and we have a better chance to see at least one more rally as both crops go in the ground earlier than normal suggesting good yields, other things equal. I would finish any needed forward pricing on any rally back up toward the recent high at $7.89 on the November futures or on a close below the long term trend line that you can draw on this chart, whichever comes first. We are in the neighborhood of 90% planted on the corn crop and making rapid and early progress in getting the soybean crop planted. I see early plantings as not only consistent with good yields but also very consistent with the thought that every possible acre in the key producing regions will be planted to either corn or soybeans given the very strong prices we've seen.
You should be heavily priced in 2004 wheat in both Chicago and Kansas City. The recent rally gave a new opportunity to price well above $4.00 in both markets, and that opportunity surprised me. Perhaps most encouraging was the move up toward the magical $4.00 level on the 2005 crop with the Kansas City July 2005 contract having traded as high as $4.00, and the Chicago contract up to exactly $4.00 as well. I hope you have 50% of your expected 2005 crop priced up against $4.00 in the futures complex which, after adjusting for cash-futures basis, will give a price above $3.50 for virtually every producer in the country.
Choice boxed beef values are back above $160, and fed cattle prices averaged around $90 last week. Limited sales so far this week appear to be slightly under that $90 level, but most feed yards apparently think they can get $90 or better. Live prices have gone up faster than boxed cut-out values across the past few weeks, and this is starting to put some pressure on packer margins. But this is a strong market in terms of supply-side numbers and one that is benefiting from continued increases in demand. July cattle futures rallied on May 6 to as high as $87.55, and I would place or replace short hedges on June cattle on anything back up toward that $87.55 high. I don't see much upside potential from there, and we are nervous in this market waiting for the traditional bearish move in prices down as we approach June. I don't see a major reason for price breaks here, but any unexpected announcement that suggests restoring trade channels around the world will be delayed or anything dealing with beef recalls or a BSE phenomenon can easily push these markets to the downsides, so I think protection is in order here. Producers might want to look at the August live cattle futures at about the same time. That contract traded above $86 in Tuesday's session, and you can get better prices in the August to cover the late summer cattle than you can get in the June. We have seen the $100 level in August feeder cattle, and I see signs of topping in this market. Anything above $100 on the summer feeder cattle ought to be seen as a possible forward pricing opportunity. We would need slaughter cattle to continue to hold at least the $85 level as we move toward the end of the calendar year to justify a $100 August feeder cattle. I'm not totally confident that we can hold those types of levels in the slaughter cattle complex with all of the uncertainty we face in the broad global market place. Keep in mind that any weather development that pushes corn prices up will push feeder cattle down.
June lean hogs are making new contract highs in Tuesday's session trading as high as $76.50 which is limit up on the day. Weighted average cash prices for hogs earlier this week were slightly above $77. You can hook the lows on the June hog chart from February 17 to the daily low of $70 that occurred on April 22, and let this market move to the upside if it can and not do anything with short hedges until you see a close below the trend line. We may see a parallel here, however, to what we have already seen several times this year in the grain and soybeans where being willing to sell a rally is likely to give you more attractive prices than waiting on trend line sell signals. But the other side of that issue, of course, is you can sell rallies to two or three different highs as the market continues to move up in a bullish fashion and have to buy back those short positions and try to manage this volatile marketplace. So, backing away and letting the trend line give you direction is not an unreasonable posture in these hog markets.
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