Weekly Purcell Agricultural Commodity Market Report

Mike Roberts
Commodity Marketing Agent
Virginia Tech

November 8, 2005

The Net Farm Income estimates were published by USDA last week. In 2005, net farm income is forecast to be down $11 billion after rising 30% between 2003 and 2004. The largest decline in average net cash income is for wheat farms according to the report. Average farm household income in 2005 is expected to rise 2.7% from 2005. Average farm household income has risen each year over the past 5 years. One has to keep in mind however that the "Average Farm Income" includes all off-farm income as well. Farm value of production is forecast to be down 3% from a record high established in 2004. Livestock production income is expected to remain relatively unchanged from 2004 while crop production income is expected to decline by 8.9%. Direct government payments are expected to increase by $9.4 billion, up from $13.3 billion in 2004. Total production expenses in 2005 are projected to be up $12.2 billion from 2004. Prices of oil and natural gas are big drivers of the increased costs for purchased inputs such as fuels, fertilizers, pesticides, and electricity. What does this mean? It means that the importance of focused marketing decisions will very important to net farm income and the viability of the agricultural business.

CORN futures were weak in early trading on Monday opening down 0.2¢/bu at $1.952/bu. Monday's close on the DEC'05 Corn futures saw another life-of-contract low reached at $1.944, down 1¢/bu from Friday's close of $1.954/bu. Trade at the CBOT was seen as spillover from the tumbling soy complex, ongoing pressure from a large supply of feed grains and worry of potential impact of bird flu on feed demand. The Relative Strength Index (RSI) stood at 28.89 by noon. A market is considered oversold below an RSI of 30.00 and overbought above an RSI of 70.00. Pit sources said fund selling was pushing the market lower but was still somewhat underpinned by slow farmer selling and firm cash basis markets. Exports were quiet amid hopes corn would soon be going to South Korea where buyers are expected to make an impact. USDA said corn-for-export inspections were down 2 million bushels from last week. Weather has been taken out of the picture as corn harvest is virtually complete. LDPs today in the Mid Atlantic region were 2¢/bu higher at $0.43/bu while a 1¢/bu lower-from-last-week rate was observed in the Midwest. The risk is still being carried entirely in the basis. At present fuel prices, storage costs on average will run about 20-25¢/bu for 6 months. A forward contract to price corn for Jan., Feb., or Mar. delivery should now be considered. Historically, price increases don't normally cover storage costs from now through next March. If you want to hold the '05 crop in storage for a May or July delivery, it might be a good idea to consider an out of the money Call Option in case there is a price rally next year. Hedgers could go short on 20% of the 2005 crop in storage. Some might consider purchasing a MAR'06 Put Option at $2.10/bu for 8.6¢/bu if the crop in storage has not already been forward contracted for delivery. Users of grain should still forward price as much of this market as they can afford. Producers who have not hedged the '06 crop yet should consider hedging up to 50-60% of the 2006 crop at this time.

.SOYBEANS slide in Monday's trading. The NOV'05 futures closed down 9¢/bu at $5.714/bu. JAN'06 soybeans gapped lower, opening below its 50-day moving average of $5.907/bu. Futures still remained under pressure from the big U.S. soybean crop. Some analysts forecast harvest lows have already occurred. However, USDA will release its November WASDE report on Thursday and pit sources expect this year's output to be near 3 billion bushels, the second largest bean crop on record. This expectation coupled with decent crop weather in South America is providing downward pressure on price. Additionally, fund selling saw near 1000 contracts sold on the JAN'06 futures. The RSI in the NOV'05 soybean futures stood at 50.25 at closing providing plenty of room for more shorts in the market. Exports were quite over the weekend amid almost daily talk that China is seeking or buying U.S. soybean products. However, USDA export inspections on beans were down 7 million bushels from one week ago. As with corn, weather is becoming less, and less a factor in the U.S. crop as harvest nears completion. Cash basis bids for soybeans in the Midwest were firm due to slow farmer selling and strong crusher demand. Large Speculators broadened their net long positions at the Chicago Board of Trade (CBOT). In futures and options combined, the funds were net long several thousand lots. This report is still optimistic for short hedging opportunities over the next few days. That opportunity is expected to run its course by the end of the week. For selective hedgers it is recommended to get in now or sit back and watch the action. Resistance at $5.891/bu is seen today and could move downward to $5.82/bu range by the latter part of the week. Primary support today is at $5.581/bu with secondary support at $5.63/bu. Cash marketers should seriously consider selling more of any unsold portions of the '05 crop on price rallies. There were no reported LDPs for soybeans on Monday. LDPs may materialize toward the end of this week. Careful market watchers may have selective short opportunities in this bearish looking market. For users of soybean products, now is the time to buy in the cash market.

WHEAT futures for the DEC'05 wheat on the CBOT closed down 1¢/bu to a new life of contract low at $3.102/bu pressured by the lack of exports over the weekend and good overall weather prospects in the U.S. winter wheat region. However, crops in Oklahoma and Texas are seen as needing rain. USDA export inspections for wheat mimicked corn and soybeans in the downside. Long profit taking in the Kansas City Board of Trade (KCBT) weighed heavily on CBOT wheat. Friday's CFTC Commitments of Traders report showed large speculators added to their net short positions in CBOT wheat. Funds were net short almost 40,000 contracts in futures and options combined. Advice from last week's report that Selective Hedgers should be out of the DEC'05 market and should not be short as the market trades sideways still holds. There is still some upside potential in this market for the JULY'06 contract before '06 harvest. Hedgers may want to forward contract 10-20% of the '06 crop then consider an out of the money JULY Call Option in case of a price rally. Considering wheat stock forecasts, it may be prudent to hold off pricing any more of the '06 crop until December or January.

LIVE CATTLE in the DEC'05 closed up $0.325/cwt at $91.80cwt. The FEB'06LC broke above the $94/cwt mark last Friday and closed up $0.40/cwt at $94.65/cwt today in excited trading. Price, Open Interest, and both the 10 and 20 day moving averages were up, all technical indications of sustaining the longs. Momentum from a higher trending market, on better than expected news, helped push futures up again. The cash, fed cattle market held firm last week reflecting strength of a tight supply situation and steady wholesale beef prices. Analysts say that beef is moving through retail channels at a very good pace for the market. Expected Japanese demand opportunities are also buoying the market. Many believe that Live Cattle futures are not paying attention to the USDA prediction of major increases in beef production as they refuse to break. Due to low feed costs, there is more justification in the fundamental strength in feeders. As stated last week, later live cattle contracts are still overpriced and could present hedging opportunities on the short side. A cluster of sell orders are in place in the DEC'05 and the FEB'06 just under $90/cwt and $93/cwt respectively. Live cattle feeders should be short in both the DEC'05 and the FEB'06 market to protect 4th and 1st quarter sales. Feeder cattle producers can be short in the NOV'05 contract to cover late marketings but have been stopped out of the JAN'06 and MAR'06 futures. The JAN'06 closed up $0.125/cwt at $114.775/cwt while the MAR'06 contract closed up $0.375/cwt at $112.30/cwt.

LEAN HOGS on the DEC'05 Lean Hogs (LH) futures opened $0.025/cwt higher on Monday amid good trading volume. The DEC'05LH finished strong closing up $1.475/cwt at $63.75/cwt. The FEB'06LH contract closed up $1.425/cwt at $67.75/cwt. While most of the news for the trading day revolved around livestock grain inputs, the good news for lean hogs is that both finished strong. The DEC'05LH contract found good buyer interest as that contract never slipped under $62.30/cwt. Cash prices were steady on Monday and are expected to remain so as the breeding herd seems to be building at a slow rate. Analysts are hopeful that cash prices are near the low price for the fall but the market must get by Thanksgiving in order to properly assess whether or not the low point has been passed. The most encouraging fundamental this week is the continued stability in the wholesale pork market, thanks in some part to exports. Both producers and packers are enjoying a decent profit margin. Continued firmness in price is a good sign that prices will hold. The 10 and 20 day moving averages were close to intersecting on Friday but a strong showing today sustained a separation. Last Friday the 10 and 20 day moving average for the FEB'06 contract did intersect. It now may be a good idea for hedgers to be short in the FEB'06LH around the $65.00/cwt level protecting the 1st quarter sales.

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.