Weekly Purcell Agricultural Commodity Market Report

Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
May 18, 2004

The corn, soybean, and wheat markets are all searching for a price level that will uncover buying support and a corrective rally of the major price breaks we have seen across the past few weeks. In wheat, there are lows across the $3.70 level that go back to mid-March that I think will provide support in the July in Kansas City. The July Chicago contract has already moved below those mid-March lows but is trying to form a congestion pattern in preparation for a price rally. The corn market shows fewer imminent support levels as price moves lower. I said last week that a head-and-shoulders topping pattern in this December corn projects down into the $2.50s. But I certainly don't expect this market to go down to that level without at least a corrective rally back up toward $3.00 or higher as we move through completion of planting and start getting the weather to be a bigger factor in this market. Old crop July soybeans gapped lower on Monday and traded down hard again during Tuesday's session. The November soybean contract has an old chart gap back on February 20 down in the $6.70 area, and that is about the only thing I see on that chart that might start to surface some support. That is also about the same price level along which we saw a number of daily highs back in January, so we might see the almost free-fall in this soybean market find some support there.

In corn, soybeans, and wheat producers should be hedged. They should hold those short hedges until we see buying support surface and some signs of at least a short term bottom. Be aware that when these markets do rally again, I think all we'll see is a corrective rally back to the upside and I don't expect to see the recent highs challenged again unless there are some major weather problems that emerge. Producers with no price protection in place should be patient if you have nothing done to date. Let's let these markets find some support. Get at least a short covering rally back to the upside or possibly a 50 percent correction of this last move down in all of the markets across the past three to four weeks, and I'll certainly be watching those with you as we move into the summer months. Users of corn, soybeans, or wheat who have been pursuing long hedges during the year and have taken profits on those long hedge positions and are exposed to the cash market now should stay in that posture. It's difficult to anticipate being able to buy and profit from just a corrective rally to the upside if you are a long hedger, but as a selective hedger, that is what I would be trying to do and will offer advice accordingly across the next several weeks. Without any question, we have seen changes in the perceived fundamentals in all three commodities. That is especially true in corn where acreage is going to jump to a record high, and we have the very real prospects of seeing a record large crop in the U.S. if weather cooperates this year, especially since we have this crop planted early. The changes in fundamentals in soybeans and wheat are a little less compelling, but we'll see a huge acreage planted in soybeans in South America if these price levels stay anywhere close to current levels this fall, and we'll be back on a path toward increases in supply at the world level that pushes prices back down toward costs.

Last week's cash cattle sales were mostly in the high $80s with a limited number of better cattle in Nebraska as high as $91. There were hopes at the feedlot level for a $90 level again this week, but I suspect it will develop in the high $80s. Boxed beef values were down significantly in Monday's trade, and the Choice types are around $156, which is a bit off the $160+ prices we were seeing last week. On the charts, what we see is a correction of the major move up that occurred on the June live cattle contract for example, from about the $75 to $76 level back in April to the contract high of $87.55 on May 6. Tuesday's prices on the June closed above $81, and if the cash market can hold in the high $80s, I think we will see this June futures pulled a bit higher. Aggressive selective hedgers at the feedlot level might want to look at buying back short hedges. The idea then is to replace these short hedges when this market rallies again, and we will have to be very alert because I'm not at all sure that it is going to challenge its contract high again. A more conservative producer might hold short hedges that you have in place hopefully at higher price levels

This August feeder cattle market is showing impressive strength and is making new highs again in Tuesday's session having traded up to the $101.60 level. I would repeat the advice of the last few weeks, and either hedge these summer cattle when profit margins are too good to pass or step back and let it show us how far it can run to the upside. This market is clearly getting help by the substantial change we've seen in the corn market across the past two to three weeks. It is still steeper than I like, but we are getting to the point that we can use a trend line on that August feeder cattle contract that goes back and hooks the low at about $86.17 on April 5 and then cuts across the lows on Monday as this market surges. One approach, then, is to just let the market move up as long as it can and then only place short hedges when you see a widely verified sell signal with a close below that uptrend line on the chart.

I will look back on this period in the hog market and recognize that I underestimated the benefits I have been discussing coming from increased demand for pork with trade channels for U.S. beef being closed to countries like Japan and South Korea. We are headed into the time of year in which we would normally get seasonal strength, but the weighted average price on a carcass basis for lean hogs at the national level in Monday's market was $81.79. That is a hugely profitable price level that translates to something in the low $60s if you mentally convert to a live hog basis. We know this will start to stimulate some expansion in the breeding herd and some supply response to these higher prices, but that cannot happen overnight. Any holding of gilts will just push these prices still higher because of reduced slaughter. The June lean hog futures are around $75 in Tuesday's session, and this contract recorded a new price high on May 12 at $77.40. I had actually been recommending moving ahead to forward price these May and June hogs on a rally to the old April 12 contract high at $76.47. That is still certainly a viable position in terms of short hedges. I think it will be the July and later contracts that probably reach still farther to the upside. I would hold those short hedges in the June hogs and probably extend my price protection if this market can get pulled up toward the recent contract high of $77.40, since I don't see substantial upside from there.

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