Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
July 12, 2005
November soybeans have established a new range from $6.60 to $7.35. As the tropical storm moves its moisture into Indiana and Illinois, the markets are very uncertain. The overnight trade was lower coming into Monday trade. The early call on soybeans was lower by 10 to 15 cents, and then the close on the November that was up by 13.5 cents. I would continue to set prices on rallies to the $7.35 level or higher. If you have been pricing on a scale up basis, I would want to have 60 to 70% of expected production priced if you see the November around $7.35 or better again this week. Tuesday's USDA report shows a decrease in ending stocks for the 2005-2006 crop year from 255 in the June report to 210 million bushels with the change coming from a decease in beginning stocks and a change in production. The estimated range in cash price for the crop year moved from $4.95-$5.95 to $5.10-$6.10, the first time we have seen a number above $6.00. Stocks have to get much tighter during the year to justify November futures up around $7.50; that type of change is very unlikely.
I show the December corn chart this week. Clearer pricing opportunities are here than I see in the soybeans. After the December moved above the March highs just below $2.50, the market has struggled moving higher with $2.55 to $2.57 being all the market has been able to manage. With all the talk about the weather, the market has been able to add, at most, about 7 cents to the March high on the December new-crop contract. I would look at a rally into the mid $2.50's as a short hedging opportunity or a chance to add to cash contract price protection in moving up to at least 50% forward priced. Long hedgers should stay on the long positions until we see whether the market will quit at the same $2.55 to $2.57 levels if we get another rally. Producers have program benefits if they do not get all of their production priced, but corn users have no protection in case the market does move sharply higher. Ending stock estimates were down 300 million bushels to 2.240 billion bushels compared to the June report, and the projected price range moved up by $0.15 per bushel to $1.70-$2.10. A survey of producers will be taken prior to the August report so there will be uncertainty on the crop size for the next several weeks.
With the soybeans staging a big recovery on Monday, the wheat contracts regained the losses they were showing early in the day. It looks as if the July Chicago needs to be bought to lift short hedges around the $3.20 area and the Kansas City looks the same near $3.25. We never saw the weakness I expected in this market with the soybeans continuing to stage rallies and the weather helping both the corn and soybean markets. Take a look at your storage opportunities and keep an eye on the July 2005 contracts where we have already seen a price in Chicago as high as $3.77. World level production and stocks are declining in recent USDA reports, and this market should show us $4.00 plus prices again this coming year unless there is a huge and largely unexpected increase in acreage.
August live cattle futures were hit hard on Monday with concerns that the courts will reopen the Canadian border added to the disquiet surrounding the last BSE incident and the search for other contaminated animals in the same herd. I have been uncomfortable with the cattle market and advised being cautious and holding short positions in last week's letter. Monday's close on the August live cattle was just above $78.00 and the contract low on the August is $77.70. The October closed at $81.82, about $2.50 above its low, but the close was very weak. This contract will trade lower as well this week. Hold short hedges. Boxed beef was up slightly on Monday, and cash cattle late last week were around $82. But those prices could disappear in a hurry if the border is reopened, and the futures complex appears to be saying the border will be reopened.
Feeder cattle were hit harder with the fall contracts down $2.00 or more on Monday. This complex has been vulnerable with the huge premiums to current fed cattle prices and to the live cattle futures prices. The August close on Monday was still around $110.00, more than $20 premium to the close on the August live cattle. The later fall and winter live cattle contracts are higher than the nearby, but not high enough to support the very high prices in the summer and fall feeder cattle. Hold short positions here. I have been advising for weeks to pay margin calls if needed to stay short in this over-priced complex in light of what we are seeing in the rest of the beef sector. But don't expect this scenario with feeder cattle pushing up breakeven prices to go away anytime soon. It is a product of herd building and holding of heifers for breeding and a tight supply of feeder cattle in the presence of a first quarter average fed cattle price of nearly $90.00 to boost enthusiasm in the feedlot complex.
After rallying off the $64.00 price level, the August lean hog contact appears ready to test $64.00 again. If that price does not hold, we will see this market searching for the right price at still lower levels. I am encouraged by what I see on the later contracts such as the December. After rallying more than $4.00 from the $52.00 level, this contract appears to be more nearly making a normal correction of the gains, If it can hold well above the $52.00 level and rally again, we have a chance to see significantly better prices. Hold short hedges if you have them, but wait and see what happens around $64 on the August before taking action to place or replace short hedges. I think the longer term direction in this market is up in light of the bullish June Hogs and Pigs Report.
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