Weekly Purcell Agricultural Commodity Market Report
Mike Roberts
Commodity Marketing Agent
Virginia Tech
January 24, 2006
CORN on Monday at the Chicago Board of Trade (CBOT) for the MAR’06 contract opened up 1.4¢/bu to $2.064/bu. Despite USDA’s record cattle on feed report, market strength found support in timely corn sales of more than 228,000 tonnes, uncertainty over weather forecasts in South American crop regions, and private estimates of smaller U.S. corn planting intentions. U.S. corn acreage seedings is estimated down 2.34 million acres from 2005 plantings at 79.4 million acres. Upward momentum was subdued amid record corn stocks, news confirming a new case of mad cow disease in a Canadian cow, and Japan’s reinstating a U.S. beef ban. Trade reports on Friday showed funds reducing net long positions in CBOT corn. Futures and options combined were net bullish at 22,821 contracts. Midwest cash basis bids for corn were mostly stable Monday morning amid light farmer selling. Chart resistance last Friday for the MAR’06 contract was between $2.080/bu - $2.090/bu with resistance on the DEC’06 futures between $2.44/bu - $2.46/bu. The MAR’06 contract didn’t break resistance closing up 3.2¢/bu at $2.082/bu. The DEC’06 finished up 3.4¢/bu breaking resistance at $2.460/bu. Unless corn stocks decline significantly, LDPs on the ’06 crop would not be surprising next harvest. Cash sellers should consider forward pricing up to 35% of next year’s crop. Hedgers should stay on short positions up to 50% of the ’06 crop.
SOYBEAN futures on the CBOT were up on follow-through buying from Friday’s bullish close. The downward move in freight prices along with a weak U.S. dollar encouraged commodity exports making them more attractive to importers. The MAR’06 rallied up 6.4¢/bu at $5.744/bu with deferred months up 4.4¢/bu to 7.6¢/bu. The NOV’06 futures closed up 7.2¢/bu at $6.046/bu. Mostly dry forecasts for Argentine soybeans fueled support. Additionally, trade data from Friday’s CFTC report led large funds to net short positions at the close of last week and is expected to lead to market volatility in the near-term. The large view of the market is still bearish amid lagging exports from a year ago, plentiful U.S. stocks, and an increase in’06 plantings estimate by analysts. Planting estimates were placed at 76.102 million acres, an expected 3.96 million acre increase over ’05 plantings. Higher-than-expected export inspections for 30.4 million bushels proved price positive. Cash basis bids for soybeans in Midwest markets were steady amid slow sales. Technical resistance on the NOV’06 futures is in the $6.080/bu range. Markets are fascinated by chart gaps. Gaps on the bar chart are widely watched and widely used in managing a trading program. Observation of market actions over time will convince the chart watcher that many analysts employ gaps in placing buy and sell orders, and those actions suggest a self-fulfilling prophecy dimension unless the fundamental picture changes significantly. Fundamentals in place at this time are extremely large world stocks and the fear of lowered off-take due to bird flu fears. In a down market the market will try to come back up and fill the gap. In this instance, short hedgers look to add to their short positions and the bearish speculator will favor selling the rally. There will be a cluster of sell orders in the gap bottom waiting on the anticipated rally. The chances of filling the sell order will be increased if it is placed at, or just below, the gap bottom. When a gap is not filled within 5 to 10 days, it becomes a strong candidate for a break-away gap. Coupled with a crossing of the 10 and 20 day moving averages, the trading gap established on 1/12/06 indicate a technical sell signal. The second gap may become a measuring gap providing a means to project a market move. Monday, on day 6, the NOV’06 soybeans futures contract lacked two ticks filling the gap. This raises the question, “Could this gap be seen as a measuring gap?” If so, prices could decline rather quickly to the target price of $5.85/bu before the next market hesitation. If the market takes a sudden plunge and meets the measuring objective another gap may form indicating a short-term exhaustion gap. This may mean some sort of bottoming action for a time. However, the market may not stay there long due to bearish supply/demand fundamentals in place. Cash sellers should have at least 20% – 25% of the ’06 crop forward priced. Hedgers should now be short up to 45% of next year’s crop in the NOV’06 bean contract.
WHEAT futures on the Kansas City Board of Trade (KCBT) closed mostly lower on Monday amid mild profit-taking. Performance for the KCBT MAR’06 wheat contract was down 4¢/bu at $3.80/bu and the CBOT MAR’06 wheat contract closed down 4¢/bu at $3.60/bu. At the start of the day, prices were supported by weakness in the U.S. dollar, drought in the U.S. Plains and spillover strength from soybeans and corn. Long funds and locals took profits after a run up amid technical sell signals. Weekly export inspections proved somewhat supportive of price totaling 18.871 million bushels, just above trade estimates of 12 to 18 million bushels. Offsetting market support was news indicating Syria would fill Egypt’s order for 300,000 tonnes. Egypt is the world’s largest wheat importer and a large customer of the U.S. Supply was increased today also with some analysts forecasting the U.S. winter wheat acreage up 934,000 acres from last year at 41.367 million acres. CFTC reported Jan. 17 that long funds were down 2,814 and short funds were down 110 contracts. Basis bids were steady to slightly weaker in slow point-of-contact selling. On the CBOT, primary chart support and resistance for JULY’06 wheat futures are placed at $3.431/bu and $3.496/bu respectively. Cash sellers long ago sold the ’05 crop and should have up to 20%-25% of the ’06 crop priced. Hedgers should consider forward pricing up to 25% of the ’06 crop in JULY’06 Wheat futures.
LIVE CATTLE futures closed slightly lower on Monday amid uncertainty where the Japanese beef import market will go and the announcement of a new mad-cow case in Canada. The FEB’06 live cattle (LC) contract was down $0.20/cwt at $95.575/cwt. APR’06LC futures was down $0.175/cwt at $93.95/cwt. Talk of larger cattle showlists at U.S. Plains feedlots provided a bearish pull to the market amid fund selling near the close, floor sources said. Live cattle followed early gains in feeder cattle futures until the mad-cow case announcement. At first, the market anticipated a Washington-imposed ban on imports, especially feeder cattle, from Canada. The market declined on news that U.S. Agriculture Secretary Mike Johanns expected no change in the status of Canadian beef imports. Price support came from the expectation of higher cash cattle prices this week and the statement by South Korea that it would not change its plan to resume U.S. beef imports. Feedlot cattle owners are expected to ask at least $1/cwt more than Friday’s $97.00/cwt to $97.05/cwt. Friday’s USDA cattle-on-feed report still showed a record number of cattle on feed in the U.S. However, the news helped support deferred months while weighing down nearby contracts as the numbers were below market expectations. Choice boxed beef prices were weak in light to moderate offerings with USDA reporting on Friday choice boxed beef down $1.17/cwt from Thursday at $156.85/cwt. Packer cutout margins on Monday were a negative $16.15/cwt, down from a negative $10.75/cwt from Friday but above the negative $24.00/cwt one week ago, according to HedgersEdge.com. Cash marketers should keep sales and weights current while pushing them hard out the door. Live cattle feeders should consider maintaining short hedges in the FEB’06LC on 1st quarter marketings and the APR’06LC for 2nd quarter marketings.
FEEDER CATTLE on the CME JAN’06FC closed up $0.45/cwt at $113.05/cwt on Monday. The MAR’06 and APR’06 both closed up $0.30/cwt at $111.78/cwt and $112.43/cwt respectively. Feeder cattle futures finished higher amid speculation that supplies from Canada may be halted due to the mad-cow case. Unlike live cattle, the market held those gains despite word from U.S. Agriculture Secretary Mike Johanns that the current status of cattle imports would remain unchanged. The market noted an upturn with support in the CME feeder cattle index amid expectations of reduced numbers of feeders coming off dry pastures ahead. The latest CME feeder cattle index for Jan. 19 was up $0.34/cwt at $113.17/cwt. Both feeder cattle and live cattle may have formed distribution tops taking current events in stride. Feeder sellers should be short in the MAR’06FC on a significant portion of 1st quarter sales.
LEAN HOGS on the Chicago closed weaker but above Monday lows. February and April premiums to CME’s hog index, along with caution concerning USDA’s monthly cold storage report on Monday, contributed to the slide. The FEB’06LH contract finished the day down $0.15/cwt at $59.10/cwt on Monday. The APR’06LH was down $0.125/cwt at $63.775/cwt on the close. Late local short covering buoyed the market somewhat. However, prices remained weak as funds took profits covering short positions amid expected shrink in packer margins. The average pork packer cutout margin on Monday sank $0.70/cwt to $6.57/cwt on Friday and $13.20/cwt a week ago according to HedgersEdge.com. Mostly $0.50/cwt - $1.00/cwt higher cash hog prices at Midwest markets provided support on Monday. The Japanese U.S. beef import ban lent strength to lean hog futures in expectations of returning export opportunities for U.S. pork. After a two year ban on U.S. beef due to BSE, pork exports had slowed somewhat. The latest CME lean hog index was up $0.02/cwt at $54.16/cwt. As the market developed late last week, hedgers should have taken profits on the FEB’06LH contract and thus should now be out of that contract. The JUNE’06LH futures should be protecting a small portion of the 2nd quarter marketings with advice to consider a higher level of protection. Cash sellers should start to push the weight envelope in live sales to capitalize on this latest advantage in the red-meat market.
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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 or (804) 733-2686.