Weekly Purcell Agricultural Commodity Market Report

Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
March 1, 2005

The grain and oilseed markets have surprised me. We forget, sometimes, that these markets are so prone to over reaction to a modest change in the fundamental supply demand balance. This major price surge in soybeans has been prompted largely by dry weather and expectations for dry weather in South America in general an d Brazil in particular. But the price outlook does not change that much from the very bearish tone we were dealing with earlier in the year. With production of soybeans in South America in the 3.4 billion bushel area the ending stocks at the world level were being estimated in the area of 60 million metric tons, well above the prior record near 38 million metric tons. If we had a 10 percent decrease in production in South America and we assume it all shows up as a reduction in ending stocks, that would be about a 9 million metric ton decrease in ending stocks at the world level-----and we are at 51 million vs. the prior record of 38 million metric tons in ending or carryover stocks. That simply does no merit to a $1.25 rally in the old crop May futures or a $1.00 in the new crop November.

Sell the new crop November soybeans aggressively $6.20 to $6.25 range. The September high near $6.26 will be major resistance for this market. I would clean out the bins and sell any and all old crop product here at these price levels. I cannot quite believe I am seeing the $6.20 level on the November but it is here and we should take advantage. And since wheat has rallied with soybeans, take advantage. Sell the July Chicago in the $3.48 to $3.55 range and the July Kansas City in the $3.45 to $3.50 range. If you are comfortable with a selective hedging approach, cover essentially all of your normal crop with the expectation that we will see this maker move back down toward the lows as we move through the yield setting period of March and early April. If you are pricing via cash contracts, you should have at least 50 percent priced at these prices.

These moves up in the soybeans and in wheat did not do much for the corn market. The old crop March and May contracts are up around the highs that were put in late last year and are about $.15 above the life of contract lows. The new crop December is around $2.40. This is not enough for me to be quick to sell these markers as producers to place short hedges or to sell and take profits form long hedges if a corn user. We will see more volatility and more opportunity in this market later. If anything, I would sell old crop corn held in storage and cut of the storage cots. Let's wait on short hedges on the new crop and hold long hedges until we see bigger rallies than this $.15 off the lows.

Limited cash cattle sales are $87 to $88 and about where trade quit late last week. Boxed beef values for Choice beef are back above $140 and feed yards look current and are asking $90 for cattle this week. With the March 7 date for the Canadian border just ahead, I would stay on short hedges on the nearby April live cattle contract and wait on better prices on the June and later contracts. We will not see a horde of cattle cross the border when and if the border is opened again, and I expect the flow to ramp up to about 5% of our kill across a few months with no dramatic price impacts unless there is some shock related to this that I am not seeing. I would continue to hold long hedges in March feeder cattle and work toward long hedge postures on the August on any price dips. Looking ahead, I see higher prices for calves and feeder cattle and want to place long hedges against that expectation.

Generally sound demand and less than burdensome supplies are boosting the hog complex, especially the distant futures contacts. The summer contracts started making new contract highs on Monday and continue that impressive performance in Tuesday's session. Sketch a resistance plane across the January 18 high at $78.60 on the April lean hog futures and a trend line connecting the October 27 low and the February 15 low and you have this market "trapped" in a big triangle. I always want to sell rallies to the highs, but you can let the market tell you which way it will break out of the triangle and place short hedges only if you see a close below the trend line. These are very profitable prices in hogs and this favorable price outlook will eventually start to bring some cyclical expansion.

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