Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
December 14, 2004
There were no big surprises in the December 10 Supply-Demand report from the USDA. The old adage that big crops tend to get bigger did not hold this time with corn crop estimates staying at 11.741 billion bushels and soybeans at 3.150 billion. The huge crops have already done their thing with the estimate of the average cash price for corn for the crop year that extends out to August 31, 2005 in a range of $1.70 to $2.10. The rallies we have seen in the complex across the past several days are primarily technical in nature. There are no big changes in a generally favorable South American weather picture and no significant changes in the level of export inspirations.
The corn or soybeans are in the storage bins by now. I do not like holding grain in storage unpriced, but we have not seen a nice rally to get product that will be held into 2005 as a new tax year for many farmers forward priced. Continue to carry the market risk exposure here as we will watch for better prices. The November 23 high on the January soybeans at $5.62 is nearly $.60 above the low November 11 low at $5.03 and that $5.62 is the first modest price objective I have to forward price stored soybeans. In corn, I would hold long hedges and be adding to long hedge protection if you need it out through 2005. Producers looking for short hedge opportunities need to wait and be patient here. There is nothing to encourage short hedges with the March around $2.05
Wheat prices continue to languish. March Chicago 2005 futures are below $3.00 and the March in Kansas City is around $3.25. When any rally comes in these markets, and the chances are growing smaller with each passing day, they will come from lower levels than I had expected. It is still a matter of corn and soybeans on price lows and it might still be the case that we need some relief from corn and soybeans before wheat can rally. But there is no reason to be doing anything other than looking for a place to lift short hedges in wheat, and I would be careful lifting short hedges on 2005 wheat. I was pushing some pricing in 2005 wheat going back to the first half of 2004, and I would put those off limits and leave them alone until we see how low this wheat market can drift.
Modest cattle sales so far this week are showing $85 as the best price, about the same level at the close of action last week. Asking price in many feed yards are $87 but the volume is likely to move close to $85 this week. Boxed beef values are drifting lower with some of the Choice boxes below $140 again. There is talk about weak movement into consumption in the institutional market, the part of the market for which we have no data. The fresh market demand in the grocery stores is holding up well, but struggling boxed beef prices do suggest that packers are having trouble moving product into all buying channels at higher boxed beef prices.
February live cattle are drifting lower with Tuesday trade around $86.50. There is support in the February across the November 10 low at $85.25. That support should hold and give us a rally again but that will not happen unless the boxed beef values find a short term bottom and stop the current day to day negative price moves. If you lift short hedges on the February around $85.35, you might want to run a sell stop close only order at $85.25 to get you back short if the close is below the $85.25 support plane. In feeder cattle, I continue to watch the long hedge possibilities in the March contract. There will be support across the November 22 low at $95 and I show the same chart pattern this week we looked at last week. Buy a dip toward the $95 level or a close above the trend line, whichever comes first. I would be a little less inclined to use sell stop orders if we dip below the $95 level but would have no problem with that approach. To me, this is a longer run strategy that has solid support in the fundamentals and I am confident we will see this market rally again in early 2005 barring some unexpected shock to the market such as a BSE announcement.
February lean hogs have dipped more than $7.00 off their $77.70 high. Lean hog traders would like to know what and when with regard to the reopening of beef shipments to Japan. Each time we hear an agreement will be reached, the lean hog prices dip. Then, there is a follow-up report that says it will still take time and the hog market rallies again.
On the February and the more distant contracts, we are seeing the possibility of a very useful trend line emerge. Not fully there yet on the February, it is a matter of hooking the October 27 low to the lows that are being developed this week. If the market rallies from the current levels for 2 or 3 days, we can sketch in the trend line and use it to form a big triangle with a flat resistance pane cross the high at $77.70 on the February and a trend line under the market. In this instance, I would definitely favor selling a rally toward the high and not wait on the close below the trend line. When the beef channels open again, and it could be after February before that happens, we could see some significant moves down in lean hogs.
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