Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
June 21, 2005
Weather is the key in corn and soybeans. Funds are aggressively long in both crops, and the trading volume in recent days has been double the normal levels. The soybean crop is not made in June, but the forecasts and the fund buying are pushing both markets higher. The markets are overbought looking at the relative strength index, but you cannot use the overbought status as reason enough to sell this market when the weather has the market firmly in its grasp.
I said last week that the November soybeans would take out the contract high near $7.00 unless the eastern Corn Belt got rain early in the week, which did not happen at the levels the crops need. Monday's trade moved the November up to the $7.64 level, but it is interesting to note (see the chart) that the close for the day was near the middle of the trading range. There is some set of traders who do not believe the bullish attitude that is sweeping through this market and they are selling; part of this group might be firms and countries in the global market that are taking profits on long hedges. Selective short hedgers who followed the rule of ̉buy back on the second consecutive close above the old highÓ would have been off short hedges just below $7.21. The need now is to find a solid sell signal as a reason to get back on short positions at higher prices. The trend line is still there. Cash contract sellers who have more to sell or producers who have sold nothing should be selling on a close below the trend line.
December corn popped higher on Monday. Corn will be hurt more by dry weather in June than will soybeans. The important high and resistance plane from March near $2.50 was taken out as the market gapped higher on Monday. The next chart resistance goes back to the highs near $2.66 to $2.67 from last summer and the next high is $2.71 from last June. For this reason, I have been advising long hedgers to be careful and not get caught off the long hedges. This market recorded a second gap on Monday. If it is not filled, it becomes a measuring gap and that suggests prices in the $2.70s. Producers will need to protect short hedges with margins if they did not pull them off at the close on Monday when the market took out the $2.50 resistance.
Last Friday's cattle on feed report showed smaller replacements during May than had been expected, but the marketings were also below expectations. Boxed beef values continue to struggle and were down $0.56 again on Monday afternoon for the Choice types. The Choice-Select spread is small, suggesting that cattle coming out of the feedlots are not being sold as Selects; the Choice percentage is higher. Prices are expected to be near $84 when cash trade develops this week. August live cattle have seen only 2 closes below $80, but we may not be through with the weakness that comes from BSE concerns. The October contract looks a bit better with recent lows near $82. Hold short hedges until we see some signs that this market will show some life as we move into the full fledged grilling season.
August feeder cattle took a beating across the past 10 days but are still near $109 at the close on Monday. The key to this market is what happens in corn. If corn goes to $3.00, the feeder cattle market will not hold these levels and if corn goes to $3.50 due to prolonged weather problems, not likely but possible, then the feeder contracts for the fall could come under $100 and stay there. I hope you have taken long hedge profits already. I would hold short hedges until this weather picture in corn clears up.
I am astounded: July lean hogs were near $80 on April 1, and they are near $66 on June 20. What has happened during this period? If Japan had opened its borders to beef again and the robust shipments of pork to Japan had disappeared, it would be easier to understand what we are seeing. Cash prices are around $67 to $68 so the current level of the July futures is not inconsistent. What looks to be the case is the $80 level never made any sense, and this market is not showing excellence in its price discovery efforts. Hold those short hedges. It is not yet clear that this unpredictable market is ready to find a bottom.
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