Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
June 16, 2004
In the grain and oilseed complex, the old crop soybeans are traded higher early this week, and the new crop November futures are showing lower prices. It is no secret we have very tight supplies from the 2003 harvest, and the possibility of a very large crop and substantial relief in terms of stock levels cannot come until we at least approach harvest later this year. There is also talk that China is having difficulties with shipments of soybeans and soybean products out of Brazil, and they may turn to the U.S. for soybeans. Recent crush data were better than expected, and that is a significant switch from month ago levels. The new crop contract is under pressure because of improving weather conditions, and the same thing is happening in corn. This week's conditions in corn showed significant improvement, and we still have large trading funds long in this market. There is widespread anticipation that those positions will have to be closed by selling in the not-distant future. Wheat prices are under pressure as harvests continue even though weather is slowing the harvest of both hard red winter and soft red winter wheats.
In soybeans, I think the old crop July is making a correction of this last major price break that started around $10.36 on May 12 and went down to $8.01 on June 3. A 50 percent correction of this last price decline would be around $9.15 to $9.20, and that would be back up in the chart gap that occurred on May 17. I would certainly expect selling to come in at those price levels, and that would look like a good opportunity to continue or to finish sales on old crop product you are holding in storage. With the new crop November in a continued downtrend, I would hold short hedge positions there. Obviously, you will want to hold positions you established possibly out in the 2005 crop at early and substantially higher prices. On the November chart, I do not see much reason for buying support to emerge on this new crop November contract until we get down across the lows in the $6.30s that came back in February.
In corn, the old crop July contract has crashed down through support across the late May lows in the $2.90s and appears to be headed for a possible test of the old chart gap that goes back to January 12 down in the $2.70 area. We do not have the same extremely tight stock in corn that we have in soybeans to support these old crop contracts, and that makes it easier for the new crop December to trade lower. That contract was down significantly in Tuesday's session, and a test of the support across the May 21 low at about $2.78 is imminent. I indicated earlier that I thought this market had projections down into the $2.50s ultimately, and if the weather continues to stay favorable and to be bearish to price, we are probably going to see that tested. Hold short hedges that you held in this market for some time or certainly short hedges that were placed or replaced on the most recent excellent opportunity. On June 2 this market traded up as high as $3.22 and came within a fraction of $.01 of the resistance across the late April highs around that $3.22 level. It appears that this market has endured the weather shock that came from excessive rain and floods and is starting to recognize the possibility of a huge crop and pressure on prices. If you are a user of corn, there was an opportunity on this last early June, weather-induced rally to take profits on long hedges, and I would stand aside in this market until we see signs of buying support at lower prices.
The July wheat futures are headed lower in both Kansas City and Chicago. I see a possibility that Kansas City July might find support across the mid-March lows around the $3.70 area. If harvest weather improves and harvest pressure starts to hit this market harder, and all of this, of course, depends on what the yields appear to be, we can see further downside in this market. I would not be quick to buy back short hedges here given the developments across the past week or two and would hold short hedges in both of these markets. Hold short hedge protection that you might have placed out in the 2005 contracts where we had an excellent opportunity to price part of next year's wheat crop up at $4.00 or higher on the futures boards.
Bull markets almost always run too far before they lose momentum, and that certainly seems to be what is happening in the cash market for cattle. Boxed beef values on Tuesday afternoon were down almost $9.00 for some of the Choice categories since June 9 and 10 on those cut-out values slipped back below $150. There are still some $90 cattle in Texas in early week trade, but numbers at those price levels are small. We have seen a movement in Kansas down to $86 on a live basis and in Nebraska around $138 on a carcass basis. Most of these prices are significantly below last week's levels as the boxed beef cut-out values start to put pressure on packer margins. The expiring June live cattle futures recorded prices as high as $92.70 on June 7, and the close on Tuesday was $84.75 and well off of those extreme price levels. In active August, the high was also $92.70 on June 7, and Tuesday's low was at $84.77. These markets have shown us closes below uptrend lines, and I will show that on the feeder cattle contract again this week. The first possible support zone that I see for the August live cattle is around the lows back in mid-May at $82.50 to $82.75. Be careful if you have short hedges at extremely high price levels on buying them back too soon, because this market is going to turn volatile. I do not think we are ready to hold a $90 slaughter market.
In feeder cattle, we have clearly seen closes below the uptrend line that I show on the August chart. This week's market is holding prices better than the live cattle complex, but that is because we have also seen sharply lower prices in corn. There is a strong inverse relationship between corn and feeder cattle prices. On rallies back above Tuesday's close on the August, which was just under $107, I certainly would be looking at short hedge protection in this market unless you have already placed short hedges on the recent close below the uptrend line. It is very dangerous to carry feeder cattle without any price protection through the pollination period in the corn complex during July when yields and crop size are basically being set.
The expiring June lean hog contract closed above $79 on Tuesday and is about in line with the cash market, so I see no major reason for movement in the futures from this price level. The active July contract closed just below $76 in Tuesday's session, and I would be inclined to place or replace short hedges in these summer hogs on any rally back up toward the June 14 high on the July at $77.90 and would certainly be aggressive on any rally back toward the all-time contract high on June 4 at $78.60. I do not see significant upside from those levels in the summer market and would look for protection out into the August as well. On the more distant hogs where we see a huge discount in the fall and winter contracts, I would not be placing short hedges at this point. I think we will see better prices later in the year than we have been offered in the middle of June.
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