Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
February 8, 2005
There are no signs of life in the grain and oilseed markets. With March corn sinking below $2.00 and March soybeans poised to break down through $5.00, the markets are telling us that all is well in South America in terms of weather and crop development. July wheat in Chicago and in Kansas City are around $3.05 and if we do not get weather developments in the Southwest during March, both markets are likely to fall well below $3.00 as corn and soybeans drag wheat lower.
In corn and in soybeans, I am watching the March contracts since any signals often come on the actively traded nearby futures first. I show the March corn this week with resistance planes near $2.10, $2.20 and then major resistance across the late summer highs near $2.50. The March will be sold on rallies to each of these successive levels so if you are looking for cash contracts on the new crop corn or want to sell the new-crop December futures, then look to take action on a rally by the March to the next layer of resistance. I would be inclined to carry the risk in the cash market until we see the $2.20 resistance challenged but would be an aggressive seller if we see a challenge of the $2.50 level. That type of rally is not likely to show up in time for it to occur on the March futures since it would take a surprise in the later March Prospective Plantings report or weather issues later as we approach planting to get a rally of that magnitude. Users of corn should be long corn futures spread across the 2005 year and I would consider moving out into 2006 as well if you know you will be buying corn in 2006. On the March soybeans, there are layers of resistance before we reach significant resistance across the late November highs near $5.65 and then we have resistance near the bottom of an early September chart gap just above $6.00. We need to watch here just as we will have to watch for better opportunities on rallies in corn.
If we do not see developments in wheat soon, we need to lower pricing objectives and get more aggressive with short hedges. My first upside objective on the Kansas City July is now across the late December and early January highs in the low to mid-$3.30's. In Chicago, those same dates show highs near $3.25. As a selective hedger, I would sell on rallies to those objectives with the idea that the markets are very likely to correct back down toward the lows at least once before they can go higher. It will take significant weather issues to get us above those late December and early January highs and penetrate the selling pressure that will emerge if we can rally to those levels, so selling that rally is likely to work.
June live cattle continue to trade up relative to the nearby contracts. Boxed beef values have faltered across the past two weeks but have turned to the upside again. Cash cattle were at $91 on Friday and we have seen limited sales at $91 on a live basis in early week activity. On the June futures, you can draw a trend line across the late November and early January lows and let this market continue its climb to the upside. I would not place short hedges here until we see a close below the trend line or a challenge of contract highs at $84.50, and I believe this market can and will eventually take out the $84.50 high as we move toward June.
The March feeder cattle are holding around the $100 level for the time being and I still like long hedges in this market. If June and the later live cattle contracts can continue to climb back up after dipping from the recent bearish cattle on feed placements number, then the March feeder cattle can challenge its highs above $105. It is corn costs and the prices for the distant live cattle contracts that drive pricing in the nearby feeder cattle futures, and corn looks cheap and slaughter cattle prices look to be high as we move through this year.
Lean hogs showed nice gains in Monday trade, especially the summer contracts but then traded lower on Tuesday. The July contract has been less than $1.00 from its $75.40 contract high and I suspect this high will be taken out either on a February rally or after we get through any seasonal weakness in March and April. The fall pig crop comes to the market during March and April with a seasonal increase in daily slaughter levels compared to February levels. Very profitable prices are being offered. The risk in this market is that we will see a major price decline when the Japanese market is opened to beef again and the exports of pork dip accordingly, so having and holding profitable short hedges makes sense.
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