Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
June 29, 2004
The report is a day late this week due to travel commitments and allows us to look at the early June 30 acreage estimates. Expectations prior to this report were for 80.2 million acres in corn and slightly below 75.0 million acres in soybeans. The numbers come in at 81.0 million acres for corn, up 1.96 million acres from the March Prospective Plantings report. The report shows 74.8 million acres in soybeans. There is likely to be a special survey in conjunction with the August supply-demand reports to get a better handle on acreage and provide insight as to what happened to acreage at the farm level with flooding and weather problems we have had. The total wheat acreage was down about 3 percent, but some expected a larger decline.
Coming into the report, the July corn had been trying to do some base building around $2.70, and that was helping the new crop December hold around $2.78. Tuesday's close on the December was below that $2.78 level at $2.77 1/2, and I suspect the bearish tone to this early morning June 30 report is going to push this market down through the recent lows around $2.76. I have been encouraging caution in terms of buying back short hedges here. You can expect a drop to the lows in the high $2.60s that go back to late January and early February. I think there will be significant support around the top of the chart gap which is around the $2.59 level on the December going back to January 12. As I have indicated on several occasions in recent letters, I expect this market to go to the $2.50s at least. I would hold short hedge positions and watch for signs of bottoming action to occur across the next few weeks. Long hedgers should be off long hedges here and taking advantage of what appears to be the prospects for lower prices and lower costs in corn.
The July soybean futures were able to trade up through the chart gap that goes back to May 14 but was never able to close above the top of the gap. I show the July chart again this week. The market then traded down significantly on Monday. The market chopped in the Tuesday session waiting on the early morning June 30 report, and we need to be short in this market. This recent rally gave us a 50 percent correction of the price break that moved from about the $10.40 level on the July down to $8.01 on June 3. I have been suggesting that if this July contract was not able to close above the top of that gap and continued to run into selling pressure in the old chart gap, we would likely see the November falter at the same time and that certainly has been the case. November, somewhat to my surprise, traded as high as $7.14 on June 25 and essentially closed the chart gap on the November chart as well. I think we will see pressure on this market as South American starts to become a major factor in terms of world trade. We are likely to see another decrease in exports of soybeans from the U.S. in the July supply-demand report. I would hold short positions in this market, and users of corn and soybean meal, etc. should not be on long hedges until we see signs of support. If the November contract trades down toward the recent low around $6.53 on June 15, look for the market to find support at that level and I see additional support across lows back to February around $6.33. Don't look for any dramatic break in this market with all the production season largely in front of us, but I do think this market will drift down to lower levels across the next few weeks.
Wheat prices continue to drift lower with the July Chicago as low as $3.35 in Tuesday's session. The July Kansas City was as low as $3.59 and the close was at the $3.59 low in Tuesday's session. This July Chicago market is drifting down toward support across the lows from late 2003 around the $3.50 level on December 24 and then the $3.49 level on November 19. We may have enough harvest period pressure that the market will have difficulty finding any support even across those lows. Hold short hedges in this market, and let's give the market some time to show us a bottom before buying them back. Generally, we are in a time of the year that in most areas this is a matter of buying back short hedges as you harvest the crop and start thinking about whether you are going to sell in the cash market at harvest or whether the basis in your area is sufficiently weak that hedged storage looks possible and plausible.
Issues surrounding the BSE problem in cattle cropped up again last week. There were suspicious cases and reports on Friday and Tuesday that were inconclusive. This issue is dominating the cattle markets this week. The futures market was down on Monday with the August live cattle contract down significantly, and then there was a sharp recovery in Tuesday's session after the second report of an inconclusive test. The hog market had been expected to rally as some of the BSE issues were rippling through the beef sector, but we haven't seen much improvement in that complex. This cattle complex, looking at the August live cattle contract, had made a contract high at $92.70 on June 7 and then traded down to as low as $84.77 on June 15. That is essentially an $8.00 break in the market, and a 50 percent correction of that would have carried us back up to the $88.70 to $88.75 area. We saw prices a bit better than that on June 24 with trade going up to $90.25 and completing a bigger 62 percent correction of this last price break. I thought that short hedges should have been placed or replaced on that correction, and I hope that was the case. I would hold those short positions until the nervousness that this BSE issue is imposing on the market gets resolved one way or the other, and I would adopt essentially the same position in feeder cattle where this August contract had traded as high as an incredible $114.25 on June 25 and as low as $110.20 in Tuesday's session. I would want to be short in this market in anticipation of possible rippling consumer concerns over BSE. We had a close Tuesday at around $112 on August feeder cattle, so certainly there have been attractive pricing opportunities offered in feeder cattle.
With the underlying fundamentals still very strong in the meat complex and including beef if these BSE issues can get resolved, we have seen the pork sector continue to get some benefit in export trade with channels for beef in important buying countries like Japan still closed. The July lean hog contract had registered a new contract high at $78.60 back on June 4. It traded as high as $78.67 on June 21 and was as high as $78.50 again on Monday this week. Tuesday's high was $77.65 and the close was around $77.50. Anything up in this $78.25 to $78.75 range across those highs I see as a forward pricing opportunity, and I would look to get hogs covered out through early fall and winter at the same time. The June 25 hogs and pigs report didn't show any signs of rampart expansion, but if you look at the weight numbers, there are very good prospects that we will see some increase in slaughter hogs coming to market across the next several weeks given the concentration of the market hogs in the heavy weight categories. I would be interested in being short in this market given these very high pricing opportunities that have been in place and continue to be in place in the hog complex.
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