Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
August 9, 2005
Mike Roberts and I are working toward Mike taking over the letter by September 1 when I retire. Mike is interested, is talented in this area, and will continue the efforts to help producers and users of commodities manage exposure to market risk. Virginia Cooperative Extension is very supportive and recognizes the value and potential of a site that is averaging over 12,000 hits per month. Welcome Mike to the writer's desk! He can be reached at mrob@vt.edu.
The World Agriculture Supply and Demand estimates will be out Friday, August 12. The primary question on everyone's mind is just how big the '05 crops will be. Actual crop size for both corn and soybeans will most likely not be known until the machinery hits the fields. Pre-report estimates combined with the USDA August report are based upon crop conditions prior to August 1. Crop and weather conditions across the Midwest continue to be varied making it very hard to predict crop size.
Soybean futures rallied to $6.80 in Chicago early Monday on a rebound from Friday's fund led sell off and worries about dry weather in the Midwest. By late morning, new crop November beans had settled into a trading range of $6.73 to $6.78. The November chart included in this newsletter shows a nice trend line upward revealing further short hedging opportunities for traders. Bears were aggressively taking positions under the trend line on Friday and there was heavy trading on Monday as well as funds were liquidating long positions. There may still be a possibility of a short covering rally based on the supply-demand reports, however. Weather is a big question mark along with the impending ending stock estimates. Noting the table below, price can be eventually expected to go lower. It would take over 200 million bushels (5.65 mmt times 2204.6 lbs. per metric ton divided by 60 lbs. is 207 million bu.) to pull the estimated ending stocks down to the prior world record of 45.08 mmt!
| Crop Year | World Ending Stocks | U. S. Prices |
|---|---|---|
| (mmt) | $/bu) | |
| 2000/01 | 30.92 | 4.54 |
| 2001/02 | 32.14 | 4.38 |
| 2002/03 | 40.67 | 5.53 |
| 2003/04 | 35.00 | 7.34 |
| 2004/05 | 45.08 | 5.80 |
| 2005/06* | 50.73 | 5.10-6.10* |
| *July report estimate | ||
Corn opened lower on Friday. This pierced the support plane of $2.37 established across the month of July on DEC corn. DEC '05 corn had rallied toward $2.40 on a short covering rally by noon on Monday with volume steady around 83,500 from previous days. Technical analysis indicates the market is bearish, however. Tuesday's early trade shows prices across the lows of recent months near $2.30 on the DEC. But in light of weather and world supply/demand report uncertainty the market may be bottomed out at this time and will move sideways. It may be a good idea to hold short hedges for another week or two. Additionally, in this kind of sideways and low-priced market, users may consider getting on long hedges or replacing them if they have taken some selective hedging profits earlier. There is a great deal of uncertainty about how much the crop has been reduced in Illinois in particular.
MAR '06 Chicago wheat volume is lower after a market "blow off" last Thursday. By noon on Monday MAR '06 wheat was trading at $3.51 showing ability to hold above 3.44. The market is showing bearish tendencies, however, with open interest increasing while the market tries to make up its mind where to go. Local basis strengthened by $.05 from Friday to Monday. Negative basis levels in Virginia for wheat combined with storage cost increases from higher energy costs indicate the better move would be to either cash sell the wheat or place a short hedge now. Buying a $3.50 put option would cost $.22 as of Monday. Deducting storage costs of $.225 says this doesn't pay. At this time a short hedge against possible declining prices would be a better approach.
August live cattle were off $0.175 at $80.40 and October live cattle off $0.325 at $81.60 in early week trade. Lower cattle prices late last week prompted light selling in the futures. August showed light underlying support based on its discount to cash. Cash cattle traded at $82.50 per cwt. last Wednesday but then lightly traded at $80 to $81 late in the week. Boxed sales have slowed and there is concern beef sales may slip some more once supermarkets finish buying for Labor Day. The average packer margin for Monday was estimated at a negative $20.55 per head, up from a negative $33.97 on Friday according to HedgersEdge.com. The negative margins will continue to pressure cash prices. The rally last week up toward $84 by the October was a huge hedging opportunity with Monday's close at $80.72 and Tuesday showing little improvement.
On Monday August feeders were off $0.55 at $109.85 while September feeders were off $0.625 to $107.95. Lower live cattle futures and higher CBOT corn prompted early selling after an initial higher start. Some expect the CME feeder cattle index to rise further following cash strength last week. The limited numbers and the holding of heifers for herd building will continue to support the feeder cattle market, but Monday's big reversal day on the fall contracts suggests placing or holding short hedges in face of all the uncertainty in the cattle and in corn prices.
Also on Monday afternoon, August lean hogs were off $0.275 at $60 to $69.50 with a weighted lean hog weighted cash average price of $68.60 on the national direct hog market. October lean hogs were off $1.25 to $59.525 from last Friday's close. Everything is being blamed on the hot weather! The weather delayed hog marketings recently, but hog shipments will likely increase as producers need to ship those hogs soon, traders said. Slow cash pork trade was viewed as a bearish factor and is proving to continue the slide. USDA reported pork trade at a near standstill Friday and again early Monday. The market continues to keep an eye on pig disease in China and avian flu problems. If those problems persist, it could result in increased demand for U.S. pork. The average packer margin for Monday was estimated at a positive $6.30 per head, up from a positive $5.28 on Friday, according to HedgersEdge.com.
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