Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
October 19, 2004
The most promising scenario in the grains and oilseeds is in wheat. The key reversal bottom on the December Chicago continues to hold out the possibility of a decent rally to give a chance to sell 2004 wheat and to look at the prices being offered for 2005. The market will have to first close above the downtrend line connecting early June and mid-September highs and that may take some time. But the first resistance on the chart is then across the highs near $3.40 in mid-September so it is worth a wait. Every day that passes gets us closer to the finish of harvest in corn and in soybeans and it may be after those harvests have finished that the wheat has its best chance to rally.
I see nothing to do in the corn and soybean markets except take a look at the harvest period basis and decide whether there is enough potential basis improvement to justify holding hedged corn or soybeans. November soybeans closed up 13 cents on Tuesday, but this is just short covering and has no long term meaning. What is important here is the huge and record crops in corn and in soybeans and the interesting possibility that the usage components have grown sufficiently to keep corn on the futures board at or above $2.00 in the face of a phenomenal 11.6 billion bushel crop. Futures prices may not make record lows, but the cash market will be under tremendous pressure simply because we do not have nearly enough storage capacity to hold this record crop. Some cash corn will get dumped on the ground and dumped on a market that does not need this much corn this fast and the cash prices will be under tremendous pressure. Look at you basis patterns to see if hedged storage makes sense if you do have on farm bins.
Take the same approach in soybeans where the November is dancing near $5.00 just like the December futures are dancing around $2.00 in corn. In corn, soybeans and in soybean meal, long hedges can be held or placed when November soybeans are close to $5.00 and December corn futures are near $2.00. There is no concern for a rapid rally in either of these markets but long hedges near historic lows make sense and I would extend out through the 2005 year in setting that protection. Buying calls would not interest me here since you are paying for the flexibility of still lower prices and input costs should that occur and I do not see much downside potential from here.
Boxed beef cutout values are pushing higher and that is helping packer margins get back in the black and giving a chance to see the cash market at higher prices this week. Late last Friday, there was movement of large volumes of cattle in the $85 to $86 range and a few loads have sold at $86 in Texas early this week. Look for an $86 market when buying emerges this week unless the boxed values turn sharply lower across the next 2 to 3 days.
In live cattle and in feeder cattle futures, you can work a trend line hooking the early and late September lows. Look at selling December live cattle if it rallies to the $90 area before closing below the trend line. November feeder cattle futures are near the $113.50 contract highs and as I suggested last week, I would look at selling to place short hedges out through January. I am concerned that the losses on cattle coming out of feedlots between now and January will take enough money out of the feeding sector to force some relief in the form of lower feeder cattle prices. If these feeder cattle do correct significantly to the downside, we will need to take a look at long hedges on the spring 2005 contracts.
Monday's trading range on December lean hogs was wide and the close was well off the highs. The market came back on Tuesday, closing up $1.40 and continuing to show strength. Pork exports to Japan continue to be robust and this is going to continue until the beef shipments are allowed again. That may take some time in the face of yet another case of BSE in Japan that was announced recently. We have a major uptrend line across the late May, late August, and mid October lows on this December lean hog chart. The contract high is $71.80 and I would sell a rally that gets close to that high if we see that type of price move before a close below the trend line. Use the line as a safety net and set short hedges on a close below that line if we do not see a rally toward the highs before the break of the trend line.
Note: There is no chart this week due to technical problems.
Download Purcell in PDF format