Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
July 19, 2005
A truly unusual, one of those 1 in 20 or 1 in 15 years, does not come along very often but we have one this year in corn. You know it is unusual when a tropical storm moves all the way into the Midwest and then does not deliver significant rain to the northern halves of Indiana and Illinois and the southern half of Michigan. Illinois produced over 2.0 billion bushels last year and Indiana and Michigan delivered about1.0 and .25 billion bushels respectively. We could lose 500 million bushels or more in these states and that is why we see the December futures up in the $2.70 area. But we are bringing in a huge "buffer" against weather in the form of beginning stocks that was estimated at 2.115 billion bushels in the July 14 report----and that number will not be impacted by the weather! We see that in the lower prices in Tuesday's session. I saw the rally coming after the key areas in Indiana and Illinois were missed as a chance to continue to move up to the 60 to 70 percent forward priced area as a target. Users need to hold long hedges. This is not a truly scary situation because of the big stocks and the chances of corn above $3.50 are small, but they are not zero so stay on the long positions until this market quits showing ability to rally on weather news.
I am gong back to the November soybean chart this week. It shows highly visible resistance planes at the highs and a useful uptrend line across the May and late June lows. This market has more time with the weather patterns since soybean yields are more nearly set in August than in July like corn, and there is no big rush to buy this market. I would be quick to sell a rally to that $7.70 high or a close below the steep trend line if that comes first. Tuesday's prices suggest the trend line will be attacked first. We will not have a survey of acreage and likely yields in soybeans until the August UDSA report, but we do know that the July 14 report showed estimated ending stocks at the world level for soybeans for the 2005-06 crop year at 51.99 million metric tons. This may change a bit in the August report if the crop estimate in the U S is down somewhat but the prior record was last year's 45.08 million metric tons. If we end up wit 50 million metric tons or more, that is about 1.9 billion bushels. That's a lot of leftover soybeans. I would look at selling a rally to that $7.70 high!
March 2006 Chicago wheat closed strong at $3.80 on Monday and the contract high is $3.93. Selling a rally to the high will lock in profits for storage programs and you should take a look at the July 2006 at the same time. Prices are not quite as attractive in Kansas City but the same type of opportunities are there.
Cattle are coming across the Canadian border again. It appears the market had discounted for the court ruling with the August and October live cattle futures showing only modest changes in the $78 and $80 areas respectively. The December is around $83 with the contract low at $80.20. Hold your short hedges in this complex. It looks like second quarter demand will show some small decline compared to last year but will still be well above the lows in 1998. Since the border was closed, Canada has built more feeding and processing capacity and the long run impact is going to be a reduction in export demand from Canada with more nearly self sufficient feeding and processing capacity north of the border. For years, Canada had been the third or fourth top beef buying country and that had been often overlooked in the attention paid to the cattle crossing the border for feeding and processing in the U. S.
Feeder cattle dropped about $4.00 with the border opening and the more distant March 2006 feeder cattle are below $100. Many analysts are saying we have seen the highs in the feeder cattle markets and that may be right, but I would not give up on feeder cattle seeing $100-plus levels again. Fed cattle in the cash market closed out the week at the $80.00 to $80.50 level, and that will not support $100 feeder cattle but we will see fed cattle back at the $90 level and higher again. Keep in mind that the inability to send beef to Japan keeps about 4.0 percent of our beef production in the U. S. and that means it has to be consumed here and that keeps pressure on price. If he Japanese markets open again to cattle below 30 months of age, that could mean a 6 to 8 percent increase in our cattle prices. But stay short in feeder cattle until the fall contracts start to show a bottom.
The current down correction on the lean hog contracts could be completing a head and shoulders bottom. If that is the right reading, we could see a nice move up when the bottom is completed. There is lots of competition for market share from poultry and the less than robust demand in beef is not helping, but this looks like the start of a cycle based move up in hog prices that will offset some of the normal seasonal weakness. As soon as you can put a trend line on the October and December under the markets, look at buying back short hedges with the trend line providing protection under your increasing price levels.
Download Purcell in PDF format