Weekly Purcell Report

US - Agricultural US Commodity Market Report by Wayne D. Purcell, Agricultural and Applied Economics, Virginia Tech.
calendar icon 25 January 2006
clock icon 7 minute read

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.

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.

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