Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
July 6, 2004
As we move through July and determine corn yields, we are in the process of completing an inevitable response to high prices. Without supply controls, it is always the case that supply will increase in response to very favorable prices and drive out what economists call ģeconomic rentē or prices above the average total cost of producing. After the record high prices in 1996, corn prices were a disaster again by harvest in 1998. It is not whether this response is coming in corn and in soybeans; it is just a matter of how long it will take to build supplies back to burdensome levels again. Weather, of course, is a factor, but the weather looks generally good for crop development as we move through the critical July month. Corn prices continue to drift lower, new crop soybeans continue to move lower, and wheat prices are dipping toward some important lows to try to find a bottom as harvest moves toward completion.
December corn futures gapped lower after the June 30 report showed 81 million acres to be planted. There will be support in the chart gap below $2.60 and down toward the highs near $2.50 in late 2003. I would let this market move down to the $2.50s where I have suggested for several weeks we are likely to see it go before being aggressive and thinking about buying back short hedges and/or placing long hedges if you are a corn user.
The tight stocks in soybeans are helping old crop futures hold attractive price levels. The August futures dipped down toward $7.60 after the June 30 report and then rallied late last week back up around the $8.00 level. November showed persistent deterioration after the report with a close late last week below early June lows, and that sets up the possibilities of a move down toward support across February lows in the $6.30 to $6.40 area. I would hold short hedges in this market. I don't see anything indicating the trend is going to turn up. We have a record acreage to be planted in soybeans, and if the weather cooperates at all, we are likely to see a very large crop and a switch in the current crop year ending stocks (end of August) away from very tight stocks toward 150 to 200 million bushels and a more abundant buffer against weather problems as we move into the 2004 and 2005 crop year which starts September 1.
The contract low on July Chicago wheat is $2.84 which occurred back in late January 2003. This current harvest-driven price dip is not going to approach those levels, but it is going to move down toward the lows around $3.10 to $3.15 which goes back toward the last harvest period. Hold short hedges here and buy them back as you complete harvesting the wheat or as you make a decision on whether or not you are going to store this wheat. Remember, the key to a successful storage program is that the basis be sufficiently wide during harvest that you can expect a basis improvement that would exceed the cost of storage. Then the crop should be hedged using either the March or May 2005 futures. The July Kansas City contract looks a little better than the July Chicago contract which is now a $1.00 per bushel off its highs. The damage in Kansas City has been more nearly $.85 per bushel. Look for this market to test the lows back last September and October around $3.25 to $3.30 as we move through harvest.
The cattle markets are nervous as they try to settle down after the recent concerns about BSE that turned out to be unconfirmed. We have a potential head-and-shoulders top on the August live cattle and the October as well that was completed with the price dips on the BSE concern last week. Those topping patterns would project down about $5.00 to $6.00 per hundredweight from the $86 level on the August and about $87 on the October. It is not clear to me that we will see a large price dip. I think the completion of the head-and-shoulders tops that I see on the charts as the BSE concerns drove prices down through the neckline of that formation last week may be a false signal. All this does alert me to possibilities, and I would be interested in being short in these markets if August can rally back up toward the chart gap just below $89 and certainly on a rally back toward the mid-June high at $90. You have a similar $90 objective on the October with a contract high sitting just under $91, and I would be inclined to be short in these markets on rallies back up to that $90 level or better. Such high prices are still going to be difficult to sustain in spite of the very strong demand we continue to see and the generally strong fundamental picture for beef.
Last week's BSE rumors gave us a close below steep uptrend lines on the August and October feeder cattle. I would expect this market to rally again as the BSE concerns abate, and you can expect a move back up toward $112 to $113 level in the August contract which I think is the key active contract at this point in time. I would always like to see nice profitable prices established on feeder cattle as we go through the pollination period for corn where weather can change in a hurry and corn prices and corn costs can start to rally and push feeder cattle prices sharply lower. Either hold the short hedges you have or look to get short on rallies in this market. My first objective would be the bottom of that chart gap on the August which is at $112.30. The huge advances early in the July 6 session suggest these markets will rally now that the BSE issue is settled.
The hogs and pigs report on June 25 brought no rapid signs of expansion. That news has helped kick the distant hog futures higher and started to eat into the huge premium that the summer contracts had been carrying to the late fall and winter contracts. August lean hogs have been trading in the $76 to $78 range, and after this report, the December is trying to rally and has moved up toward the $62 level, but that still leaves a $14 to $16 premium in the summer contracts. I think that is probably too much, and I would be inclined to hedge the late summer hogs on rallies back up toward the contract high just above $78. I would hold off on the late fall and winter contracts until we see the market have a chance to correct some of this discount in the more distant contracts. The report indicates nothing major going on in terms of expansion, so we should see some better prices than we are seeing this week in those distant hog contracts.
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