Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
February 1, 2005
The corn market is showing no signs of even a short term bottom. The March futures are down to $1.95 and the new-crop December is around $2.27. In some areas of the Midwest that are not close to processors or rail shipments or barge movements, the cash-futures basis is -$.30 to -$.40 or weaker, so the new crop corn is being priced well below $2.00 to some producers. That is not often seen this early in the year before the crop is even planned and planted but things are different this year. We are coming off a record 11.8 billion bushel crop that is above the prior record crop by some 1.6 billion bushels, and that is very unusual. Hold short hedges in 2005 corn that were placed in the first half of 2004 and we will look for a modest price rally and wait on added short hedges. High fertilizer prices tend to run acreage out of corn and into soybeans, but the rust issue in soybeans this year will stop some of that transfer. We are likely to see a bigger acreage this year and another huge corn crop but not another 11.8 billion bushel crop. Long hedges on corn at these price levels near historic lows make sense even though the chances of significant increases in corn prices and corn costs to dairy, livestock, and poultry producers during this year are small.
The soybean market looks like the corn. The March futures are near $5.10 and trending lower and I think we will see March prices below $5.00. The new-crop November futures are down to the $5.30 level and $5.30 in November futures prices soybeans in some parts of states like Minnesota around $4.25 since the basis at harvest can be weaker than -$1.00. The crop in excess of 3.1 billion bushels and the related surge in ending stocks to above 400 million bushels shocked this market and reversed the high prices we were seeing last year at this time. The need last year in early February was to be willing to step up and establish cash contract and short hedge prices above $6.00. The need this year is to have patience and wait for price rallies. There will be talk about rust problems and weather gyrations in South America and there will be price rallies. There are December highs near $5.75 on the November futures contract and that would be a chance to add to price protection in this soybean market.
The wheat market is making new lows in Chicago with the July futures headed below the $3.00 level. The crop size and ending stock picture in wheat is not as bearish as in corn and soybeans but the wheat market has not been able to sustain any rally with each attempt to show better prices being aborted by still lower prices in corn and in soybeans. The July Kansas City futures are now about equal prices in Chicago and they too appear to be headed lower. The December high near $3.35 on the Kansas City July is now the first rally objective and the first chance to add to short hedges in wheat at decent prices. But even that level will take some weather concerns on the hard red winter wheat crop as we move though March and April and the yield-setting phase of crop growth. I hope you have short hedges from 2004 in this market and let's see a decent rally before adding to hedge protection. Unless we get some bearish surprises in the Prospective Plantings report at the end of March, we should be able to muster a rally in wheat.
Boxed beef cutout values were down all last week, losing some $9.00 per cwt. in total for the week. Feedyards passed some $88 bids early in the week and then sold some of those same cattle as low as $86 late in the week. The demand index for quarter 4 at www.aaec.vt.edu/rilp showed a year to year demand increase of 7.7% but not all of that reached the live cattle market. Packer margins were lower than year earlier levels during the quarter but retailer margins appeared to increase at an annual rate of 5 to 6 percent and the total producer to retail price spread increased for the year. When price spreads extracted by the middlemen are increasing, the only way the producer level prices can increase is if the demand increases are robust and retail prices are increasing at a faster rate than the price spreads. But expanding middlemen margins is the norm and not the exception in beef. The wholesale to retail price spread in beef, which is a proxy for the retailers' total margin which include their costs and their profits, have worked higher after adjusting for inflation for the past 30 years. Look for February live cattle futures to try to rally above $90 again and I continue to like short hedges on rallies in these nearby futures. Do the same thing in the April futures if you see a rally toward the contract high just above $90. Don't price the June cattle with those June futures around $82. Friday's inventory report shows cattle inventories up 1.0% and heifers held for beef cow replacement up more than 4.0%, confirming that after about 9 years of liquidation, we are moving into herd building again. That will tend to support the cattle prices in mid-year and beyond and I continue to expect to see demand increases as the array of new quality controlled beef products-both fresh and pre-cooked-continues to grow.
Continue to hold long positions and long hedges in March feeder cattle. That market is near $100 with a contract high near $105. Corn is cheap and getting cheaper and I obviously expect the June and later live cattle futures to trade higher so new highs are not out of the question in feeder cattle. And we need to start watching for the same long hedge strategy in the August feeder cattle futures.
In lean hogs, let the recent correction to the downside run its course and watch for another rally to start. Then, sketch a trend line across the lows in December and the new low that will be left when the rally starts again, likely to happen within the next week. Sketch a flat resistance plane across the contract high and either sell a rally toward the high or sell a close below the trend line if that comes first. I see some signs of divergence in the February and April lean hog futures with the RSI failing to make a new high when the prices made the new high in mid-January. That suggests a top is coming and we need to be alert to chances to set short hedges in this market.
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