Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
May 31, 2005
Grains and oilseeds opened higher Tuesday reflecting the lack of significant rainfall across the long weekend. States like Illinois received very little rain and the forecasts for better conditions across the next 5-7 days may not get much attention since recent forecasts have not panned out. But the markets could not hold the opening gains. We are in the middle of a weather market, which means that chart-based resistance planes may not always stop the market in the presence of what looks like big speculative fund buying. Remember, the market has to honor the fundamentals and no technical or chart consideration can void that rule. If the weather stays dry, then the bearish stock picture at the world level in soybeans, for example, will be offset somewhat by the prospects of smaller than expected crops.
This weather market possibility is why I talked last week about using cash contracts if margins on futures positions would be a problem and why I suggested looking at buying back short hedges if we see closes above important contract highs like the $6.50 in November soybeans and the high just below $2.50 in December corn. November soybeans closed above the $6.50 level last Wednesday and held those levels through Friday so that buying back short futures positions was in order. Tuesday's prices opened significantly higher as the longs that closed out positions last Friday in front of the long weekend came back and bought. But the gains turned into losses during the session. For cash contract sellers, a good approach is to sell more soybeans on a scale up basis as the market moves higher on these weather scares. It is very early to have a major weather market, but we are in the middle of one.
Corn comes into the week well below the high near $2.50, and that high appears to be still relevant. This market was up only 3 cents or so in early Tuesday trade in the $2.41 to $2.45 area and then turned lower later in the day. Unless the weather gets worse this week, the rallies to $2.50 should still be sold. Use cash contracts to avoid any margin problems, and be prepared to buy back short hedges on the second consecutive close above $2.50 which has been the life-of-contract high. Two consecutive closes at new highs is a buy signal seen all over the world, and short hedges should be bought back, especially if you have the fortitude to put them back on if we later see a sell signal above $2.50 or if we see a close back below $2.50 within the next several days.
Wheat is not getting help from the dry weather. I still like the $3.40 level as a place to sell on the July Chicago. Sell the July Kansas City in the mid $3.40's. The primary damage that weather could do to wheat yields from this date forward is rain or wind that will damage the crop that is close to being ready to harvest with harvest already well under way in the southern-most states.
June cattle rallied a bit on Friday to close the chart gap from a few days back. I think this contract will come under some selling that will push it down toward the support on the chart that we show again this week near $83.35, but it is not happening in Tuesday trade. Prices are up during the session. Boxed beef closed out the week with some big losses on the Choice boxes. That series lost several dollars across the past 6 trading days and was down again Tuesday morning. Cash cattle closed out the week around $87 with some sales at $87.50, but I think the cash market is headed lower in the short run unless we get some positive news about beef sales over the long weekend. The Tuesday gains appear to be anticipating positive movement levels over the weekend when the data come out. I would still hold short hedges in this market until we see some legitimate signs of a short term bottom, and I would expect to see that happen along the support plane I show on the chart.
Hold short hedges and get off long hedges in the August feeder cattle on this Tuesday rally if it continues this week. Weakness in cash fed cattle and higher prices of corn will both pressure the summer feeder cattle market. The big uncertainty is in the corn sector with the uncertain weather threatening that crop in these early stages of development. The August feeder cattle is at prices more than $20 above current fed cattle prices which is very unusual and is not likely to be maintained.
Cash hogs are in the $66 to $67 range and are still well below the June futures. There are some early signs that the cash market will get better from here, so I don't see major downside moves from here in the June lean hogs. So far, the June is trying to hold along the support plane I talked about last week across the December lows near $71. If the cash market can crawl higher across the next few days, this should be a short term bottom. Aggressive selective hedgers will be looking to buy back June hedges early at these levels. I think that strategy has a good chance to work.
Download Purcell in PDF format