Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
October 26, 2004
Price quotes may be skimpy in livestock with Mandatory Price Reporting not yet extended or renewed and reports back on a voluntary basis. Fed cattle prices looked strong at the end of the week but the Cattle on Feed report shows numbers above expectations and beef cutout values were down on Monday. The weighted average national level lean hog prices dipped below $70 on Monday with the news about beef shipments to Japan the major market maker in cattle and hogs. There are still some uncertainties and we can see that traders are not looking for immediate change with the distant live cattle contracts and nearby feeder cattle, priced off the more distant live cattle futures, showing limited positive reactions to the news. And if the channels are open again for beef by early 2005, that positive development for beef is negative for pork where exports to Japan have been very strong with the beef movements shut down.
The lower close on December cattle on Monday could have been worse given the cattle on feed news. There were $86 cattle and a few at $87 late last week and asking prices are up in early week discussions. That makes the $87 to $88 trading range of recent days look reasonable on December live cattle futures. I still think we have a shot at a rally up toward the $90 area but the chances are slimmer than they were before the report. And note that we are now below the short term trend line on the December hooking the lows in late August with those in mid-September.
September. I would be more aggressive and sell rallies a bit quicker after the report from last week. And watch the November feeder cattle contract. If it rallies back up toward the high with some help from anticipation of trade opening to Japan, I would look at short hedges out through January. I continue to have some concern about a feeder cattle complex showing a huge premium to current fed cattle in both the cash and futures markets.
Watch the lean hogs for December. We are over $6.00 off the September high of $71.80 with limited potential to challenge that high again. I would look at selling to place short hedges on a rally back to the $68.50 to $69.00 range or on a close below the trend line hooking lows in late May, mid-August, and early October. This is a major end line and we could see a significant dip in this market if beef shipments to Japan open up again in the presence of seasonally large daily slaughter levels during November.
Don't get excited about the modest early week rally in corn. The pending 11.6 billion bushel crop will keep a lid on rallies in corn as long as corn is being dumped on the ground because of the lack of storage for such a huge crop. Watch your basis levels. If cash bids get to $1.50 or lower in your area, you may be looking at enough basis improvement to hold corn in storage and hedge it in the March or May futures. If you have no storage, you can ³store² on paper by buying March or May futures or call options. In either case, you are speculating in the futures complex and losses may not be tax deductible so talk to your tax advisor. Recognizing that losses might be non deductible, I still see being long the futures as a possibility here since you eliminate the cost of storing the actual physical corn. Just factor the tax treatment into your thinking.
Soybeans were up earlier in the week, and this looks like a short covering rally. The big crop and the lack of storage will be a factor in this market too. Export inspections last week were decent at 43 million bushels and that helped the modest rally. Any rally up to the $5.50 area by the November will run into selling at about $5.50 in the mid-September chart gap and I would not expect more than this until we get past harvest and start to get some occasional help from bad planting weather in South America. In soybeans, soybean meal, and in corn, users can relax and either hold long hedges in relative comfort or just buy on dips to the recent lows in November soybeans at $5.06 and at $1.97 on the December corn futures.
The early week rally turned wheat higher again. The weak U.S. dollar helps wheat more since we export a higher percentage of production of wheat, often above 50 percent, and the weak dollar makes our wheat look cheaper than wheat from other counties that are not seeing a weakening of their currency in the world markets. I have been talking about a rally in wheat at both the Chicago and Kansas Cit exchanges and expect we will see some move up in prices when the corn and soybeans have felt all the harvest pressure and quit making new contact lows. If the December futures can move above last week's highs near $3.20 in Chicago and $3.50 in Kansas City, we may be able to sustain a rally. The chart for December Chicago is shown this week. You should be off short hedges in wheat and watching for a rally to sell old-crop wheat and start or resume hedging and forward pricing in the 2005 crop.
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