Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
July 20, 2004
Coming back from a week of travel, we find the December corn futures in the $2.50s as I had been predicting since mid-May. The chart this week shows the head and shoulders topping formation and the break down through the neckline. From that breakout point, you can project the price difference the day of the contract high price vertically down to the neckline, and a glance shows that to be down to the $2.50 level. It is hard to find such a historical formation that involves new contract highs at levels above costs of production and above the historic price norms that does not turn out to be a major top. Add the failure of the RSI (relative strength index) to make a new high relative to the prior surge when the new contract high was recorded and we have what chart readers call a divergence that virtually guarantees a market top. It is useful to have this type of perspective when all the talk you hear is about the need to see higher prices to ration usage.
The rationing talk has been widely heard in soybeans. The USDA report of July 12 decreased the carryover stocks for crop year 2003-2004 again to 105 million bushels, but we will not run out of soybeans and we do not need still higher prices to ration our limited supplies, not when the south American crop is available to any and all buyers and we hear talk about soybean meal coming into the poetry operations in the Southeast. What we saw last week was one of the biggest one week drops in old crop soybeans futures I can recall, with the active August down $.43 on Friday to a level now over $3.00 below the $10.24 contract highs. Hold your short hedges in soybeans and look for the November to go lower. After the modest Monday correction of last week's price plunge, the November is down hard on Tuesday. Hold short hedges in corn. December futures are probably going to dip to the $2.35 to $2.40 area and around those old summer-of-2003 lows, there will not be much risk if selective hedgers decide to buy back short hedges and take profits just in case we do get a modest pre-harvest rally. Users of corn and soybeans should stay off long hedges and exposed to cash prices until we see sings of a bottom and, in the soybeans, a close above the obvious downtrend line on the November that connects the early May and late June highs.
Look for December Chicago wheat to challenge the summer and fall lows in 2003 near $3.25. Selective hedgers who rolled July hedges into December and held the wheat in on farm storage might look at buying back in that area, but stay alert. December Kansas City wheat looks better but I expect to see a close below the early July low near $3.70 and still lower prices. Hold short hedges in this market until we see some signs of buying support. And for those who looked out and hedged part of their 2005 wheat, I would not be quick to buy back those short hedges. Put those hedges aside and we will look at them on occasion if we see a price dip that makes the 2005 positions look very profitable at prices that should leave little risk to the downside.
After holding near $140 all last week, Choice boxed beef was down nearly $2 on Monday and is down again in early Tuesday trade. The much discussed preliminary tests for BSE by the USDA likely added to the nervous tone that was already creeping into this market, and cash prices closed out the week in the $83 area and were down abut $3.00 from the prior week. August live cattle futures show the same type of classic head and shoulders top that we discussed above on the December corn and the projection here would be down into the $76 area. Demand has been strong in this market and we are awaiting the opening of other export channels, but not all of the hoped for positives always occur, so I would be careful and hold those short hedges I have been discussing for several weeks. The uptrend has definitely been broken and it does not help that prices paid for recent placements of feeder cattle put the breakeven prices well above the levels we are seeing this week. If cash trade develops around $81-82 this week, that will put more pressure to the down side on the entire complex, and that could prompt more hedge selling in the October and December futures which are around $86.
August feeder cattle futures are showing a double top around $114 and I do not expect to see those levels again. But I also did not expect to see the $114! Calf and yearling numbers are a bit below last year and as the prospect for cheaper corn emerges, the feedlot margins have definitely been bid into these high priced feeder cattle. The rally last week in August toward the $114.25 high from late June was absolutely a selling and hedging opportunity for summer and fall feeder cattle and those positions should be held until we see more clearly what is going to happen in the feedlot complex and in the live cattle futures.
August lean hop futures spent nearly 2 months in a trading range from $75 to $78 but started to give that up late last week. The modest recoveries in early week trade this week do not hide the fact that we have tops in place and that we have likely seen all the premiums the summer price rally can generate. live base prices that had been up around $60 on a weighted average basis a week ago are $2 to $3 off that level and we see comparable declines in the carcass cutout values. I would want to be on short hedges here as we move into and through August and start into the fall months where the decline from the summer price peaks is typically over 10%. Keep in mind that when the export channels for beef to Japan get opened again later this year (likely, not guaranteed) there will be a concurrent decrease in demand for pork in the world market and we could see lower prices.
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