Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
April 26, 2005
I noticed a story on the internet about the grain and oilseed markets and it was titled "Waiting for May". That could truly be said of the markets as we move into the last week of April. There is not much to move the markets. The talk of rust in soybeans, dry weather in China, and the big bounce in the soybean markets are losing their clout. It will take continued wet weather in the Midwest and the prospects of some serious delays in getting the corn and soybean crop in the ground to move the markets in a significant way.
If weather is normal, I think we will see December corn below $2.00, November soybeans below $5.00, and July wheat in both Chicago and Kansas City below $3.00. If those are the likely price developments barring something unusual, then certain price risk management moves are in order. Without question, the November soybeans need to be sold or a rally toward the $6.50 high or when the market closes below the steep trend line I show on the chart if the $6.50 resistance plane is not challenged. I pay attention to the ending stocks at the world level. Prior to this year, the record ending stocks for soybeans at the world level was 40.75 million metric tons (mmt) in crop year 2002/2003. In February of this year, the USDA was estimating the ending stocks for this crop year at 61.35 mmt. That number came down to the April 10 report estimate of 52.59 mmt. The U. S. markets were too excited as the weather damaged the South American crop. The 52.59 mmt is still 29% above the prior record stocks and a number as large as 52.59 suggests cash prices in the U. S. could average below $5.00 this year. It is a global market and if we needed reminding of that fact, we have the recent CBOT announcement that they will start to trade South American soybean futures. In the face of all this, Monday's rally to $6.42 by the November contract looks attractive.
The outlook for corn may be even more bearish in the U. S. where ending stocks in the April 8 USDA report were a huge 2.2 billion bushels. With acreage up again this year, it is likely that the 2005 crop will be above usage and ending stocks will increase again. Eventually, we may see increased use in ethanol applications help restore a balance but it will not happen this year. I would sell December corn starting at $2.40 if we get a rally and would be very aggressive as we approach the March high near $2.50. We got $2.40 on the December corn Monday, within a fraction of a cent of the March 31 high, and then saw a very weak close near the low for the day. There will be a mass of sell orders waiting on the market to rally toward these resistance planes, especially the $2.50 level, so be willing to sell a few cents below that level to help assure you will get a fill. If you are pricing in a cash contract, find out what basis adjustment your buyer is using and place an order accordingly. If the basis is -$.15, then instructions to contract at $2.32 is the equivalent of selling futures at $2.47. If an order to sell futures at $2.50 is not filled due to massive selling just below that level, then your cash contract "order" to price at $2.35 would not be filled.
Sell the July wheat starting at $3.30 and better if the market can rally. There is a chart gap near $3.40 on the Chicago chart and I would be aggressive at that level. I wrote this before seeing final action on Monday and the high on Monday was exactly $3.40. Anything approaching $3.40 on the July Kansas City would be a 50% correction of the price break from $3.70 down to $3.10 and will be sold by traders round the world if there is any sign of faltering on a price rally. The high on Monday was $3.43 and the rally did get sold and sold hard. We now have recent highs at $3.40 in Chicago and $3.443 in Kansas City with which to work. Sell these markets on rallies back to those highs, especially since the markets closed well below those levels on Monday and are making no attempt to challenge the highs again in Tuesday trade.
Cash cattle were as high as $94 late last week and may go higher this week with help from stronger boxed beef and generally positive numbers in the April 22 Cattle on Feed report. . The expiring April futures are around $92 and the next actively traded contract is June and it closed the week at $85.72. To date, cattle slaughter is running over 4.0% below last year, so reduced supplies are helping keep prices up. The USDA in April 8 reports was predicting second quarter beef production at 6.525 billion lbs, up 4.3% from the 2004 6.253 billion but that increase is not happening. The question is whether any increase will just get delayed to the end of this quarter and into the third quarter. The continued price strength is also countering the naysayers who keep finding something wrong with the indicators that demand is in good shape. Still, the early 2005 cattle placements were big cattle and they will start to come to market in the June to August period and that keeps me alert. June has an early March high of $87.70 and I suspect that June futures will increase across the next few weeks and that cash prices will start to moderate and move lower. Sell rallies toward that $87.70 level and be prepared, if need be, to answer a margin call or two or use the trend line across the late February and mid-April levels and wait for a close below that line to sell. Remember, two consecutive closes above the $87.70 high means the market is going higher and selective hedgers will buy back short hedges if new highs are made.
August feeder cattle make a new high at $108.80 by a few cents last week and moved up again on Monday. . I have been suggesting that short hedges around the old highs near $108.50 will be okay and I still think so. If you want to let this market run to the upside, use a trend line hooking the $105.05 low on April 8 and the $107.60 low on April 22.
Cash hogs show a weighted average price near $70. With the June up to $82 on March 7 and approaching $82 again around April 4, I felt the premium in the June futures was too big. Cash hogs show a major seasonal pattern with the prices in June and July as much as 10% above March-April prices when he fall pig crop comes to the market as slaughter hogs and also above October-November when the spring pig crop pushes daily slaughter levels to yearly highs. Expecting a $70 market to move up to an $82 market was too much and there was no compelling reason to expect cash prices to go still higher. I had thought in the face of all this that short hedges up around $82 made sense and the April 4 move up to $81.55 was a classic case of selling a rally back up toward the old contract of $82.20. And note that the sell order had to be $.65 off the contact high to be filled. When the potential sellers, hedgers and speculators, are so anxious to get short that they are selling $.65 off the high we have a useful piece of information. The bullish bloom is coming off this market.
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