Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
August 17, 2004
Weather is the key word in the grains and oilseeds. Yields in soybeans have not been set, and weather can still affect the size of the crop. Crop conditions on Monday afternoon were down more than expected for corn and soybeans. Longer term, the August 12 USDA reports brought the first survey-based estimates of crop size. Corn is at a record 10.923 billion bushels and soybean production was pegged at 2.877 billion bushels, down 63 million from the July report and a reflection of the lingering weather issues. Wheat production was up from July at 2.123 billion bushels and world supplies and stocks for wheat are up sharply.
November soybeans were down on Monday but near the top of the trading range for the day, and November is up significantly on Tuesday. December corn is rallying off the July 30 low at $2.25. Both of these markets will see short covering as short hedgers and speculators buy to take profits. I would hold long hedges and would continue to buy back short hedges on December corn just above $2.25 and on November soybeans on a dip to the $5.52 low from August 11. We are not likely to see significant rallies to encourage replacing of short hedges in the short term so it will be a matter of carrying the risk in the cash market for producers who buy back short hedges in corn and soybeans. My very early objectives for rallies are $2.55 and around $6.10 for December corn and November soybeans respectively.
The USDA report brought enough pressure to prompt new contract lows in December Chicago wheat. I have been suggesting buying back short hedges on that contract on dips toward $3.21. The two consecutive lows below that old $3.21 contract low suggest still lower prices, but we have to be careful with the harvest behind us and with prices relatively low in terms of world level supply-demand fundaments of recent years. The December contract recorded a key reversal bottom on Monday with a new contract low, an outside day, and a higher close. Prices are up on Tuesday as that key reversal bottom is being honored by hedgers and speculators. We should see at least a modest rally here with the December moving back up into the high $3.30s and eventually challenging the long term downtrend line on the chart.
Choice boxed beef values spent about 10 days around $135 and that turned out to be a short term bottom as values are moving higher this week. Clean-up fed cattle activity late last week was around $84.50 live and $135 in the beef, and I think the stability in the boxes will bring higher bids from the packers this week. Selling the recent rally to the chart gap around $89 on the October live cattle looks okay even with the recent close above the gap. The contract high is from back on July 27 at $91.72 and I would pay margin calls on the $89 cattle in the October and sell this market hard on a rally toward the high. The consumer does not have as many dollars to spend on foods with the high priced gas and some other cost increases recently, and I don't think we are ready to hold the cattle market above $90 just yet. Perhap next year, but not this fall as hog prices come down on a seasonal basis. The opening of Japanese trade in beef may already be bid into the cattle prices on the futures board with the December contract above $90 and the February above $91.
The recent high on October feeder cattle is $115.20 and I think this market needs to be sold around $115. Cheaper corn has already boosted feeder cattle prices, and now the market will price feeder cattle off the fed cattle market and the live cattle futures. Later in the year, feedlots will start to see cattle coming off at a loss and that will force some readjustments in the slaughter cattle versus feeder cattle relationships and put some pressure on feeder cattle prices.
Cash hog prices are starting to drift lower with weighted average prices in the $73-74 area, off as much as $5.00 across the past few weeks. Daily slaughter levels are usually highest in October and November on a seasonal basis and even a modest increase from current levels will pressure prices and the futures are starting to register that fact. Monday closes on the October and December lean hogs were down over $1.00 and both contracts showed sell signals with closes below trend lines. Tuesday's price declines are over $1.00 on the October as the breaks of trend lines brings selling pressure. If the hogs were not already forward priced, they should have been priced on Monday. For producers who are late in seeing the chart action, look for a really back up toward $66 which is Monday's high and also the bottom of a small chart gap on the October contact. The Tuesday closes well off the lows suggest we might see a rally across the next several days.
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