Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
September 14, 2004
We did not get an 11.0 billion bushel crop estimate for corn, but it was above 10.96 billion and was up from the August report. The soybean estimate was down a bit but the big news in that market has been the forecasts for frosts in the northern part of the western Corn Belt. The latest forecasts are not calling for early frost, and soybean prices have come down with corn since last Thursday's USDA report. The wheat market, absorbing news about growth in production and in world stocks after several years of decline, has been under pressure for several weeks. The USDA reports indicate that the pressure is moderating, and the rally I have been looking for in wheat is starting.
The corn market has made new lows below the $2.25 contract low on the December futures, and I suspect this market will test the $2.00 level. Short hedges should be in place or should have been replaced on the recent and second rally to $2.45 if they had been lifted near the important $2.25 support plane. I do not expect a price plunge but the estimates of this crop are likely to increase as we move into October and beyond. Producers will see low prices and farm program payments are likely to be large for corn producers this year. Users of corn get helped by all this, and I would continue recent advice to stay off long hedges until we see this market start to build some type of bottom, likely after harvest and likely close to or below the $2.00 level on the December contract.
The key to the complex may be the November soybean futures I show again this week. After making a low at $5.52 on August 11, the frost scare pushed the market up to $6.52 on September 1 and it then dipped to $5.57 on September 10, the day after the USDA report. I like the fact that buying emerged near $5.57. We may not see another big plunge in this market and the two lows at $5.52 and $5.57 may turn out to be a double bottom. There is a chart gap starting at $5.94 that was left on September 7, but I am not sure that selling there will push this market to new lows. Prices in the $5.50 to $5.60 on the November futures are pricing soybeans well below $5.00 in many parts of the Midwest and that may be low enough in a commodity that is seeing world demand and usage grow. I would be inclined to buy back short hedges on a dip toward the recent lows with the expectation that harvest pressure is not gong to be severe and will not prompt new lows in the November futures.
The wheat price picture does look better. Prices are $.23 above the $3.09 low on the December Chicago contract and some $.30 above the $3.24 low on the December Kansas City. If the corn and soybean markets do not plunge, we could see a rally on wheat toward the July highs near $3.87 on the December Kansas City and toward $3.64 across the July high on the December Chicago. If that rally develops, we have to look at selling cash wheat and/or pricing wheat being held in storage and we will need to look out to the 2005 crop to see how good the prices are for that upcoming crop.
Most cattle sold in the $80 to $82 range last week, but late-week sales started to look better with $83 fairly common and even some $83.50 prices on a few pens of cattle. The futures market was surprised by the strength in the cash market and price jumped on live cattle and feeder cattle futures on Friday and closing prices were up again on Monday. Tuesday's session is holding or extending the gains. Monday's boxed beef values were up from Friday and morning prices were sharply higher on Tuesday. Improved boxed beef values may be what will be needed for these cattle markets to turn higher again. But the discovery of another case of BSE in Japan casts some bearish overtone across the complex, with the possibility of some pressure on cattle prices and some help for hog prices during the week.
I would hold short hedges or get them established in hogs with the lean hog contact for October back up toward $68. Demand is good and is being helped by the BSE talk and the continued shut down of beef shipments to Japan, but we may see the slaughter level for the week climb above 2 million head. It will be hard to hold current prices as the daily slaughter levels continue to run high through October and November. I doubt whether we can hold a $70 cash price average and if that is right, there is no reason for the October to rally from the $68 level as we move toward the first of October.
In the unlikely event October live cattle can move up toward $88 and challenge the bottom of the chart gap left on August 19, I would be an aggressive seller in this market and I have no problem with holding short hedges through such a rally. A margin call is likely to come, but we need to be careful with getting too ³fine² in this market. Cash trade will likely develop this week in the $84 area but the performance in the boxed beef markets have been less that stellar in recent weeks and the supply of market ready cattle is relatively large compared to the past weeks when we saw $90 futures. As I have mentioned in past letters, we are into losses on some cattle coming out of the feedlots and that always puts a damper on cattle prices and pressures the feeder cattle market as the feed yards and cattle feeders try to buy feeder cattle cheaper to restore some margin.
The feeder cattle market will be hard to break, especially with corn getting cheaper. As we move toward the herd building phase of the cattle cycle and some heifers are held for breeding, it is calf and feeder numbers that will be ³tight² and will constrain how many cattle we have on feed. If the Japanese markets open again and exports grow as expected, we could see domestic per capita consumption of beef come down toward 60 lbs across the next 2 to 3 years, and that would be the lowest levels across the past 40 years. The big message here is that tight numbers and cheap corn will keep feeder cattle well above the fed cattle prices as feeding margins get bid into high priced feeder cattle. The current $111 level on October feeder cattle is nearly $30 above the current cash fed market, however, and is $22 above the $89 price on the February live cattle futures. Those premiums are big and I would want to have short hedges in place on feeder cattle through November.
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