Weekly Purcell Agricultural Commodity Market Report Wayne D. Purcell Agricultural and Applied Economics Virginia Tech

LEAN HOGS on the Chicago closed mostly higher on Monday amid short covering after a recent break in futures. After starting mostly lower, the nearby FEB'06 futures was the only month ending lower with the deferreds all finishing up. The APR'06 looked oversold with a 14 day RSI at 29.50. The FEB'06LH closed off $0.175/cwt at $56.075/cwt while the APR'06LH finished up $0.50/cwt at $61.825/cwt. February's premium to the latest CME lean hog index going into the spot month this week kept it lower, sources said.

The lean hog index for Jan. 26 was down $0.25/cwt at $55.58/cwt. Floor sources said hopes are the market will show steadier amid hopes that packer interest will pick up as the week goes by if margins remain in the black. According to HedgersEdge.com, packer cutout margin on Monday was down $0.10/cwt at $6.40/cwt from Friday's $6.50/cwt but up $0.15/cwt from last week's margin of $6.25/cwt. It looks like the market has confirmed a major top on the weekly chart.

Hedgers in the FEB'06LH have taken profits on 1st quarter sales and now should seriously consider protecting a significant portion of 2nd quarter sales in the JUNE'06LH contract. Cash sellers should be pushing the weight limit on marketings to the limit to take advantage of market support before this oversold market declines.

Grain commodity trading benefited last week from activity from large funds now called "commercials." It is interesting to note the surge in open interest in grain futures in recent years. Open interest is a contract that has not closed the position with the offsetting trade thus completing the "round turn." On the Chicago Board of Trade (CBOT) during the 70's, open interest for wheat ranged form 10,000 to 20,000 contracts and between 50,000 and 100,000 contracts for both corn and soybeans respectively. Wheat open interest on the CBOT is now past 300,000 contracts and is a little over 150,000 at the Kansas City (KCBT) and Minneapolis (MGE) grain exchanges. CBOT corn has setting open interest records for several days.

On Friday, it went above 1 million contracts for the first time ever with soybeans nearing 750,000 contacts. What does all this mean? Total contracts is a generic way to "play" wheat. The near-year supply/demand markets show bearish and are likely to go more that way. Traders don't seem to mind this as more and more move into the Chicago market instead of the KCBT or the MGE which more often than not represents the true wheat fundamentals. Total open interest now exceeds the size of the U.S. wheat crop. This sets a new standard. It is believed by several analysts that this expanding open interest is what is supporting crop prices above fundamental levels. As large funds expand their reach into the commodity markets in the name of portfolio diversification, they could now be considered large commercials.

The tendency for these firms is to be long in the market continually propping up values with spreads that reached into back months. A concern is that what will happen if the money stop coming in or the market were to retreat? This would most likely be a bearish development but not a major market threat to plunge price. Funds hold money for the long-term based on coinciding indexes as they diversify. This would indicate some level of activity level over the long run. However, there are no guarantees. These markets can not be expected to keep up current levels without U.S. crop problems for the 2006 crop. In light of the recently La Nina warning from the U.S. National Oceanic and Atmospheric Administration, weather could be a concern this coming year but it is too early to tell at this time. Markets are expecting more volatility in the coming months as no one knows how the funds will influence the market.

CORN futures on the CBOT were lower early Monday on chart setbacks after the rallies to near five-month highs driven by the funds. The MAR'06 corn contract closed down 1.2¢/bu at $2.242/bu with the DEC'06 futures down 1¢/bu at $2.590/bu amid substantial fund selling taking profits. The CFTC report on Friday showed large speculators growing their net long position by 45,823 lots from the previous week to 194,225 lots in CBOT corn futures. The net short positions were down 44,244 lots to 120,071 lots. The 14 day Relative Strength Index (RSI) for the DEC'06 corn futures finished at 66.84. An RSI of 70 is considered overbought.

Last Friday dogged buying of corn futures by the funds boosted prices and drove the market into overbought levels on the 9 day RSI closing at or above 70. Some support was noted from brisk export sales of U.S. corn but price still contended with the anchor of a very large global supply. The USDA said on Monday that 38.5 million bushels of corn were inspected for export last week, higher than trade estimates between 32 and 38 million. Weather also boosted price as the Argentine corn crop is seen to be suffering. Basis bids for corn were weak early on Monday showing speedy farmer sales. Farmer sales were enormous last week in the U.S. Midwest after the CBOT rally to price levels above $2.00/bu. Cash sellers should hold with last week's considerations of forward pricing the '06 cash crop at 35%. Hedgers should think about being short on 50% of the '06 crop.

SOYBEAN futures on the CBOT were up from 8.4¢/bu to 11.4¢/bu near closing on Monday. The MAR'06 bean contract closed 9.4¢/bu up at $5.986/bu with the NOV'06 futures finishing the day at $6.306/bu, up 9.6¢/bu. The largest gainer was the AUG'06 bean contract closing up 11.4¢/bu at $6.24/bu. Hot, dry weather expected over the next 5 days in Argentina's soybean growing areas propelled price upward through the gaps discussed in last week's report. This movement obliterated the notion that the market may be approaching a downward measuring gap. The NOV'06 gap of 1/12/06 was filled on 1/25, tested again on 1/26, then completely offset with an up-gap move on 1/27.

Another up-gap move on the NOV'06 was charted Monday, 1/30. The 14 day RSI on the NOV'06 bean contract registered a healthy bull-market 49.48 by the end of the day. Everything looks bullish ... except those pesky ending stocks that are so very large. If dry conditions remain, the market may test price to see if these ending stocks could be reduced in light of growing worldwide demand. Is the market telling us that it does not trust there is enough supply to meet demand? Commercial hedging pressured price after the MAR'06 contract spiked 14.2¢/bu for a short time to $6.034/bu before quickly retreating after a run up in soymeal. Exports were disappointingly below the USDA report of 19-27 millions bushels at 18.9 million bushels.

Midwest cash basis bids for beans were weaker on Monday after higher cash price opportunities triggered farmer selling. CFTC data on Friday for futures and options showed large funds short CBOT beans as of January 24. Chart resistance for the MAR'06 bean contract is now between $5.99 & $6.10/bu with chart resistance for the NOV'06 contract at $6.24 - $6.33/bu. Cash sellers should think about keeping no more than 20-25% of the '06 crop forward contracted. Hedgers should consider staying with 45% of the crop in short hedges. You could also consider buying an out of the money call on the NOV'06 in case prices rise.

WHEAT futures in Kansas City at the KCBT ended 4.5¢/bu higher at $3.983/bu with the MAY'06 KCBT contract closing up 3¢/bu at $4.015/bu. Strength in the CBOT soybean complex supported wheat price up but most of the lift were a result of hopes that U.S. wheat sales to Iraq would become a reality after a tendered offer for 1 million tonnes (37+ million bushels) on Saturday. Wednesday should show the results of the offer. With no significant moisture in the forecast, drought remained fundamental price support as the condition of the new crop declines each day.

In addition, the wheat crop in Russia is now trouble due to extremely cold weather. Export provided additional price support as USDA reported 23.4 million bushels were inspected. This was 7 million more bushels than expected. By the end of Monday's trading on the CBOT, the 9 day RSI for the MAR'06 contract was near the overbought number of 70 at 69. The funds showed a bearish move down 333 lots to 44,467 lots. Short funds were up 262 lots at 3,128. Cash bids for U.S. wheat fell 5¢/bu late Monday after global sources reported Argentina will likely harvest 12 million metric tons of wheat in the '06 crop. The forecast is higher-than-expected for key Argentine wheat producing areas. However, Argentine wheat export levels fell 55% for December.

This was the 7 month in a row exports were down in that country. Traders said sales were down largely due to heavy buying when clients loaded up on wheat early last year amid a record South American wheat crop. The KCBT/CBOT spread on the MAR '06 contract was up 2.7¢/bu at 53¢/bu, premium KCBT. Kansas City spot cash bids for 11% - 13% protein fell from 4 - 6¢/bu while bids for 14% protein were unchanged. Farmer sales limited gains with cash bids lower to steady.

Primary chart resistance on the JLY'06 wheat contact at the CBOT is at $3.698/bu with secondary resistance at $3.762/bu. Prices may eventually challenge the $3.8301/bu high but that may be somewhat optimistic. With that in mind and the '05 crop long gone, cash sellers should have no more than 30% of the '06 crop forward contracted at this time. As short hedgers are now out of the market, it will pay to be vigilant for short opportunities in JULY'06 futures at the $3.78 - $380/bu price level.