Weekly Purcell Agricultural Commodity Market Report

Mike Roberts
Commodity Marketing Agent
Virginia Tech

Wayne D. Purcell
Agricultural and Applied Economics
Virginia Tech
September 20, 2005

Commodity prices remained adrift as the 2005 harvest approaches. Prices may go lower as traders sense harvest pressure and the cropping season south of the equator nears. River transportation is picking back up and terminals were beginning to re-open for business but basis levels remained weak reflecting the slowdown. As harvest approaches, basis level recovery is not expected. Basis levels in forward contracts are showing very little appreciation with spreads between harvest delivery and January delivery only about 12¢/bu. Weak basis levels are expected for the next 4 to 6 weeks. Basis levels may improve toward the end of 2005.

Local basis levels for corn were still somewhat weak ranging from -12.2¢ to -20.2¢/bu everywhere except in northern Virginia showing a +21.8¢ basis. Soybean basis ranged from -10.2¢ to -61.2¢ for old crop with new crop basis even weaker. Wheat basis varied from -55¢ in the country to -20¢ at the export terminal. LDP rates are showing only for '05 corn. Basis levels for corn and soybeans in 15 markets near Minneapolis were very weak. Corn basis ranged from -44¢ to -72¢ while soybean basis ranged from -46¢ to -81¢. This would put the cash price for beans at or below the $5.00/bu mark in many cases! Wheat exhibited a strong basis ranging from +50¢ to +68¢ for HRW and +35¢ to +70¢ for HRS. As soybean harvest gears up, prices below $5.00/bu may be expected.

On Monday, the DEC '05 corn closed down 5.2¢ from one week ago at $2.06/bu on Monday. This was a 9.8¢/bu slide in ten days. Corn futures at the CME started flat following the steady tone set in overnight trading. Support from an oversold market is helping price while harvest and export difficulties limit upside potential in a sideways trading pattern. Technically, it will take a close above $2.1579/bu to fill the last downside price gap. A challenge to the $2.00 price level is very possible in the near term. The measuring objective for DEC '05 corn is now around the $1.84-$1.90 level. Support is set at $2.05, the contract low. Hedgers who followed advice to be short on 50-60% of the crop could have a net selling price of more than $3/bu that portion of the crop. If you are strictly cash, look at collecting your LDP on the entire crop within the next 2 Ð 4 weeks. LDPs for corn on Monday ranged from 40-46¢/bu in most areas. They are not likely to go much lower. It is expected that bulls will keep pressure on the DEC '06 contract so hedgers should consider a short position on up to 30% of the 2006 corn crop.

NOV '05 beans slipped 9¢/bu from last Monday while down 14¢/bu from ten days ago. On Monday, the 14 day RSI closed at 31.83 close to the benchmark 30 level that traders view as a technically oversold market. At the same time, volume was up while open interest remained steady. This condition could lead to some short-covering rallies as traders take a wait and see stance. Shorts in the NOV '05 futures should have taken profits by now and some did filling the price gap of 8/19 on 8/30. As of Monday, six days of trading has failed to fill the gap established on 9/12 at $5.90/bu. There is a cluster of sell orders hovering near the $5.80-$5.70 range. If harvest numbers begin to increase as expected, futures could drop more. Hedgers should seriously consider establishing short positions on another 20-25% of this year's crop in the $5.70 area to get filled. Advice to cash marketers has been to contract 50-60% of the crop long ago. Cash marketers should be patient if storage is available. LDPs are not out of the question.

On Tuesday, opening wheat futures at both the Kansas City Board of Trade and the CBOT were mixed ranging from 1¢/bu higher to 1¢/bu lower following news Iraq planned to buy wheat every 40 days to build wheat stocks. Iraq tendered offers on Monday and Tuesday for a combined 350,000 tonnes of U.S. HRW wheat. Export activity overnight included news both Jordan and South Korea were going to buy wheat. Support for DEC '05 wheat is the contract low of $3.156/bu. The market may struggle to move higher in light of pressure from corn and soybeans. Technicals still indicate a bearish market in the JULY '06 futures. Advice last week was to sell orders around the $3.50 - $3.45 range. That advice still holds waiting for the downward breakout.

In cattle, the Choice/Select boxed beef price spread averaged $11 to $12/cwt in mid-September, up from $4/cwt a year ago. Due to increased fed cattle slaughter and heavier weights in fed cattle, 3rd quarter beef production is expected to increase over a year ago. Heavy slaughter weights and larger numbers of cattle on feed over 120 days typically suggest overweight cattle and problems. However, USDA reported Friday, 9/16 that demand for high quality beef remains strong with supplies of Choice or higher staying relatively tight. Prices for stockers/feeders remained strong as supplies tightened cyclically. Prices for lighter weight stocker cattle also remained strong even as feedlot margins moved into the loss column this summer. According to the report, margins were positive this past spring but turned negative this summer and remain so for this fall. Favorable feed costs and higher prices have encouraged cattle feeders to put more weight on cattle while the additional premium on Choice cattle makes more days on feed even more attractive. Additionally, recent rains in the High Plains grazing regions improved prospects for wheat grazing and increased the demand for lighter-weight stocker cattle.

OCT '05 (FCV5) Feeder Cattle were stronger than expected at over $115/cwt on Monday due most likely to the $3+/cwt run up in the OCT '05 (LCV5) Live Cattle futures over the last two weeks. Live Cattle marketers should be short in the DEC '05 (LCZ5) futures to hedge 4th quarter marketings and short in the FEB '06 futures to hedge 1st quarter marketings. Feeder Cattle marketers should have closed short positions a week ago and gotten ready to get back on short positions in the NOV '05 (FCX5) futures to cover 4th quarter marketings. There will be a cluster of sell orders around the $112/cwt price so hedgers should target the $112-$110 range for the NOV '05 futures. On 9/20, the RSI for the NOV '05 FC showed an overbought situation at 70.15. Remembering that an RSI near 70 or higher is called overbought, this usually means that any bearish news can send the market lower.

The OCT '05 Lean Hogs contract (LHV5) was up $0.675 at $65.65/cwt in early trading Tuesday. The DEC '05 (LHZ5) was up $0.40 to $62.70/cwt. Firm cash hog prices prompted some short covering and lifted futures early as the morning advanced. Futures closed higher on Monday in part due to the firm cash markets. The average packer margin for Tuesday was estimated at a positive $7.65 per head, down from a positive $8.05 per head on Monday, according to HedgersEdge.com. Last week's report continued to recommend that all risk could be carried in the cash market while waiting on technical signs to place short hedges. That advice is still viable. Hog hedgers may consider buying a DEC '05 $58 put option and selling two DEC '05 $62 call options.

Download Purcell in PDF format

Remember, when working with futures, risk is involved. Past performance does not indicate a promise of future results. For comments or questions you may contact Mike Roberts at mrob@vt.edu.