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Market Analysis: Alan Brugler

posted on November 2, 2012

While Sandy forced a two-day closure of equity markets in the east, commodity traders pressed on electronically and in Chicago.  For the week, December wheat moved less than a penny higher while the nearby corn contract moved almost 18 cents higher.  With dry conditions in Brazil and increasing Chinese demand soybeans rallied for the second time in as many weeks as the January contract settled with a weekly gain of 27 cents, while nearby meal prices advanced by $7.50 per ton.  In the softs, cotton continued its downward trend posting a loss of $2.07 per hundred weight.  In the dairy market, November Class III milk futures gained a nickel, while the deferred contract moved five cents lower.  Over in livestock, December cattle gained 17 cents, nearby feeders lost 40 cents and the December lean hog contract moved $1.15 lower.  In the financials, the Euro lost 124 basis points against the dollar, crude oil moved lower with the loss of $1.42 per barrel, Comex Gold declined by $36.70 per ounce and the Goldman Sachs Commodity Index lost 13 points to settle at $6.26 even. 

Market Analysis: Alan Brugler

Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Alan Brugler.  Alan, welcome back.

Brugler: Great to be here.

Pearson: Glad to have you.  It's been a big week with Superstorm Sandy in the news and impacting so much of the East Coast.  What effect has that had on the markets this week?

Brugler: Well, it did have a bit of an effect on the livestock sector because people don't realize that if you have all of those restaurants for ten million people closed for several days it cuts your consumption.  We did have at least three packing plants that were shut down because of power outages or high water and that affected the demand for livestock in the eastern Corn Belt as well.  And we're still not back to normal.  There's still a lot of closures, transportation problems in particular.  But it's not the heart of the agricultural meat industry but it is a big demand center.

Pearson: Sure.  So we did see some waterfall effect there from the storm.

Brugler: Right.

Pearson: Moving over to the grain complex, we saw wheat relatively unchanged this week.  Where is the wheat market headed?

Brugler: Basically wheat has been sideways ever since July and with a slightly downward drift to it.  I think the problem is we're not making the numbers that we need to see to hit the USDA forecast for the year on exports.  And the window is getting narrower and narrower for us to do that as South American production comes closer to harvest, actually Argentina is about six percent harvested now.  Australia has just begun harvest so there will be a couple more pockets of supply there to compete with the U.S. wheat.  We're still not competitive into the Middle East or into North Africa.  Egypt bought Russian and Romanian and French wheat this week.  So the market is looking for proof that we can get the export business done.  We think there will be a window there in late December and January to do that but if it doesn't happen prices will have to go lower eventually.

Pearson: So do you see prices sideways until we get to that late December, January turning point?

Brugler: Yeah, some of our technical indicators say there's basically no trend right now and the trend is your friend so if there's no trend it is still not trend.

Pearson: Looking over to corn, where do you see corn headed?  We're still not seeing much of any exports to speak of.  Where do you see that driving the market?

Brugler: Well, corn is doing what it needs to do, it is rationing the consumption.  We're, as you mentioned, very slow export sales.  The ethanol side of thing is not real good either.  We've had a couple of plants this week that announced they're going to shut down at the end of November or they're not going to reopen.  The margins aren’t good there and so we're seeing some rationing on the ethanol side as well.  The livestock section is the big question mark because the USDA has a cut in feed and residual use and we're not sure if we're getting that part.  But the other two parts are declining.  I think the market can just stay at this level for a while and accomplish the objective.  The other question, of course, is do we get an increased supply out of South America in the spring?  What happens to the Argentine corn crop and the Brazilian corn crop?  Brazil in October had record corn exports, 3.6 something million tons so that is one of the reasons we're not getting the export sales, it's coming out of there.

Pearson: People are just waiting to see what happens from South America still?

Brugler: Yeah, if they have a problem then our prices can go a lot higher.  If they come up with a competitively priced supply then we'll go back to looking at acreage for next spring here in the U.S. or we plant more corn or more beans but it won't be quite as urgent as it would be if something happens down south.

Pearson: All right.  With the way things stand currently do you see a trend in the market, anything producers could hang onto?

Brugler: Well, corn is trying to work just a little bit higher.  We're sitting on some pretty good speed line support on the charts so we're being patient on corn and not expecting to go back to the old highs but we are expecting a little bit of post-harvest firmness here and then either we get a surprise of some type that spurs the market or next spring we get something on the acreage side.

Pearson: All right.  Now looking at soybeans we're seeing the exact opposite of corn on the export side.  Soybean exports are at record highs or close to?

Brugler: Not quite record but we've had over 60 million bushels each week for the last two weeks.  The record is somewhere in the mid 70s but very strong export shipments and we expect that to continue.  Probably for the first six months of the year we'll be up 40% to 50% over a year ago on exports.  Again, that is the result of the drought that they had down in South America last growing season and so the U.S. got all the business and so now it's got to be shipped.  The big question here is whether the farmer will sell enough of the beans to the shipper.  We're seeing some pretty strong basis bids and the market is trying to buy that grain away from the farmer but he's say, well, it's down quite a bit from where it was in August and I think I'll just wait.  So, a little firmness there.

Pearson: So do you see basis getting stronger as we work through the rest of this fall and into early winter?

Brugler: It is always a trade off between futures price and basis.  Either the board goes up and does the heavy lifting or if the board isn't because speculators are liquidating, etc. then the basis will have to firm up.  Right now I think that is probably the more likely of the two.

Pearson: All right.  So for folks out there with beans in the bin, probably best bet hold onto them, see where this market goes?  Or what would be your advice there?

Brugler: Yeah, we just put out what we call a price and probability forecast.  It says that statistically we've got pretty good odds of getting it into the upper $16's or maybe as high as $17 over the next few months.  So that says wait but realize that we also have down side targets from that same methodology.

Pearson: Sure.  Let's move back to livestock.  You touched on it earlier.  Where do you see feeder cattle heading?

Brugler: Feeder cattle, their values drive by the corn and by the live cattle.  Live cattle price is still pretty strong right now.  Corn, as we mentioned, we think has a little bit of an upward bias to it right now so that would tend to work against the feeders and you're seeing that, the feeders have sold off over the last few weeks here.  We don't have a lot of feeder cattle out there.  The numbers are down.  The herd is the smallest in 50 years, etc.  So there is a natural support there in terms of the supply side.  But the demand is going to be controlled by whether the feedlot can make any money with them.

Pearson: And do you see that support that is out there providing enough strength to get feeders through the fall and into the winter and into springtime?

Brugler: I think you have a broad uptrend there because of the numbers and you'll see these periodic corrections of $5 or $6 down because they don't work at the feedlot but I think overall we're still in an uptrend.

Pearson: All right.  Well, let's move over to live cattle.  Where do you see live cattle moving?

Brugler: Live cattle are already pricing in record high retail prices for next spring.  The question is, will the consumer pay it?  If you take the futures trades and we're saying $133, $135, $136 if you go far enough out, that would imply as much as $210 for choice cutouts.  We have never been able to make a price above $200 stick.  So the board is saying consumer, we're going to have less beef, you're going to have to pay up. The question is will they pay up or will they shift to chicken or to turkey or something else?

Pearson: And these higher prices are going to start to hit the consumer, we're looking April/March, into that timeframe?

Brugler: Well, we're in a very tight supply right now.  It does ease up and we'll have more finished cattle marketed as we go into year end.  But then we know that the placements are down as far as what we'll have in Feb, March, April and April is historically a pretty strong time for the futures.  Again, my concern is the board has already got a big price premium built into it.  For our guys that are a little more sophisticated we're selling upside calls something above the market for next spring thinking that it won't ever get there.

Pearson: All right.  And now in order for it to get there we'd have to see a lot of -- it's going to have to come from the demand side.  We're going to see a lot of strong demand and consumer willing to pay that price?

Brugler: Right.  Right.  We have to see the consumer pay more and then you get into is that in inflationary environment at that point or is the economy really rolling along and they're feeling better about spending the money?  Or if it is none of the above then we probably won't get it to happen.

Pearson: All right.  Time will tell.  Let's talk hogs quickly.  Where do you see the hog market headed?

Brugler: Hogs benefit from the tighter supply of beef that we see.  We still have a little bit too much on the pork supply.  If you look at the cold storage numbers, if you look at the cutout values themselves, they are down quite a bit from where they were in the summer highs.  But, again, we're seeing strength in pockets.  Ham demand is really good around Thanksgiving and Christmas period but of course most of those hams were bought by the processor for curing previous to now.  So it's not helping the value of the hog at the slaughter plant right now.

Pearson: You bet.  And as we roll through the end of this year and into early next year, if we see a none of the above scenario we were talking about with the beef, there is not inflation, the economy is not stronger, are we going to see the cutout values on hogs rising as they fall on beef do you think?

Brugler: It would be unusual for them to go in opposite directions for very long.  We do get a little help just because of the chicken numbers being down.

Pearson: All right.  Thank you so much, Alan.  That wraps up this edition of Market to Market.  But if you'd like more information from Alan on where these volatile markets just may be headed visit the Market Plus page at our website.  You'll find expanded market analysis, audio podcasts and streaming video of our program as well as links to our Twitter feed and Facebook account all free at the Market to Market website.  Be sure to join us next week when we'll examine the market impact of the elections.  Until then, thanks for watching.  I'm Mike Pearson.  Have a great week.

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Tags: agriculture Alan Brugler cattle commodity prices corn drought economy feeders hogs markets Mike Pearson wheat