Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
November 23, 2004
The grain and oilseed markets are marking time and wanting to get past harvest pressure. The modest rally in soybeans has run out of steam already and was coming primarily from some news that rust has now been detected in 5 states. Export inspections in soybeans were decent last week, weak in corn. The wheat market continues to struggle as corn prices move back down toward their lows and we get word that China is buying wheat from Australia with none of the sale coming from the U. S.
Strategies need to be the same as in recent weeks which involve watching and monitoring for opportunities. We need to see a decent rally in wheat before doing anything in the old crop or new crop 2005 wheat. In corn and in soybeans, it is a matter of lifting short hedges as the harvest moves toward completion. Users of soybeans, soybean meal, and corn should have long hedges in place or be prepared to move out through 2005 with protection on dips back toward the lows. The urgency to get soybean and soybean meal cost protection by buying futures is inching up slightly due to the developing story on rust in soybean fields. And I would buy futures rather than buy call options. We are near historic lows so buying a call to benefit from still lower prices is not the way to go. With the need for protection extending out through 2005, the time value part of call option premiums is big and the option premiums are above levels I would be considering.
Lots of uncertainty in the meats. No final results on the BSE tests as of noon on Tuesday. Bids for fed cattle are scarce and mostly in the $78-79 range. Some of the Choice boxed beef weights had small positive changes for Tuesday morning and most of the Choice boxes are in the $136 to $138 range, well above levels of 10 days or so back when the market dipped into the $120's. The processes in opening the Japanese market to our beef and in opening the U. S. to shipments of cattle from Canada move slowly and appear to be months in the future.
Slaughter levels have increased as packers look beyond the Thanksgiving break and into the extended holiday period with what appears to be optimism. Part of this willingness to boost daily slaughter levels may be coming from the lower cash cattle prices that accompanied the announcements of inconclusive BSE tests last week. Cattle coming out of the feedlots during October have been estimated to lose $103 on average per head, a period of negative feeding margins that had been widely anticipated and the numbers will not look good for November or December. In net, there is renewed enthusiasm that all these issues will work themselves out and we will be able to go back to positive trends tied to the continued strong demand for beef. In the short run across weeks and even across days, there can be slow movement or other changes that might be nothing more than short run changes in orders at retail and expansions and contractions of the packer margins as the large packers struggle to keep margins positive. We were hearing that type of volatility called ³struggling demand² into September and what consumers were actually doing was paying record high prices for a quarterly per capita offering of beef that was up slightly from last year. The demand index for quarter 3 was at 127 (www.aaec.vt.edu/rilp) and showed demand up 27 percent since the bottom in 1998 and the percentage change from 2003 to 2004, quarter 3, was up a robust 9.4. So, keep in mind the fact that demand is growing strongly as new products hit the market and we continue to make progress in solving long standing problems like toughness in the fresh beef offering.
These price patterns are volatile and nothing much works when the market is being hit by BSE news or similar unexpected shocks. December live cattle look like they will try to rally toward $90 again and they are carrying the February higher as well. I have always been interested in being a seller across all those September highs around $90 on the December and I would continue that suggestion and would look at the February at the same time. Any opening of beef to Japan will be later than February, it appears. Sources of strength in this market are not immediately apparent given the recent cattle on feed report with was no big surprise and the continued uncertainty surrounding the BSE tests. The strong moves up in live cattle futures on Tuesday suggest to me that the tests are expected to be negative, saying there are no new cases of BSE and the market it being bid up in front of that news.
Feeder cattle futures did see a price dip but I did not expect it to be associated with a BSE scare. The March feeder cattle have dipped to $95 on Monday and it looks liked the downside price dip is done. If that is right, buying on dips back toward $95 to place long hedges make sense. But with all the uncertainty, you might want to note the steep trend line I show on the chart and wait and buy on a close above that line.
Cash hog prices are declining and packers are trying to buy hogs cheaper to get their margins in better shape. If the daily slaughter levels stay high, they are likely to have some success as we move through a period in which turkey tends to be the entree of choice. With December lean hogs at $75 and better, I would continue to want to have short hedges in place in late 2004 and early 2005 hogs. Later in 2005, it is likely that the beef channels to Japan will be open again and that will take demand away from pork. With the December at $75, the July 2005 lean hog futures are $4 to $5 lower, a very unusual pattern. In the normal year, there is about a 10 percent decline in hog prices from December to July. The unusual pattern being shown this year is indirect testimony to how important the increased export buying of pork in Japan, with the beef channels closed, has been to the pork and hog sectors.
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