Weekly Purcell Agricultural Commodity Market Report
Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
August 16, 2005
The World Supply and Demand report released last Friday answered some of the questions regarding decline in corn and soybean production estimates. Weather developments continue to play a role in pricing the market. Better than expected crop weather in the Midwest continued to weigh on prices, especially soybeans. Prices retreated in early activity on the Chicago Board of Trace. Early Monday, the opening bid for NOV '05 beans was down 8¢ from Friday's close of $6.48. Long fund positions being liquidated pushed prices lower by as much 18¢ during the day with some price rebound tendency appearing around the $6.22 level. Plugging USDA ending stocks numbers into the price model indicate price of over $6.50. USDA increased the average farm price by 40¢ per bushel on both ends to a range of $5.50 to $6.50 per bushel. The relative strength index (RSI) for NOV 05 beans shows the market may be somewhat oversold for the time being thereby holding the market steady for a bit at this point. Technical traders view an RSI of 30 or less as an oversold market and 70 or more as an overbought market. It might be a good idea to hold present long positions on a short market rally over the next few days being ready to close those positions at about the $6.40 level. I would consider holding short hedge positions until we see a challenge of the support place at the low just above $6.00. Look at buying them back to take profits in the $6.05 to $6.10 area".
DEC '05 corn futures continued to find pressure from the release by USDA early Friday of a U.S. corn production estimate for this year of 10.350 billion bushels, above the average pre-report estimates of 10.235 billion bushels. Some U.S. grain dealers in the western belt posted 4¢ protection on old and new crop corn bids early Monday on expectations for a fall in DEC 05 corn futures. It is now thought that even though the corn crop has finished its critical pollination stage, rains now will help the corn ears fill out and add to corn tonnage this year. Also, some underlying support may be stemming from recent export business which included Taiwan's purchase of 56,000 to 60,000 metric tonnes. This market was also technically oversold after sliding to six-week lows on Friday. These kinds of opportunities don't come along very often in the futures market. With DEC corn approaching contract lows, there is not much risk in going long in this market to place long hedges if you haven't already. As producers, take a look at buying back to take profits on short hedges near the important support place at contract lows near $2.21 on the DEC. It is always good to remember there are times when you should just get into or stay in the role of speculating in the cash market. If you do not have the corn priced at higher levels, this may be a time to let the market have a chance to rally and not be too quick to sell it down near the lows. The successful manager is successful because they do a good job of managing their exposure to risk in the cash market and giving themselves a chance to see a rally, and then be ready to take advantage of it.
Wheat was trading lower by midday on Monday as a follower to soybean futures. By 2:00 p.m., EST, wheat futures were down over 5¢ to $3.16 per bushel. Wheat prices were taking some support Monday in news that Iraq has bought 1.2 million metric-tonnes of American and Australian wheat, but traders said the dealings have been rumored for days and were already largely factored into pricing. The latest commitments of Traders reports released by the Commodity Futures Trading Commission on Friday showed that large speculators narrowed their net long position in KCBT hard red winter wheat futures during the week ended Tuesday, Aug. 9. Last week it was stated a short hedge against possible further price decline would be the better initiative. That advice still holds true for this week.
August Live Cattle were off $.175 at $78.80 per cwt and October off $.25 at $79.80. Expected lower cash cattle prices this week prompted early selling. Cash cattle traded at $79 to $80 per cwt last week, down from $82.50 the previous week. Initially, feedlots resisted $79 but eventually accepted it as they needed to sell the cattle. Talk circulated that $78 could trade this week. Also, cash beef prices were expected to turn lower once buying for Labor Day promotions is finished. Average packer margins were up, from a negative $6.75 per cwt on Friday, according to HedgersEdge.com. Negative margins will continue to pressure cash prices. However, prices may resist downward movement this week on ideas that some feedlot managers are reluctant to sell at lower prices. The time could be ripe for short hedging opportunities as pressure to lower prices build.
August feeders were up $.40 at $109.675 per cwt. September feeders were up $.475 to $107.10 per cwt. Futures corrected higher after Friday's lower close, with gains helped by lower CBOT corn futures. As stated last week, the limited numbers and the holding of heifers for herd building look to support the feeder cattle market. It still may be a good idea to place or hold on to short hedges in face of all the uncertainty in cattle and corn prices.
On Friday cash hogs were traded steady to lower as hogs backed up from the heat came to market. By late Monday, Lean Hogs for October were up $1.68 / lb to $60.20 cwt. in lively trading bringing volume closing out many positions. Futures advanced in reaction to higher cash pork prices on Friday. The market may be responding to an increased demand for U.S. pork as the market continues to watch pig disease and avian flu problems in China. The average packer margin for Monday was estimated at a positive $9.20 per head, up from a positive $4.15 per head on Friday. Selective hedgers may wish to consider a long position in the futures at this point.
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