Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
October 5, 2004
The tug of war continues in the fed cattle market. Boxed beef values drifted lower last week and packer margins were in the red. Feedlots resisted lower price bids all week and cattle were selling at $84 and better, the highest prices of the week, on Friday. Some of the Choice boxed beef values were up in Tuesday morning trade so there is a chance we will see $84 and maybe $85 cattle this week. There is a limit to how long feedlots can hold off, of course, and it is very important that we do not see the weights on cattle get heavier and the cattle start to back up in numbers in the feedlots. In the pork sector, we still have mid $70's and better in the direct cash hog trade and this continued contra seasonal rally is helping cattle prices.
With the December live cattle around $88, the futures complex is clearly expecting cash prices to work up as we move toward the end of the year. Part of that is expectation of the export channels to Japan eventually becoming open again and part of the optimism is coming from bullish possibilities on both the supply and demand sides of the price equation. If we start to see some heifer holdback this fall, beef production on a per capita basis will start to decline and is likely to continue to decline through the next year or so. That is the supply side cycle at work and it will be bullish to price of all classes of cattle. Despite reports of sluggish movement of beef into consumption on a short term basis, the demand for beef is running well above year earlier levels and that is certainly bullish. The chart pattern on the December live cattle mentioned last week is happening with an uptrend line hooking the $83.35 low on September 7 with the $86.25 low on September 28. Don't be quick to replace short hedges in this market and in feeder cattle until we see a close below that trend line or a challenge of the $90 to $91 levels by the December live cattle futures.
December lean hogs are nearly $6 off the September 24 high of $71.80 as the market starts to reflect the inevitable possibility of daily slaughter levels moving to still higher numbers. Demand coming over from banned beef exports has continued to help this market and domestic demand is also in good shape. But there are limits to what prices can be sustained and I am seeing signs that this market will be sold on rallies back to $70 and higher in spite of current cash prices in the mid to high $70s. By the time December gets here, we will have moved through the high daily slaughter levels in November and into the intense competition from poultry around Thanksgiving and cash hog prices will be lower. Look to place or replace short hedges on late 2004 hogs and into January and February on rallies but hold off on later 2005 sales until we see those markets rally again.
The fledging rally in wheat was killed last week by USDA reports that showed September 1 stocks above the top of the pre-report range of expectations. Add the fact that the production estimate was also above the average expectation and we eliminated the bottoming and price rally actions we had seen in both Chicago and Kansas City. New lows were seen in the December Chicago but the December Kansas City I am showing again this week gives us a shot at a rally from a different level. Note the recent dip down toward the $3.24 low of August 16. If this current dip can uncover buying above or near that $3.24 level, and I believe the buying with be there, we have a possible double bottom across those lows and a place to buy back short hedges or to buy futures or call options to replace wheat you sold earlier. Keep in mind you are a speculator in futures or options if you buy futures or calls after you have sold your wheat, but that is okay if it has a good chance of making money and is a less costly way of speculating on higher prices than holding the wheat, paying storage costs, and speculating in the cash market. If you lose money as a speculator in futures or options, it will not be deductible in most cases so talk to your tax advisor.
December corn has traded down toward $2.02 this week and it will go lower if the private analysts who are calling for a crop well above 11.0 billion bushels are right. Hold short hedges here and watch the basis patterns at harvest to see if they are weak enough to suggest hedged storage if you have on-farm bins. Like in the wheat, it might be better and cheaper to speculate by buying futures or call options and selling the cash corn than to pay the storage costs and speculate in the cash market. The reminder about lack of deductible looses as a speculator in futures is still in order. Long hedgers can wait or place long hedges at any time. This market is not going anyplace to the upside anytime soon and there is only limited potential for still lower corn costs.
The plunge in soybeans has slowed but it is not done. November futures were as low as $5.19 in Tuesday's session before a modest short covering rally lifted the market. Hold short hedges here until you harvest and then use basis levels to guide your storage decision. Like the corn and wheat, it could make sense to sell the cash product and buy futures and this is a reasonable strategy if cash prices look low but the basis is still not especially weak at harvest. We will likely see $5.00 on the November and that is almost a given if December corn breaks below $2.00 and heads lower. Keep in mind that as long as corn and soybean prices are working lower, we will have to be patient waiting on any rally in the wheat complex.
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