Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
August 10, 2004
The wheat market ran into selling pressure before corn and soybeans on the modest rally of last week and that surprised me. December wheat in Chicago and in Kansas City recorded outside days and closed weak on Friday. We may see Chicago test the contract low again on the December which is $3.215 from back on July 10 of 2003. There was a low of just above $3.22 last Monday when the market first tested the old low and found lukewarm buying support. I would look at buying back short hedges with buy orders placed around $3.22 or $3.23. Remember the chart readerıs rule when you buy a dip to the contract low: put the short hedges back on if we see 2 consecutive closes below the old $3.215 low since closing below the contract low is a sell signal seen around the world. If flour mills and exporters think the fundamentals are good enough to support prices above the $3.20s, they will buy this market and prompt the building of a double bottom along the support plane at the contract low. If they donıt step up and buy, then we want to be short hedged again, but I do not expect that to happen.
Corn closed the week better than wheat or soybeans. That may be due to the fact that December corn was pricing corn below $2.00 in producing areas where the harvest period basis is weaker than -$.25 per bushel when the market traded down to $2.25 early last week. This market may not be ready for still lower prices until we move closer to harvest and see the 11.0 billion bushel that some analysts are saying is possible. And an 11.0 billion bushel crop may not be a price disaster if demand stays strong and is boosted by a continued weak U S dollar. We are such a big factor in the world corn market that buyers will eventually have to come here for corn as the crop year moves forward. We now have a new contract low at $2.25 to buy against, and I would buy back short hedges on a retest of that $2.25 low and look to place long hedges to cover corn needs out through the summer of 2005 at the same time. Donıt be too quick to sell again on 2 consecutive closes below $2.25 if we see that unexpected, to me, development. There is still time for talk about early frost and the soybean crop is not made yet and I think it is too soon for any sustained move below the $2.25 contract lows in corn.
New crop soybeans, bean oil, and soybean meal are all well above contact lows which go back as far as late 2002 when the November 2004 soybeans first started trading. There are layers of support on the November soybean futures if we see dips down toward $5.00 and we will need to get through August with good crop development weather to put that type of pressure on this market. But I would continue to hold short hedges here. Fridayıs inability to take out the Thursday high and the weak Friday close suggest we may be ready for lower prices this week. To be equally profitable on a per acre basis, $2.00 cash corn equates to about $4.80 cash soybeans, so I see corn as being closer to fundamental support than is the case with new crop soybeans. Mondayıs modest rally came from better soybean meal prices, but bean oil continued to drag. Looking ahead, hold short hedges for 2005 in wheat, corn and soybeans until we see what harvest brings us in corn and soybeans.
Choice 600-900 lb boxed beef was at $135.28 Friday afternoon, down from $139.91 week-earlier levels. Monday came in at about the same level. Unless the Labor Day buying is very strong, we are not likely to see the live cattle futures for October back above $90 anytime soon. Cash cattle were $81 to $84 last week with most of the volume around $83. October live cattle is on the verge of giving trend line sell signals with a chart gap around $89 which will host huge numbers of sell orders on any rally back up to $89 or better. Hold short hedges if you have them. Use a rally to $89 to place or replace short hedges. The top of the gap is at $89.25, and selling is in order if the market cannot close above $89.25 this week. If the trade channels to Japan are not open by yearıs end, we will see big losses on cattle coming out of the feed yards late in the year and that can always prompt holding cattle to higher weights and push prices lower.
There is no chart gap but there will be strong selling actions if the market can challenge its July high of $114.45. Watch the live cattle futures. If they do get turned back on a rally to the chart gap near $89 on the October, then feeder cattle are likely to turn lower at the same time and you have to look at short hedges in fall and winter feeder cattle. Even if corn is cheaper, the feeder cattle are priced too high for feedlot profits if the live cattle futures cannot hold above $90, and it will take sales to Japan again to get us back above $90 and hold us t here.
Weighted average cash prices for hogs are still above $76, offering huge profits in hogs as corn costs moderate and come down. Helped by export demand while beef is blocked to major buyers like Japan, any progress on re-opening channels for beef to Japan will hurt hogs. We saw trend line sell signals on the October in the mid-$60s back in July, but the market recovered and made new highs as the export and domestic demand stayed strong. You can sketch a major trend line from the February lows near $50 on the October across the mid July lows that dipped below $64. The bull-market run in hogs is likely over when we see a close below that trend line later in the summer or early fall. Eventually, we will see expansion in this complex and the late September quarterly Hogs and Pigs report will be closely watched for signals on what will be happening out into 2005. There is not likely to be any huge break in the 2004 market, however, simply because we cannot change the number of hogs coming to market that fast. The strong profits are destined to be around through the end of the year in all probability.
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