Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
November 16, 2004
I did not look at my own web site and cited the beef demand index wrong last week. Since the bottom in 1998, demand for third quarter is up 27 percent, not the 22 used last week. This is important because we need to see that demand strength manifest itself again if the boxed beef values are to go higher and let packers pay more for fed cattle. The buying support in the boxed values did hold in the high $120's for the Choice grade boxes and we are back up to $136-137 on Tuesday morning, November 16. It was anticipation of better box prices that was behind the fed cattle prices late last week that jumped as much as $3 to $85 for a limited number of cattle that would grade high Choice. Futures jumped higher last Thursday as the surprising strength in the cash market made the rounds and the December futures are $4 above the recent daily low of $82.20. Cash hog prices are back in the high $70's, continuing testimony to the importance of robust export shipments and to strong domestic demand. The season has not been normal at all for hogs with the expected 4th quarter price swoon completely missing this year. Feeder cattle futures are not as strong as live cattle or lean hogs but I expected that as the cattle coming out of the feedlots continue to show losses and take equity out of the feedlot complex.
December live cattle can rally back up toward $89 and the February can move up toward $90 before running into selling across recent highs. I would look at replacing short hedges on rallies of that magnitude, and if the December starts to struggle at lower prices, you may need to get more aggressive. I do not believe the Japanese market will be open until well into 2005, too late to help the December and February markets. The hog market continues to surprise me with its upside ability. December lean hog futures are back above $75 and the distant hog futures such as the July are well above $70 and moving higher. It is a matter of watching chart patterns here for some signs of topping and replacing short hedges at levels that make the profits too good to pass. Keep in mind that when the beef to Japan thing finally gets cleared up, that will take some of the wind out of the sails in this recurring bull market in hogs.
I show the March feeder cattle again this week and highlight the big opportunity that may be coming in the opportunity to place long hedges in feeder cattle. Both the live cattle and lean hog futures will correct to the downside across the next few weeks and that may push the March feeder cattle down another step, perhaps down to the $95 level or lower. What I see on the chart this week looks like a bear flag, suggesting lower prices are in front of us. Let's be patient and not pick bottoms here. On a day that the market pushes down to new day to day lows and then closes higher for the day, we may be looking at a buy signal that is worth considering. I think the feeder cattle in February and March with be priced based on fed cattle market prices after Japan is open again, and I do expect to see this March contract well above $100 again.
Big crops do get bigger. The estimate for corn is up to 11.741 billion bushels and most of that increase went into estimates of ending stocks which moved up to 1.818 billion bushels. Average yields are estimated to be a whopping 160.2 bushels per acre. The soybean crop estimate jumped from 3.107 billion to 3.150 billion and U. S. ending stock estimates moved from 405 to a large 460 million bushels. World ending stocks in soybeans are pegged at a record high 61.40 million metric tons, some 20 million metric tons above the prior record.
Much of this report was in the market and we have not seen major moves in price for corn or soybeans. December corn is near $2.00 after trading below $2.00 on October 12 and again on November 12. November soybeans are around $5.20, up from the 2004 low of $5.01 on November 11. It is hard to shake the thought that as the harvest moves to completion and more of the product is ³stored² on the ground that we will see still lower prices, but the futures market is an anticipatory market. Futures traders know the bearish measures and they have not been able to pound the market down from $5.00 on November soybeans and $2.00 on December corn. There are actually bullish thoughts from current price levels in the minds of some who are seeing significant corn go into ethanol production and hearing all the talk of soy diesel fuels. Sometimes, we don't need much to start to turn bullish from historic low levels.
I am not bullish but the way the market handled the report with the increases in crop size and the ending stock estimates is suggesting that users might think about getting long hedges established out through 2005 in corn, soybeans and soybean meal. This also means it is time to buy back futures if you have held the short positions a few days after the corn or soybeans have been harvested. It appears that significantly lower prices in corn and soybeans are not very likely and users can get costs established near historic lows. It is hard to go wrong doing that over time.
Wheat prices have not been able to sustain any increases. The report did not change things very much in wheat and it is a matter, I think, of getting past the long standing pressure from corn and soybeans and finding some reason for higher prices in wheat. Neither corn nor soybeans will stay at the harvest lows. There will be some slow and painful climbing to higher prices as we get past the specter of grain on the ground and feed usage and other uses start to increase the rate of usage because the prices are so low. Feeing rates will go up in hogs, cattle, and the dairy sector with corn this cheap and available and if fuel alternatives like ethanol and soy diesel are to ever work in terms of cash flowing, it is when oil prices are high in the world market and corn is cheap. And we need to remember that once the investments in ethanol production are made, whether subsidized or not, the investments become fixed costs and cannot be easily reversed. The usage of corn will continue even if price of corn go back up to make ethanol production look less profitable. All this influences the wheat market. December Chicago what needs to get back up to the late summer highs near $3.40 before I will start to think about selling in this old crop market or adding to pricing of new crop 2005 what. Let's watch and wait here.
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