Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
January 25, 2005
The January 21 report took some of the bullish shine off the cattle markets. Placements into feedyards were up 5% from last year's December placements, and this number was nearly 7 percent above average pre-report estimates. The more distant futures contracts took a hit, and I had been touting waiting on short hedges on the June and all of the later contracts. It appears that the recent move to positive finishing margins for some cattle coming our of the feedyards and the bullish tone coming from the combined herd building and increased beef demand we will see this year prompted lots of placements. I am showing the June live cattle futures this week. The June contract has a bright spot in the form of the close on Monday. During the day, the market traded down to the $81 level and below but then closed near the middle of the trading range for the day, and this was not a weak close. I continue to look for better than these low prices on the June contract. The market is trading higher on Tuesday. Hold short hedges in the nearby February live cattle if you placed them on the recent rally to $92, and wait on the later contracts. I have the demand index for quarter 4 of 2004 up at www.aaec.vt.edu/rilp and the numbers show a modest increase over quarter 4 of 2003. Pre report expectations suggest the important January 1 inventory report will show small increases in total numbers and in the beef cow herd when it comes out Friday, January 28. If we do see signs of herd building after nearly 10 years of liquidation, that makes the price outlook even more positive as growth in beef supplies are constrained by heifers moving into the breeding herd.
I continue to like long hedge positions in the March feeder cattle, and the next scenario we need to start watching is the August contract. The late December contract low on the August is just below $96.00, and I think a dip toward that level needs to be bought. I see a positive outlook for fed cattle and nothing but cheap corn in the foreseeable future and that translates into strong prices for feeder cattle as we go through this year.
Some of the distant lean hog contracts are making new highs as the market starts to register the seasonal pattern that normally shows prices in the summer 10 percent or more above January prices. I expected this and continue to recommend waiting on the summer contracts to place short hedges. You can hook the December lows and the lows last week and sketch an uptrend line to tell when you should place short hedges on the June futures, for example. A bit less aggressive strategy would involve hooking the lows in late October and the lows in December and using the longer term and flatter uptrend line. Wait until you see a close below that line before placing short hedges. It is always about managing your exposure to price risk and I would want to let these markets run to the upside as far as they can before hedging. Right now, carry the risk in the cash market because I think these are going to be profitable markets as we move toward the summer months.
March soybeans came into the week only $.10 above the contract lows of $5.10. Rain in South America was less than expected over the weekend, and we will see choppy markets as we start to watch the weather in Brazil and other producing areas in South America. It appears that Brazil and China are working out some buy-sell arrangements, but it is not necessarily bearish to our market that China is not coming more aggressively to the U. S. The important point is that buying in the world market needs to stay active and strong. The November futures made new contract lows at $5.32 last Friday and the trend in the new crop price picture is down with the modest rally that is developing on Tuesday shaping up as a short run and perhaps short covering rally. We will see rallies as we move toward the later March Prospective plantings report and the talk about rust problems during production heats up. Let's be patient in this market. I don't want to be selling now on the lows prices we have seen recently.
The huge crop, the ending stocks now estimated at nearly 2 billion bushels, and the lingering issues surrounding storing this mammoth crop are keeping corn prices under wraps. The heavy placements of cattle into feedyards during December help a bit since it will tend to boost usage but the supply side pressure in corn is overwhelming any modest developments on the demand side. March futures are working lower at price levels below $2.00 and the new-crop December 2005 made new lows last week near $2.27. There is every reason here to be long in corn futures at these price levels if you are a corn user in dairy, cattle, or poultry programs but there is no reason to buy put potions or sell futures at these price levels.
Egypt bought U. S. wheat recently and the weather is said to be too wet on the new crop, but the Kansas City July futures made a new low near $3.13 and the July Chicago is trading below $3.10. If the trends in corn and soybeans continue to be down, we will see these wheat markets trade below $3.00. It appears we will need some weather problems during the growing and head-filling weeks to get this market turned higher but I do think we will see better prices and would wait for a rally. My objectives in the report from two weeks back were all in the $3.35 to $3.50 range in both Chicago and Kansas City. We may have to trim those objectives back a bit, but the best advice is to hold short hedges you have in place and wait for some bottoming actions to look at taking profits on short hedges and to then look for some rally to place new short hedges or replace any hedges you bought back on signs of a bottom.
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