Weekly Purcell Agricultural Commodity Market Report

Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
November 9, 2004

The key numbers in the livestock and meat complex are the boxed beef values. Working lower for several days, the Choice boxes may be finding support in the high $120's. We have to see some improvement in those values to keep fed cattle cash prices from drifting lower. Packers turned serious about trying to protect margins last week and reduced operating levels. There is no big backup of cattle in the feedlots to date, but that could happen if we do not see slaughter move back up to more normal levels. In the meantime, the bull market in hogs is running into some obstacles. Boxed pork levels have started to struggle in terms of prices and that has pushed pork processor margins into the red. The picture in pork is much like the one we see in beef and there is growing pressure from the packers to get buying costs down if they cannot push box values up.

I don't think the beef complex will shoot itself in the foot this time around. Historically, some of the biggest price wrecks in the industry have come from feedlots allowing cattle to back up and get too heavy. The dangers are biggest when the cattle would have to be sold at a loss and that is what we are seeing in the sector right now. Across recent weeks we have seen some back and forth on the packer margins but retail prices for the Choice product have continued above $4.00 through September. The 3rd quarter demand index at www.aaec.vt.edu/rilp shows beef demand up 22 percent since it bottomed in 1998 and the year to year change from quarter 3 of 2003 is very strong. I expect his strong demand to hold and if it does, we will work through these short term variations in box volumes and values and in packer margins and not see a huge wreck in this market. Hold short hedges in December and later live cattle futures. The December approached $92 back in July but was down toward $82 in Monday trade. I see no signs of a short-term bottom yet and would be patient and let his market see some improvement in box values and the slaughter levels get back to normal before I would buy back short hedges.

I have a different attitude on the feeder cattle complex. Since I do not expect a major break in fed cattle prices, I think still cheaper corn and the anticipation of the Japanese shipments again some months out will mean feeder cattle will trade higher when this short term stuff gets out of the market. I show the March feeder cattle chart this week and would urge stocker operators and cattle feeders to watch for a chance to get long in the March feeder cattle. Long hedges against the very firm prospects what we will see light cattle at record highs again early in 2005 make a lot of sense and I think they will make you money in the form of pegging cattle prices for cattle you know you will have to buy. Be patient. Let's see some signs of bottoming action before we rush to buy.

The hog market continues to be volatile. The December lean hogs contract has backed off from the early November high of $74.35 but there are no guarantees that it will not go through those highs as it has in the recent past. The waiting game on the Japanese market opening to beef shipments continues to feed uncertainty into pork and the hog complex and exports of pork to Japan continue to offset part of the total elimination of beef shipments. Up against these highs I would continue to want to place short hedge positions in anticipation of more difficult prices in the not distant futures with exactly ³when² just as uncertain as to when the beef shipments to Japan will start again.

Nearby corn futures are around $2 and nearby soybean futures are around $5. There is nothing of consequence that has changed in this market since last week and the week before. We are seeing harvest wind down in huge crops and too much product is being dumped on the ground. There is little reason for these markets to rally and some reason for them to drift still lower with the burden of being forced to sell in a market that doe not have storage and therefore does not need the product. Lift short hedges that are still in place as you harvest the crops. Users can place long hedges now or wait for a few cents lower pieces to peg costs. Follow this general approach in corn, soybeans and soybean meal with little concerns that the market will surge to the upside and get away from you.

The wheat market continues to struggle with the spillover pressure for very low corn and soybean prices. Because I underestimated the size of the corn and soybean crops and did not anticipate the excellent weather right into harvest, I was looking for a bottom on wheat in August and September. Those prior lows did not hold, but I think the double bottom on the December Chicago wheat across the $2.97 lows on October 12 and again on November 4 will be the bottom when we look back at this market. It will have to crawl higher in any price rally and the excellent recent weather on the winter wheat crop is not helping the chances for a rally, but we should see $3.40, possible $3.60, on this chart before it expires. Be patient and I would prefer to be off short hedges at this point in time while we watch for better prices to re-price or sell old crop wheat and start or add to forward pricing on the 2005 crop.

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