Weekly Purcell Agricultural Commodity Market Report
Mike Roberts
Commodity Marketing Agent
Virginia Tech
October 11, 2005
Tomorrow, October 12th, the USDA World Supply/Demand report will come out. The numbers are expected to be above the USDA's September projected production estimate for both corn and soybeans at 10.639 billion bu. and 2.856 billion bushels respectively. Production estimates by ProFarmer and other groups for corn range from 10.6665 - 11.1118 billion bushels and for soybeans, from 2.916 - 3.126 billion bushels. For corn, that would be an increase of 27 - 47 million bushels and an increase of between 60 - 270 million bushels for soybeans. Holding use and export factors the same, this could mean an increase in corn carry-over of between 2.1 - 2.4 billion bushels and a soybean ending stocks increase of 207 - 209 billion bushels. With the U.S. corn crop about 60% harvested and the U.S. soybean crop about 65% harvested, supplies flowing into the market have put downward pressure on price establishing a new contract low for corn while approaching the contract low for soybeans. The only question remains is whether USDA will raise their October production forecast or not. Wheat prices rallied last week while other prices held steady.
CORN futures rallied to small gains today underpinned by position squaring ahead of the USDA crop report, traders said. Some positions were covered in early trading and funds were beginning to sell a little. The market remained within a tight trading range as continued higher-than-expected yields and expectations of a large crop combined to keep futures on the lookout. DEC '05 corn was up 6¢/bu to $2.026/bu. while DEC '06 corn was up 4¢/bu to $2.462/bu. By noon, volume was up to 22,897 for the DEC '05 contract. The RSI was still somewhat trending toward an oversold situation at 34.39. Basis bids in most areas, including Virginia, were mostly steady again this week with more harvest sales over the weekend. Cash positions should look to collect LDPs on the entire crop within the next week to 10 days. LDPs in Virginia reached 48¢/bu last week then bumped down a penny. They remained down 1¢/bu to 47¢/bu this week. If you have not collected your LDP yet, it may worth taking it now. Some producers think that LDPs could reach 50¢/bu but if they don't, they may slide rather quickly. Hedgers should consider short positions in DEC '06 futures on up to 35% of the 2006 crop.
SOYBEAN futures were firm today supporting other soy product futures. NOV '05 beans were up 6.6¢/bu at $5.622/bu. on technical trading and support from firm energy prices continuing to be an underlying price influence, traders said. Soybean LDP ranged from 1¢/bu to 5¢/bu across the country with many places in Virginia paying 5¢/bu. Even though upward price resistance was broken on 10/03/05 almost filling the trading gap established on 9/12/05 indicating a glimpse of a short-term bottom, it would take a close above $5.84 to confirm it. Most analysts do not think this market has bottomed yet. The $5.28/bu measuring objective is still very much in the ball game. Open interest, volume, and the RSI were all up slightly in this market. This is a slightly bullish move that is supporting price ahead of the USDA production report. While the NOV '05 contract has made small gains today, there are a cluster of sell orders hovering in the $5.55-$5.60 range. Last week it was recommend to hedgers they should think seriously about establishing short positions on up to 20-25% more of this year's crop in the $5.70 area to get filled. If you missed the sell point at $5.70, hedgers should now think seriously about establishing new short positions on up to 20-25% more of this year's crop in the $5.55 area to get filled. Advice to cash marketers has been to contract 50-60% of the crop long ago. Cash marketers should continue to be patient if storage is available. The expected LDP opportunity for beans seems to be materializing.
WHEAT looked stronger on technical trading. The DEC '05 wheat in Chicago was up 2.4¢/bu to $3.422. The last bullish trending gap of 9/30/05 has not been filled testing support the last three trading days. CBOT DEC '05 wheat was up 3.6¢/bu. at $3.434/bu. near closing today. Technical analysis indicates a bull-market flag may have developed over the last 6 days. A close above the $3.50/bu. mark could set up a run to the $3.80 area. Some position-squaring was taking place but for the most part, things were generally quiet. Strong demand, in part due to timely exports, is pushing price higher. At the Minneapolis Grain Exchange (MGE) wheat was mostly higher in thin trading by mid-session. Strength at the CBOT was supportive amid thin trading as brokers readied for the USDA, October crop report. The production numbers are expected to be decreased for wheat. The average trade estimate for the U.S. wheat carryout was 556 million bushels, 68 million bushels below the September forecast of 624 million bushels. Cash bids weakened -2¢/bu with basis in Virginia ranging from -12¢/bu to -14¢/bu. The next price objective for DEC '05 wheat on the CBOT is $3.527/bushel. The RSI shows that this market is not overbought so Selective Hedgers should be bullish in this market in the $3.45 - $3.47 area to get filled. Cash marketers have sold the '05 crop and do not have any of the '06 crop priced. Hedgers should not be short now.
LIVE CATTLE for the OCT '05 and DEC '05 futures traded sideways at $90.80/cwt and $90.40/cwt respectively today while the FEB '06 was off $0.025 to $93.20/cwt. Trading was light. Traders said the market could not be forced lower as more traders were willing to buy near the end of the session. Both futures and cash choice beef prices were pushed higher amid export expectations of opening Japanese markets, lower grain prices, and heavy fund buying. Cattle futures were pushed higher last week by very active fund buying, higher cash cattle prices, and cheaper corn prices. The fund buying had resulted in record open interest, contract highs, and very high Relative Strength Indexes (RSI). All three of these numbers continue to show upward strength in the DEC Ô0 and FEB '06 futures. The OCT '05 futures is showing an RSI and open interest (OI) downturn in the opposite direction of price. The RSI for all three contracts is over 70. Remember, an overbought condition is said to exist when the RSI is over 70 and an oversold condition is present when the RSI is below 30. When the RSI moves in the opposite direction of price and volume, this could mean that a significant price point has been reached and the possibility for a price reversal could be near. This could be a setup for the end of the contract on October 31, 2005. A price slide may result as longs liquidate offering some downside profit potential to shorts. It was expressed last week that the market may be very vulnerable to a sharp price break. Cash producers should be aggressively marketing cattle at the proper weights now. Live cattle feeders should be short DEC '05 and FEB '06 futures to cover 4th quarter marketings.
FEEDER CATTLE on the OCT '05 were up $0.675 to a new contract high of $118.675/cwt. The NOV '05 was up $0.70 also to a new contact high of $117.10/cwt. The rally was led by the cash market and low feed prices. Choice boxed beef prices reached $140/cwt by the end of September. The premium for Choice over Select wholesale beef prices seasonally widened in August and September surpassing $12/cwt by the end of September. In September, the price premium of Choice to Select on a weekly basis averaged $11.66/cwt compared to just under $4/cwt last year and less than a dollar lower than the five-year average (Livestock Monitor). A key to the premium of Choice beef has been on the supply side as the percentage of cattle graded Choice has surprisingly declined. These small changes have had significant impact on price relationships and thus increased the demand for feeders. Also, according to a presenter at the 2005 Southern Region Outlook conference, whenever feeders look out that window and see empty pen space coupled with a little money in the check book, they are going to buy more cattle! The advice of last week still holds. Cash producers should be aggressively marketing cattle at the proper weights now. Live cattle feeders should be short DEC '05 and FEB '06 futures to cover 4th and 1st quarter marketings. Feeder cattle sellers may want to hold hedges on some of the 4th quarter sales in NOV '05 futures.
LEAN HOGS on the OCT '05 were off $0.65 to $67.675/cwt and the DEC '05 off $1.025 at $63.50/cwt in steady to lower trading. Cash hog prices were steady to lower as momentum from Monday's market guided futures lower. Funds liquidated long positions while speculative selling weighed on futures. Chart-based selling near $64/cwt pressured the DEC Ô05 and kept that contract lower. Volume was light in the OCT '05 contract, which expires on Friday. The CME reported open interest down 60,362 to 9,939 from Monday's record high of 70,301 contracts. USDA on Thursday reported the pork carcass cutout value was $70.00/cwt, down $0.25 from Friday. It is still recommended that all risk could be carried in the cash market while remaining vigilant for technical signs to place short hedges. In a gap-down move today and a downturn in the RSI, the DEC '05 futures price up trend shows signs of breaking. However, with the September Hogs and Pigs report showing no increase in farrowings or herd building numbers, a variety of reasons are holding herd expansion in check. The advice for hog hedgers to consider buying a DEC '05 $58 put option and selling two DEC '05 $62 call options is still valid.
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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.