Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
January 11, 2005
In the last report, we were watching the March feeder cattle for a buy signal to place long hedges against spring feeder cattle or calf needs. The idea was to buy a dip toward the November lows near $95 or buy on a close above the trend line I show on the chart. The close above the line is shown in a circle on the chart. That strategy was working until the announcement about 10 days back that the Canadian border was going to be opened for cattle movement again on March 7. The result was a dip to the $96 level and below, but the market is showing gains again this week on talk the border opening will be delayed due to the new BSE issue in Canada and on huge moves up in the boxed beef values. We have seen an $8.39 jump since last Wednesday on the 600-900 Choice boxes with $4.44 of that increase since last Friday. I like long positions in the spring feeder cattle and recognize the markets could be volatile as the BSE and the border opening issues get worked out.
February live cattle futures could challenge the contract highs at $92 again and any move up toward that high should be sold as an excellent chance at short hedges. Cash cattle were as high as $88.50 late last week and the talk is of feedlots asking $91.00 this week, but they may not get $91 as the packers continue to slow the lines in the face of margins that are difficult at best. Each time I talk about the strong demand for beef as documented in the last quarterly index number at www.aaec.vt.edu/rilp, I have my critics who say "no, demand is weak in the institutions market." Then, every time the market tries to trade lower, the consumer level demand comes through and the box values surge. I do not believe that the fresh market is paying up for the boxes this week and the institutions in the form of restaurants, hotels, etc. are getting the same product cheaper. I don't think it works that way. And related to all this, we are looking at nearly a $10 discount in the June live cattle futures in spite of the continued strength in demand and every indication we could be looking at a smaller slaughter as we see the herd building start this year and the heifer numbers in the feedlots decline. I would not think about short hedges here beyond the nearby contracts and would be inclined to buy the mid-year live cattle futures as long hedges if I were a packer.
Weighted average cash carcass hog prices are above $72 as this market continues its long run of profitable prices. The late December report was bullish to the distant contracts on the lean hog futures board with none of the expected levels of expansion in the breeding herd showing up in the report. The February futures backed off a bit on numbers that suggested the January-February slaughter would be bigger than we had expected, but it is rallying again as the cash market continues to be strong and the product continues to go into the export channels to Japan with a related continuing boost in overall pork demand. The June contract, which should be 6 to 8 percent about the February in the normal seasonal pattern, is around $78 after jumping $4.00 after the bullish report. Let these more distant contacts run to the upside since I see no reason for a major break even if the beef shipments to Japan are resumed by mid year. Selling the February up against its high at $77.72 makes sense, but I would wait on the more distant contracts.
The grains and oilseeds are waiting on the January 12 USDA report. There is some talk that the soybean ending stocks could be reduced slightly with a small increase in the export estimate, but that will not be a major market mover. The small rally in the March soybeans last week and Monday came on increasing open interest on most "up" days and that suggests new long positions are being established, one component of at least a short term bottom. I would like to see the March challenge the early September chart gap near $6.00 before getting excited about selling in this market. A rally of that magnitude in the March could carry the November 2005 up toward its November high just below $5.95 and that will be the first target to resume or start forward pricing on 2005 soybeans for lots of traders. Producers holding short hedges at much higher prices from the spring of 2004 when multiple year hedging was being recommended might look at a dip to the lows as a chance to take profits with the idea of replacing the hedges on the next rally.
Corn is struggling. If this March futures dips below $2.00 again, we could see more downside. I doubt we will see anything in the report on Wednesday that causes that type of price dip, so the pattern of sideways trading is likely to last for some time. Users of corn who still have not placed long hedges ought to step up here and get protection out through the 2005 year. There is only limited chance of seeing significantly lower prices, and there is a small but positive chance that weather could add significantly to corn price and corn costs during the coming year.
The Kansas City wheat market rallied almost $0.20 in the July contact last week, but the rally in Kansas City and in Chicago came on declining open interest, so we are likely looking at a technically induced short covering rally in wheat. Down-trend lines hooking the September and November highs show that we are still in a down trend (still below the line) in both Kansas City and in Chicago. When we see a close above that down-trend line in each market and we will see that within the next month, that buy signal might propel the markets up enough to start thinking about the 2005 crop. On the Kansas City July, we will see selling in the chart gaps at $3.40 and $3.45 and then major resistance across the October and November highs just above $3.50. That would be my first objective in that market. In Chicago, there is a chart gap just below $3.40, and the November high is just below $3.45. Both levels will provide resistance so the price levels at the first reasonable hedging opportunity in Kansas City and in Chicago are nearly the same.
