Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
June 7, 2005
The November soybeans have ridden weather concerns to the $7.00 level. I did not expect to see that this early. I show the November chart this week with a new contract high at $7.01 and a close near the low on Monday. If you bought back short hedges on the two consecutive closes above the old high of $6.50, watch for a correction to the downside and then another rally toward the $7.01 high. After the new rally starts, you will be able to draw a trend line using the correction low. This is a familiar pattern, to all who have read this letter, with a resistance plane across the $7.01 high and a trend line sloping up under the market. You will be using the mid-May low as one of your points and hook that to whatever low we see in the downward correction which may happen this week. Cash contract sellers should sell aggressively on a rally toward the $7.00 level. At the world level, the ending stocks are not likely to be at last year's gigantic level but will be well above the prior world record and unless the weather is extremely hard on this crop in the U. S., November prices are likely to be closer to $5.00 than to $7.00.
The December corn behaved like the November soybeans with a gap up at the opening on Monday and a high above $2.42 and then a weak close back down in the $2.30's. The $2.40 levels we were watching were exceeded by the weather rallies but the $2.50 high from March is still in place and has not been seriously challenged. I would continue to sell this market on rallies toward that high. We hear talk of dry weather and some cold weather damage in states like Illinois. Yields have likely been hurt already, but it is too soon to write this crop off. Long hedgers should hold long positions more firmly since the idea is to protect against a disaster. If you sell to take profits with orders just under $2.50, be willing to replace those long hedges if we do see a close above $2.50.
Selling the rallies to the past highs at $32.40 worked in Chicago wheat. The market is showing consecutive days lower as the harvest and yield news starts to work into this market. Hold short hedges. The $3.00 level could be challenged as the harvest progresses. The Kansas City July turned lower from the $3.45 highs and is headed lower. Hold short hedges here as well. I see more downside in this market.
The June live cattle are near $85 and the August near $83.30 in early Tuesday trade. The futures will be driven by the cash markets across the next few weeks. A trade at $85 to $86 last week showed some movement late Friday at $86.50 so we still have a premium in the cash market. But that may go away with Choice boxed beef down from $149.71 on May 27 to $144.77 on Monday, bringing some pressure on cash cattle. I would still hold short hedges in the June cattle. We will need to move out and focus more attention on the August as the summer progresses. There is support across some lows in the $82 to $83 area for the August.
August feeder cattle surged to a new high of $113.60 on Monday, taking out the recent high of $113.50 but did not now close above it. This was fueled entirely by the break in the corn market. I would continue to sell this market to place short hedges on the surges to the highs and to new highs. There is risk holding feeder cattle that are not priced through the critical July yield-determining period for corn. Long hedgers should look at taking profits, but your posture during July is a bit different. If the corn crop gets hurt badly and corn prices surge, you want to be long and get that coverage against high priced August feeder cattle.
The contra-seasonal price pattern continues in lean hogs with the futures showing lower and lower prices for several weeks. The June is down toward $67 in early Tuesday trade and that is honoring the cash market which has been in the mid-$60's recently. The seasonal increase in prices moving into the summer has not happened, and I suspect both the supply side and the demand side are reasons. We have to wait to see some legitimate signs of a bottom here before buying back short hedges. This is an instance in which those producers who were holding short hedges and who were reluctant to be selective hedgers and buy them back have benefited from that posture. This is a huge break in the June that is approaching $20 since the March highs near $85.
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