Weekly Purcell Agricultural Commodity Market Report

Mike Roberts
Commodity Marketing Agent
Virginia Tech

October 18, 2005

The USDA numbers out last week increased the 2005 US crop production estimates for corn and soybeans while decreasing wheat ending stocks. Overall, the report was not as negative as expected for corn and soybeans. Harvest pressure is expected to continue to weigh on corn and soybean prices. The report was mostly positive for wheat futures. New fundamental developments pressured wheat futures on news of Egypt's tender for 60,000 tonnes of U.S. Wheat. The order for 2.2 million bushels of U.S. Wheat was down from a possible 6.6 million bushels as 4.4 million bushels were ordered from the French.

CORN production estimates were increased 218 million bushels to 10.857 billion bushels in the USDA World Supply/Demand report last week. Corn Ending Stocks increased by 141 million bushels to 2.22 billion bushels. The yield estimate for the U.S. Corn crop is now 1.1 bushels per acre above the trend line. The USDA farm-gate price was reduced 5¢/bu to $1.65 - $2.05/bushel. Fact is that supply will weigh heavy on price for at least another year or so. Corn basis was mostly steady as harvest nears completion. Slow farmer selling and steady export demand supported corn basis values. Farmers have been storing corn because of low prices and nice Loan Deficiency Payments (LDPs). DEC '05 corn futures opened 1¢/bu lower at $2.024/bu. DEC '05 corn contract closed up 2¢/bu to $2.036/bu. The price objective of $2.014/bushel forecasted on September 30 in this report has not quite been reached. If cash marketers have been following the advice of this report to forward price 50-60% of the '05 crop those sales look good now. LDPs should have been collected over the last two weeks in the 44¢/bu to 47¢/bu range. LDPs for corn opened at 42¢/bu in most of Virginia this morning. Those waiting on a 50¢/bu LDP may have to wait a little longer. The prudent marketer has taken that LDP already. Hedgers should consider short positions in DEC '06 futures on up to 40% of the 2006 crop.

SOYBEAN production estimates increased by 111 million bushels to 2.967 billion bushels. Soybean ending stock estimates increased 55 million bushels to 260 million bushels. The USDA farm-gate price was reduced by 15¢/bu Ð 20¢/bu to $5.00 - $5.80/bushel. NOV '05 soybeans opened 0.4¢/bu lower at $5.890/bu in early trading. The NOV '05 futures closed up 1.6¢/bu from Friday's close at $5.912/bu. Both Open Interest (OI) and Volume (V) were steady while the Relative Strength Index (RSI) increased. The Technicals, coupled with the smaller than expected increase in production was enough to pull the Funds back to the long side. Soybean basis offers were firm supported by talk of export demand from China. Prices were also underpinned by last week's sharp rise in barge freight, traders said. Even with that, it should be noted that this soybean crop is the third largest on record and is likely to get even larger putting further pressure on price. Last week it was recommended that hedgers think about establishing short positions at the $5.70 area to get filled. Selective hedgers have had their buy-stop orders filled to avoid margin calls. Conservative hedgers have met margin calls and are wondering where this market is going. Wednesday's close above $5.86/bushel confirmed that at least in the short run a bottom has been established. While it is possible that NOV '05 soybeans may run up to the fill the gap at $6.40/bu. made on 8/12/05, it is not advised to get intensely bullish. Advice to cash marketers has been to contract 50-60% of the crop long ago. Hedgers in the NOV '05 crop should have closed those positions by now. Cash marketers should continue to be patient if storage is available. The expected LDP opportunity materialized last week at 5¢/bu for one day only.

WHEAT ending stocks estimate was reduced by 94 million bushels to 530 million bushels. The USDA farm-gate price was increased 20¢/bu cents to $3.20 - $3.60/bushel. Wheat basis values were mostly steady lacking fresh export demand from markets on lackluster export demand and disappointment over the U.S. share of Egypt's latest purchase, traders said. A bearish inspections figure from USDA added to the weak tone of the market as well as producers going into the winter under very good weather conditions in terms of crop establishment. The CBOT DEC '05 wheat futures opened 4¢/bu down at $3.35/bushel on Monday but recovered 1.4 ¢/bu to close at $3.362/bushel. Fund selling was nearly even as trade was subdued. Last week's chart for wheat showed a possible measuring objective for DEC '05 on the CBOT at $3.527/bushel. The RSI did not show an overbought market. Technicals show the RSI and Open Interest declining now. The trading gap established on 9/30/05 was filled today. The market is still seeking direction in light of a price-positive report from USDA and a price-negative fundamental situation from recent export action. Selective Hedgers may have been stopped out of the market by now. Hedgers still should not be short. Cash marketers have sold the '05 crop and still should not have any of the '06 crop priced.

LIVE CATTLE remained moderate to lower at midday as DEC Fund sales rose to put more pressure on prices in an already overbought market. The OCT '05 Live Cattle opened up $0.125/cwt from Friday's close at $89.275/cwt but fell to $88.35/cwt, off $0.95/cwt. Disappointing cash live cattle sales Friday continued to pressure spot-month price. Beef packers may cut kills due to negative profit margins, bearish traders said. Last week suggested there may be some downside potential for shorts as longs liquidate. The sharp price break looks to be underway. 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 upmove in futures has been phenomenal. A lack of replacement stock, cheap feed and feedlots' strong equity positions have pushed prices to these heights. Today OCT '05 Feeder futures are following live cattle contracts lower in light trading as the threat of more fund selling hangs over the market. Friday saw aggressive fund selling. Cash beef prices were higher early Monday. USDA quoted the choice cutout was $143.78/cwt, up $0.71/cwt from Friday. The strike at the Tyson Foods' beef plant in Alberta remained the focus of much attention. The OCT '05 Feeder was off $0.20/cwt at $117.475/cwt. Feed yard managers were disappointed this week; futures had been in their favor until Friday. Two weeks of only moderate movement had left them with an optimistic attitude that was hoped to carry over to this week with most lots current and slaughter weights down for the first time in months. However, fears of more fund selling and lower live cattle futures weighed on the market. Cash producers have been aggressively marketing cattle at the proper weights now and are now pushing the lighter weights. Feeder cattle producers should be short NOV '05 and JAN Ô06 futures to cover 4th and 1st quarter marketings.

LEAN HOGS on the DEC '05 futures were off $1.175/cwt at $60.325 in trading at the CME. The FEB '05 lean hogs contract was off $1.225 at $63.425/cwt. Support was met at $61.45/cwt last Friday and broken today as trading posted further price decline. Lower cash hog prices on Monday and lower cash pork prices pressured futures lower. Fund selling continued to be a threat to the market as light speculative selling pushed futures lower. Futures lost some of its attraction after several hard days of downward price movement amid broken uptrends on daily charts. Traders were also reminded by the cash market that production is running near record high levels. Hedgers should be short in this market around $63.00/cwt level protecting 1st quarter marketings.

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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.