Weekly Purcell Report

US - Agricultural US Commodity Market Report by Wayne D. Purcell, Agricultural and Applied Economics, Virginia Tech.
calendar icon 8 March 2006
clock icon 7 minute read

LEAN HOGS on the CME, APR’06LH contract opened in mixed trading sliding to $60.775/cwt to finish the day off $1.225/cwt. The JUNE’06LH futures closed off $0.975/cwt at $69.575/cwt. Futures finished lower after ranging on both sides of previous levels early on. The resistance target for the APR’06LH set at $62.10/cwt by the convergence of the 10 and 20-day moving averages was broken by the end of the day. The 100-day moving average on the JUNE’06LH at $70.44/cwt was a significant support point.

Futures were held amid continued concerns that pork product prices will slide lower and bird flu nerves. Reduced poultry exports and current competition from record large frozen chicken supplies and low leg-quarter and breast prices is a bearish pull on the market. This may soften the seasonal rally in hog prices normally seen. However, the spread of bird flu to the U.S. may fuel demand for pork here. As with other commodities, the Goldman Sachs roll is affecting this market.

In Live-Hog fundamentals, the U.S. Midwest direct hog markets were called steady to mostly firm. Cash hogs early on Monday were better than expected encouraging early short covering. Cash hogs went as high as $1.00/cwt higher on good packer demand. The average pork packer cutout margin for Monday was down $2.55/cwt at $8.20/cwt and up from $2.45/cwt a week ago, according to HedgersEdge.com. The USDA’s pork cutout value for Friday was $67.82/cwt, down $0.31/cwt from Thursday. The live hog equivalent price, based on 51% to 52% lean carcass values, for Friday was up $0.79/cwt from Thursday at $45.47/cwt.

USDA estimated Friday’s slaughter at 391,000 head vs. 380,000 head a weed ago and 370,000 head a year ago. Last week, packers processed 1.945 million hogs, up 370,000 head from the previous week and 330,000 head more than a year ago. The projected value for the two-day average CME lean hog index for Thursday was $61.73, down $0.33 from the previous day. Buyers should keep a watchful eye on this market being ready to establish a price ceiling on the JUNE’06LH at the $69.75/cwt level in case bird flu drives pork demand. Sellers should consider the JUNE’06LH contract to establish a price floor at $68.00/cwt to protect 2nd quarter marketings.

Cash markets for grain were mixed across the U.S. on Monday. High-protein wheat brought higher premiums amid weakening basis for feed grain’s surging movement to processors by corn delivered against March contracts taking advantage of good prices, favorable weather and a good opportunity to clean out the bins. Movement of grain and wheat exceeded last week’s from 50% - 100% in many places but weakened basis where supply outstripped demand.

Hard Red Winter wheat basis held firm reacting to drought concerns even as foreign purchases tumbled to marketing-year lows. A market sell-off occurred overnight Sunday, sinking all grain commodities 3¢/bu to 10¢/bu in response to news of a strengthening U.S. dollar making U.S. grain more expensive on the world market. As news of more bird flu spreads though Europe a dramatic reduction in poultry demand has begun resulting in very cautious feed ingredient buying by the poultry sector.

Bird flu has now been found in over 30 countries killing nearly 100 people. Soybeans may be considered legitimately correctible to 75¢/bu lower in Chicago but many think the underlying support in corn and wheat are considered to be able to hold this range for now as the markets continue to watch underlying fundamentals.

CORN futures on the CBOT opened 2.5¢/bu to 3.5¢/bu lower on Monday with MAR’06 futures finishing down 5.6¢/bu at $2.230/bu and the DEC’06 down 6¢/bu at $2.594/bu as the weekend failed to generate any bullish energy for futures. Export hopes to China from a week ago were shredded turning to expectations that Taiwan and South Korea will seek U.S. corn next week. Weather also anchored corn futures even though hopes for rain in the western Corn Belt build with today’s forecast calling for from 2 – 5 inches of rain in eastern Iowa and points south to parts of Missouri, Illinois, and Indiana.

Weather continues to be a factor in Argentina’s crop this year. Being dry for a long time, rains are now hampering harvest, slowing their ability to fill export orders. Floor sources said that the corn market was primed for a technical setback following the recent surge in prices fueled by fund buying. Downward momentum increased once the technicals started to slide. Funds sold between 10,000 and 12, 000 lots on Monday, traders were quoted as saying. Friday’s CFTC commitments of traders report showed as of last Tuesday large speculators were long 246,828 lots, up 6,568 lots from the week before and down 14,277 short lots at 80,092 lots.

Key support in the DEC’06 is at $2.569/bu. Cash sellers should want to remain forward priced on up to 50% - 60% of new crop sales. Hedgers should look at maintaining short positions at the 50% level. It would not be out of the question to increase short positions to 60% level. No call option would be expected.

SOYBEANS on the CBOT traded erratically in a sideways pattern sinking to 9¢/bu to 10¢/bu lower by noon then rallying somewhat on the day as the MAR’06 soybean contract closed down 6.2¢/bu at $5.870/bu and the NOV’06 finishing down 5¢/bu at $6.224/bu. Bird flu concerns worried the market as declining outside markets such as gold and crude weighed on prices. China’s late action to switch up to six cargoes of beans to the U.S. from Brazil due to loading problems helped the late run, traders said. Moisture contributed to expectations of favorable pod-filling in Argentina as other exports were quiet.

New soybean crop estimates for South American beans were lowered by private crop analysts there but still represent a record crop. Cash basis bids for soybeans in the Midwest early Monday were mostly steady amid slow farmer selling as a drop in futures was expected. Opening Mid-Atlantic cash soybean prices were robust in many places on Monday. Friday’s CFTC report showed funds switching to a net short position for CBOT soybean futures only for the week ended February 28. Cash sellers should consider having up to 50% of the ’06 crop priced at this time. Hedgers should think about maintaining short hedges and look into an out of the money call in case prices rise.

WHEAT futures on the CBOT tumbled in early trading on Monday amid disappointing export news and rain forecasts for the U.S. Plains. Trading sources said this prompted fund selling in the early hours. Early declines in corn and soybeans added to the price slide. The MAR’06 on the CBOT closed down 3.4¢/bu at $3.70/bu with the JULY’06 contract closing down 4.4¢/bu at $3.914/bu. Funds sold 1,000 contracts in the earliest moments of trading with one fund selling 300 MAY’06 futures.

News that the U.S. would miss most of a large wheat sale tendered to Iraq because Canadian and Australian firms would sell another 500,000 tonnes of wheat to that country also pressured wheat prices. U.S. wheat has now missed out on 1.5 million tonnes of recent wheat sales to Iraq. USDA’s weekly export-inspections report showed exports within expectations. Friday’s CFTC report showed funds net long positions expanding for the week ended February 28. Large speculators were net long 14,256 lots while short positions were cut only 1,301 lots. Cash sellers should consider forward pricing up to 45%-50% of the ’06 crop. An out-of-the money call option could be justified.

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