Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
March 29, 2005
Fed cattle were as high as $92 and $150 in carcass trade late last week, and it appears the feedlots will try to hold for at least that much this week. Choice boxed beef values are under $150 again so packers will have a hard time paying the higher prices. The pace of the slaughter will be slower this week and it will get slower still if the packers cannot see some improvement in their margins. All this is an alert to the potential short hedger and should prompt hedge selling on a rally toward the March 9 high of $87.70 on the June futures contract.
August feeder cattle surged to new highs near $107 on Monday and traded still higher in Tuesday's session. With the break out of the triangle on the chart to the upside, those holding long hedges who did not take profits near $106 should let this market run to the upside. We have a nice trend line hooking lows in early March with the dip early last week as a safety net. If you did decide to hold long hedges and see what upside potential is left, you can use this trend line and a close below the line as an indication the price trend has turned down. I would surely exit long hedges and place short hedges on a close below the trend line. If the momentum of this week lasts a few more days, we could see significantly higher prices before we get a trend line sell signal.
The quarterly Hogs and Pigs report showed total inventory and market hogs up from last year, but the "kept for breeding" category was still at or slightly below last year. The excellent prices for the past several months have not, at least not yet, prompted an expansion in breeding hog numbers. That expansion will eventually come, but until it shows up and is confirmed by a quarterly report, the hog business should continue to be profitable and the futures market will offer decent prices. We have a chance to see the June futures back up toward the early March highs near $82 and that translates into nice cash flows for the well run hog operation. I would sell a rally toward the $82.20 high from March 7 on the June lean hog futures. If you are not willing to be that aggressive on a rally, keep the trend line on the chart and be prepared to act if this market runs into trouble and turns down.
Thursday's USDA reports will determine direction in the grain and oilseed markets. Acreage in corn is expected to be up 1.5 million acres to 82.4 million with soybean acreage down 1.8 million acres from last year's 75.2 million acres. The unexpected price surge in soybeans across the past few weeks may be pulling some acreage back to soybeans and we are already looking at a record large set of ending stocks at the global level where price is increasingly determined.
The wheat and soybeans charts show a recent surge to high prices and then a correction to the downside that is still going on. When these corrections run their course and the markets rally again, we have the comfortable scenario of resistance across recent highs at $6.50 on the November soybeans and at $3.70 AND $3.76 on the July K C and Chicago wheat futures respectively with a trend line under the markets providing backup and a safety net in terms of prices. I would suggest selling the rallies toward the highs in the interest of better hedge price levels and not wait on the trend line sell signals. But for producers who are reluctant to sell on the up markets that are involved on the rallies back to the highs, stay with the trend lines. A reasonable strategy here that some will like is to let the market rally with the hope it will make new highs and sell eventually when there is a close below the trend line at higher prices than we have in place this week.
The May and December corn futures put in recent highs near $2.31 and $2.50 respectively and then closed below the trend lines we had shown on the charts. I expected this pattern and wanted the long hedgers to buy the dips after the trend line was broken with producers waiting and looking for rallies toward the highs before placing short hedges again. The Prospective Plantings report on Thursday might bring a surprise to corn, but I rather expect it to be bearish and not bullish in nature. Even if the expectations for acreage are about right, we are heading for a huge crop likely to be well in excess of 10 billion bushels and that will make it hard to use more corn that we produce and pull stocks down. Hold long hedges and watch for a rally back toward $2.50 to replace short hedges on the 2005 corn.
Download Purcell in PDF format