Weekly Purcell Report

US - Agricultural US Commodity Market Report by Wayne D. Purcell, Agricultural and Applied Economics, Virginia Tech.
calendar icon 23 February 2006
clock icon 7 minute read


LEAN HOGS on the APR’06LH contract closed up $0.75/cwt at $63.25/cwt while the JUNE’06LH futures contract closed at $70.725/cwt, up $0.075/cwt. Gains in futures trailed gains in the cash hog market. The pace tapered off late in the day amid talk that cash hog prices may weaken by the end of the week. Several dealers anticipate the number of market-ready hogs increasing this week as bitter cold in the Midwest slows hog deliveries.

The USDA reported on Monday the Pork Composite Cutout Value at $63.66/cwt, up $0.79/cwt. The latest CME lean hog index price was up $0.57/cwt at $60.46/cwt. The average packer cutout margin for Tuesday was down from a negative $1.30/cwt last Friday to a negative $2.10/cwt according to HedgersEdge.com. Price correction undulations are expected over the next few weeks as there is still heavy interest in the sell strength of this market. Hedgers are out of this market now. Sellers should consider holding all risk in the cash market with a watchful eye on the JUNE’06LH and the JULY’06 contracts to protect 2nd and 3rd quarter marketings.

Last week’s exports for U.S. corn, soybeans, and wheat was viewed as generally good. Corn and wheat posted numbers at or better than expectations while soybean export numbers were on the high-side of the mid-range of expected postings. At the USDA Annual U.S. and World Agricultural Situation and Outlook Conference in Washington D.C. estimates using trend lines were made for the ‘06/’07 marketing year. Ending stocks for ‘06/’07 U.S. soybeans were placed at 555 million bushels. U.S. corn acres were reduced by 1.3 million acres and an increase in demand due primarily to ethanol production yielded smaller corn ending stocks numbers for the ‘06/’07 crop year.

CORN futures on the CBOT opened mixed on Tuesday with the MAR’06 corn down 0.4¢/bu lower at $2.252/bu. After opening up 0.2¢/bu at $2.606/bu, the DEC’06 quickly followed lower 0.4¢/bu to $2.606/bu. Prices lost footing after that with the MAR’06 closing down 0.4¢/bu at $2.26/bu and the DEC’06 even at $2.61/bu. After the strong close on Friday price setbacks tied to technical fund buying were expected. Exports were quiet over the weekend amid news of bird flu spreading in Europe. These combined to form bearish factors for the market. Because of the drought, corn yields in Argentina are expected to be down 6.5 million tonnes (232 million bushels) from last year’s record crop to 14 million tonnes ((500 million bushels).

This is 17% lower than last year’s Argentine corn crop. The drought is expected to continue in Argentina for the rest of this week while Brazil is expecting rain relief. Friday’s CFTC Commitment of Traders report for futures and options combined showed large speculator long up 1,686 lots from the previous week at 222,731 lots and shorts down 4,410 at 91,343 lots. Cash basis bids for corn in the Midwest and Atlantic east coast late on Friday were mostly steady amid light farmer selling in response to somewhat improving cash offers. Corn basis looks now gaining despite rising futures that appear to be supported more by perception than fundamental supply/demand factors.

This moved cash price up a range of 7¢/bu to 10¢/bu in many places. This is a very, very important place in the new crop corn contract. Prices for ’06 corn are only 29% likely to go above this level. The ’05 corn crop should be long gone. Cash sellers should consider forward pricing up to 50% of the ’06 crop. Hedgers should look at December put options in case prices turn bearish. If you think that price may still have some upside potential an out-of-the money December or September call option can purchased to establish a price floor with upside potential.

SOYBEAN CBOT futures opened 5¢/bu to 7¢/bu lower with the MAR’06 down 6.2¢/bu at $5.950/bu and the NOV’06 starting down 5.4¢/bu to $6.240/bu. At closing the MAR’06 soybean contract was down 13.6¢/bu at $5.874/bu and the NOV’06 finishing down 9¢/bu at $6.204/bu. These technical setbacks were expected after the roaring finish on Friday tied to long activity by the commercials. Showing the market is aware of the current supply/demand situation, the bears tried to take over amid news of hot, dry weather in South America grain growing regions and bird flu outbreak reports in Europe and India.

Friday’s CFTC Commitments of Traders report for futures and options combined showed large long speculators up 16 lots from the previous week to 59,194 lots while those with large short positions were down 6,473 at 58,233 lots. A closing on NOV’06 bean contract below $6.00/bu will show the bears have regained control of this market. If this happens and ending stocks remain at 500 million bushels, LDPs are a definite possibility on the’06 crop. Cash basis bids for soybeans were mostly steady amid light farmer selling. Cash sellers should consider having up to 35-40% of the ’06 crop priced at this time. Hedgers should think about maintaining short hedges on 45% of the crop and buying an out of the money call to take advantage of a run by the bulls.

WHEAT futures at the CBOT and the MGE got a lift as the wheat market surged on the Kansas City Board of Trade amid weather trouble for growers, floor sources said. At the MGE, spreading as traders rolling into forward months was a millstone around the neck of the MAR’06 contract. On the CBOT, MAR’06 wheat was up 1¢/bu at $3.69/bu while at the KCBT the MAR’06 futures was up 4.4¢/bu at $4.396/bu. The MAR“06 contract at the MGE struggled all day. Kansas City wheat surged as traders fixed their attention on the bad weather in the U.S. Plains hurting the hard winter wheat crop.

Hopes for sales to Iraq were bullish amid announcements on Monday Iraq had plans to buy wheat from Canada, Germany, and the U.S. within the next few days. Iraq tendered an offer for 1 million tonnes (37 million bushels) of U.S. wheat in January. USDA reported export inspections at 15.4 million bushels, below an expected 16 – 23 million bushels. Japan announced it would buy wheat in the near future as well. Friday’s CFTC Commitments of Traders report showed the commercials and other large speculators thinning out of their heavy net long positions in MGE wheat as they rolled contracts forward. On the CBOT, funds were very bullish buying 4000+ contracts by noon, EST. If you are a cash seller and have forward priced up to 30% of the ’06 crop by now, you should seriously consider pricing another 10 – 15% of the crop.

Hedgers should have placed short hedges in the $3.78 - $3.80/bu level on 25% of the ’06 crop and hedged another 10% of the crop last week when the market pushed through $3.60/bu. This should put you hedged at the 35% level. You should consider hedging another 10-15% of the ’06 crop at this time. This will get you priced to 45% - 50% of the ’06 crop. As with last week’s note, “Just price the appropriate amount of the crop for your given situation.“

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