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Market Analysis: Alan Brugler

posted on January 4, 2013

Grain prices fell again this week due largely to a surging dollar.  For the week, March wheat lost 32 cents, while the nearby corn contract moved 14 cents lower.  The resurgent greenback and China's cancellation of another big purchase pressured soybeans this week as the March contract lost 50 cents.  Nearby meal followed suit giving up nearly $26 per ton.  In the softs, cotton escaped this week's carnage as the March contract gained 39 cents per hundred weight.  In the dairy market, February Class III Milk lost 14 cents, while the deferred contract moved 9 cents higher.  Over in livestock, February cattle lost 62 cents.  Nearby feeders advanced by $1.60.  And the February lean hog contract declined by 15 cents.  In the financials, the Euro lost 151 basis points against the dollar.  Crude oil declined by $2.29 per barrel.  Comex Gold declined by $7 per ounce.  And the Goldman Sachs Commodity Index gained more than 3 points to settle at 647.05.

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 again.

Pearson: It's been a busy week in the broader markets as we're looking at the equities.  We had the S&P 500 touch a five year high and the Dow Jones saw a 300 point rally on Wednesday.  Where do you see us going from here?

Brugler: Well, I think the equity markets were A, relieved to get some kind of a deal on the fiscal cliff even if it is just temporary fixes in some cases and I think you also just had some money that was parked on the sidelines until the beginning of the year, it was the first day of the year, let's go, let's put some money to work.  Yeah, it's hard to say where the thing is going.  The economy is still kind of in second gear.  It's not really rolling right along here.  But companies have done a pretty good job of capturing the earnings that are out there and I think the market is justified with where it is at.

Pearson: So is this going to be pretty sustainable do you think for at least the next little while?  Or just kind of wait and see how the economy keeps shaping up?

Brugler: I think we've got to get past the winter quarter here to find out what the uncertainty did or didn't do to the economy.  A lot of Christmas hiring goes away and you've got seasonal adjusted data that doesn't stabilize for two or three months.  I think there's some positives out there.  Real estate is definitely picking up, housing and there's a lot of sections of the economy that are tied to that including our good friend cotton.

Pearson: So we'll just continue to watch those numbers and see how things shape up.  The other big story this week was the dollar as its surge compared to the Euro.  Where do you see that going and what is driving that?

Brugler: Well, any currency pair is basically, when we say strong or weak it is compared to what?  And in this case I think the Euro was going down for some, again, first of the year kind of position adjustments there and then in Japan of course we have a new government there that has been suffering from a strong Yen.  It has hurt their exports so they're doing things to try and weaken the Yen versus the dollar.  So you've got the Euro and the Yen both trying to work against the dollar and the dollar works higher based on those moves.

Pearson: And that is going to continue probably for a little while?

Brugler: I think we've got some short-term buy signals in the dollar, longer term the charts are still fairly bearish.

Pearson: All right, and is that what is causing this big sell off we saw in the grain complex this week?

Brugler: Rising dollar doesn't help commodities that are priced in dollars because in theory if each dollar can buy more value then it takes fewer dollars to buy a given quantity, a bushel or a bale of cotton.  So yeah, the stronger dollar doesn't help us.  It won't dominate the value if there's something fundamental going on but most of the fundamental news is next week.

Pearson: Let's talk fundamentals for what we've got this week.  We saw a 32 cent slide in wheat.  What is driving that primarily?

Brugler: Basically we've got a fairly narrow window to make export sales.  The U.S. actually had a million ton sale week two weeks ago because of the first part of that price slide but then we got into the holidays and we've got India announcing that they're going to let some wheat go below market values.  And I think the key point is we've got some technical selling.  We broke out of the trading range that we've been in for months. Some of the traditional measures, point and figure charting and so forth, would say that wheat has to go lower yet before it reaches value.

Pearson: How much lower do you think that is going to slide?

Brugler: Well, I think the $8 number is kind of round number support here particularly with the crop reports coming up and we'll just have to see if we can tighten up the world stocks enough to make it give us a bounce.  We're oversold technically, the market is looking for an excuse to go up but it really hasn't found one yet.

Pearson: All right.  And so export news, we're probably not going to get much until we get the report out next week?

Brugler: I would look to see bigger export numbers after we get past the holiday reporting period but keep in mind next Thursday's report is still dealing with last week's data which is New Year's week so we'll probably still be light.

Pearson: All right.  Well let's talk soybeans.  We had another big cancellation from China on a soybean order.  Is that contributing to their 50 cent slide this week?

Brugler: Definitely.  We had a couple of big cancellations earlier and the market was kind of thinking, well, maybe that's over and we've got them washed out and then here comes another three hundred and some thousand ton cancellation.  Now, they're cancelling on the one hand but other entities are buying.  So it's not that we're really losing that much business net but the problem is we were looking at 81% or 83% of the total commitments for the year already being on the books.  Now we're starting to slip a little bit because some of these sales are going back off the books.  And there are penalties in those contracts. It goes to arbitration to figure out who lost money.  But if you bought those beans at $17 a bushel maybe the penalty is cheaper than taking delivery.

Pearson: You can pencil it out and it makes sense.  With this slide do you see more of these cancellations coming?  Or do you think we'll just see a greater share going to export moving forward?

Brugler: Well, I think the biggest risk is that our export sales just slow down, that we've got most of what we need to get sold on the books already.  South America is looking fairly good right now as far as their production.  The ag attaché raised the estimated production for Brazil to 83 million tons the other day.  That is not official data but it tells you they don't think there is a problem there.  So if you're a global importer you're just trying to get to March and April and hoping to get your hands on some cheaper new crop South American beans.  So the U.S. is going to ship what we've got sold and probably see those weekly sales commitments go down to 100,000, 200,000 tons a week eventually.

Pearson: Just hand to mouth until we can see what is coming out of South America.  With that in mind, what kind of price range do you see beans trading in here in the near future, I guess taking into consideration what we see next week I suppose?

Brugler: Well, yeah, we'll have to see if the USDA is going to have any surprises for us.  But I think from a technical standpoint the market has dropped enough now that it is getting too far below trend.  The markets are mean reverting.  When you get too far below trend some of these hedge funds will try and buy them.  Our price and probability forecast for March soybean low was $13.52 and I believe we got to $13.56 or $13.57 today. So it's saying that is a value zone, standard deviation would allow you to go a little lower than that.  But that is kind of a target for us.

Pearson: And so we'll see hopefully more of that fund money coming back out of the sidelines and maybe moving into these commodities?

Brugler: That's something to be looking for keeping in mind that if South America production is big and then we have a normal start to the growing season eventually we'll be lower than we are now.

Pearson: Well, let's talk corn.  Do you see a similar thing happening in the corn markets?

Brugler: Yeah, exports are just almost non-existent between cancellations and just slow sales and the holidays.  We basically sold less than one ship load last week to put it bluntly.  And that is a problem.  We know that the corn demand is the most elastic, it'll go away if the price is too high and what is happening is Brazil stepped up and had just a tremendous increase in corn exports to the point where it is even delaying some of their soybeans exports because they're loading corn.  But some of our traditional customers have gone away from us, gone to South America.  And so we do anticipate the USDA is going to cut the corn export number next Friday in the supply and demand report.  I think the bigger question for corn is what do they do on feed use and if they make any changes on the corn production.  Big debate about harvested acres and they need the December farmer surveys to answer that question and we don't have access to that information yet.

Pearson: So we're going to wait and see.

Brugler: Basically.  If somebody says just call it up or call it down they're really a gambler.  They're not understanding the fine points of the analysis.

Pearson: Because the analysis, the information just isn't out there for you to analyze.

Brugler: Yeah.  WASDE doesn't even know, which is the forecasting group of USDA.  They're waiting for NASS who does the surveys to tell them what the numbers are and then they'll put them together.

Pearson: And then we'll all see it next week.  You mentioned cotton a little bit earlier.  Where do you see cotton headed?

Brugler: I think it is probably headed down over time.  Cotton is an interesting case because we've got record world ending stocks and China has nearly half of those stocks but they're still in the world market buying cotton and their internal prices have started to go up.  But this week they hinted, they didn't make a formal announcement, but they hinted they were going to start selling reserve cotton in order to slow down those price increases.  And when and if they do that it will take the edge off the export market as well.  So we've had a ten percent rally in cotton despite this overwhelming supply and I think that's a good lesson for the grains, that you can have rallies even if the long-term picture is bearish.  But I think we're about done with this upward move and about ready to pull back down.

Pearson: All right. So something to look forward to for cotton producers out there.  Capitalize on the price when you've got it.

Brugler: We're moving up our sales and we've got some puts on.

Pearson: Well let's talk livestock.  With this drop in corn where do you see feeders going?

Brugler: As long as corn stays, keeps getting cheaper I think feeders go up.  We bid the cheaper feed into the walking input, as we call them.  Obviously the other part of that equation is what are you doing on the live cattle side.  But we know feeder numbers are down overall, we know that a lot of them did get moved into the lots early as lightweights because the pasture wasn't there.  So we're probably getting into some tighter numbers here this spring as far as physically having the feeders to put in the lots and that will tend to support the price.

Pearson: Do you have a price range you think feeders might trade in?

Brugler: We think the $150 to $160 range in the broader sense is fair given what we know about the supply.

Pearson: All right.  Well, let's talk live cattle.  Where do you see live cattle headed?

Brugler: They are trying to price in the tighter production, tighter supplies.  We're actually going to have a little bit of an increase in finished cattle marketings here as we go into late January/February.  So supply side would suggest we back off a little bit.  But longer term is looks like for all four quarters of this year beef production is going to be down four to five to six percent per quarter versus the same quarter a year ago.  So that says prices ought to be at least five, six, seven percent higher than a year ago assuming the consumer will pay it.

Pearson: And what -- how long are we going to have to wait to see what the consumer is willing to pay?

Brugler: Well, it's going to evolve all year long.  I think we know that historically choice beef, the 600, 900 pound carcass has only traded about $200 once and that was back in '03 when we had the whole world market to ourselves.  So that is the first marker, can we in fact take out that all time high?  Futures are basically trading $206, $207 right now equivalent so they're betting that the consumer will, in fact, pay record high prices for beef.  In a slow growth economy I'm not so sure.  But technical action is still positive on the cattle and the cattle futures don't have to respect the cash until you get into deliveries in February.  So there's a little time here.

Pearson: A little time to wait and see.  Let's talk hogs.  You mentioned if the economy doesn't strengthen, if consumers aren't willing to pay those prices at the meat counter for beef, do you think that's going to be bullish on pork?

Brugler: Well, obviously you've got substitution.  You've got pork and beef and chicken and turkey and the consumer will make some adjustment in their diet or their mix of meat that they buy based on price.  So record high beef would imply some switch towards the pork and the poultry.  As we know from the hogs and pigs report, pork production is actually a little larger than we had originally thought it might be.  I've got some upward revisions to the summer numbers and farrowing intentions were a little larger for the Dec, Jan, Feb period.  So I think we do have a little bit more pork supply there.  So yeah, probably we get a little more domestic consumption.  But the real story in pork is exports.  If we're exporting 22, 23, 24% of our production that has a major impact on what the consumer price will be and how much is available for the consumer.

Pearson: With that in mind, real quick, what sort of top end do you see for pork prices this spring?

Brugler: Well, we're already trading some of those summer contracts around $100.  I think $104, $105 is probably about it.

Pearson: 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 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 USDA's latest estimates on supply and demand.  Until then, thanks for watching.  I'm Mike Pearson.  Have a great week.

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Tags: agriculture Alan Brugler commodity prices drought economy markets Mike Pearson