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Market Analysis: Alan Brugler

posted on April 12, 2013

Tighter supplies, weather and crop condition pushed the grain markets higher.  For the week, May wheat gained 16 cents, while the nearby corn contract moved 30 cents higher.  Soybeans rallied this week as the May contract posted a weekly gain of 52 cents. Nearby meal prices tagged along, adding $8.40 per ton.  In the softs, cotton continued its downward trend as the May contract posted a weekly loss of $1.21 per hundredweight.  In the dairy market, May Class III milk gained 48 cents while the June contract moved 13 cents higher.  Over in livestock, the June cattle contract fell 75 cents. Nearby feeders were off $3.38. And the June lean hog contract moved 20 cents higher. In the financials, the Euro gained 66 basis points against the dollar. Crude oil lost $1.41 per barrel. Comex Gold declined by $74.50 per ounce. And the Goldman Sachs Commodity Index lost a little more than 5 points to settle at 623.60.

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: We've got a lot going on this week.  One of the issues that has been on the mind of a lot of exporters recently has been the dollar. We've seen it climbing.  This week what is your take on where the dollar might be headed?

Brugler: Well, I think the dollar is starting to pull back a little bit here.  We saw that against the Euro particularly -- actually what has been driving the dollar up mostly has been the Japanese Yen.  Japan has been trying to weaken their currency, kind of take a page out of the U.S. playbook and weaken the currency, stimulate some exports.  That's been really pushing the dollar up.  The dollar itself is a basket of currencies, the dollar index, and we saw a little bit of a correction there this week, which is actually helpful for commodity exports in commodities or price in dollar terms.

Pearson: Now, looking at the Yen, they're predicted to continue to continue to try to weaken the Yen.  Is that going to have a long-term impact on the dollar's place in that basket do you think?

Brugler: Well, the portion of the basket that is Yen denominated, yeah, it'll be kind of a drag on the dollar, or a push on the dollar I should say.  But keep in mind that the U.S. and several other countries have been trying to do the same types of stimulatory things and everybody can't do it at the same time, at least and have any effect on the currency.

Pearson: Okay, so we're all sort of level just --

Brugler: Yeah, it's -- the dollar is cheap compared to what is the way I would put it.

Pearson: Alright, good way to think about it.  Well let's take a look at exactly what is being exported.  Let's talk the wheat market.  We saw some heavy freeze across much of the wheat belt but then we also saw in the report world supplies are looking pretty good. Can you talk to us about what we should expect with wheat here in the upcoming week?

Brugler: Well, this weekend, probably next week as well we'll be very interested in the amount of freeze damage that we saw. We had that freeze at the end of March that affected some of the crop in Oklahoma.  Much of the crop hadn't advanced to a stage that it was vulnerable to the freeze.  We had another cold snap this past week and it looks like some below normal temps again this coming week. So we're continuing to nick that crop.  If there's snow cover it doesn't hurt it so much but if it is jointed or starting to get further on in the heading stage or shooting out stems then it is more vulnerable.  So we're definitely losing some hard red winter wheat protection which is the bread wheat.  Soft red tends to be grown in a different area of the country.  It is actually getting pretty good rains and it's a little behind in maturity but doing okay.  So we think overall the wheat crop is down a little from where we had estimated it would be, particularly the hard red.  On the global side of things though everybody likes growing $8 wheat or $7 wheat and so you're looking at potentially fairly large crops in the Ukraine and Russia.  India has got surplus wheat from last year they're still trying to sell.  So it's kind of like the U.S. and Canada down but the rest of the world is trying to make up for it.

Pearson: So now how is the market going to handle that?  What is the best way for producers in a situation that they're in right now?

Brugler: Well I think you have to be fairly defensive right now.  The normal seasonal pattern, if there is one, is to decline into May or June as we get into harvest and then once the harvest gets put away it goes back up.  Now there are years when we have an exception but we've done a fair amount of forward pricing both in the cash market and in terms of hedges and we think we just want to stay defensive until we know just how much the crop has been lost to that weather.

Pearson: So -- so keep an eye on it, see how things shake out in the next week or so before we get a true idea of what is happening on the fields in the Midwest?

Brugler: With a potential for the second or third largest world crop this year you can't, can't wait to sell.  You've got to have something on the books.

Pearson: Don't wait until harvest and get caught up.  Alright.  Well let's take a look at corn.  We did see corn kind of reverse its trend that we've been looking at for the past couple of weeks.  We saw a rise this week.  What is driving the corn market?  Can you talk to us a little bit about the supply and demand estimates?

Brugler: Well, basically as you know March 28th we got a bit of a surprise on the grain stocks side.  There was more corn sitting there in the country than what the trade had anticipated.  If you go back in hindsight you can see what, well, exports were way down so that stuff didn't get shipped out of there and so forth.  But -- but the story this week was that USDA basically decided that most of the "excess corn" that was around was going to be used between now and the end of September, excuse me, the beginning of September, that we're basically still in a price rationing mode.  We knocked the price down, that ethanol consumption will go up, feed use will go up, exports will probably respond to a degree and therefore they did not fully reflect that stock surprise in their year end projections.  That is bullish.  And then we got a little bit of life in the wheat market which had been used as a substitute for corn feeding and that also helped the corn.

Pearson: So now looking at old crop corn, this current rally that we're on, how high do you think we can ride this?  What is the trade's best level of support to keep an eye out?

Brugler: Well, we've got some chart resistance in the $6.50s and we've got some more in the $6.75 level.  I would be very surprised to see it go above $7.00 on the board.  We have to be a little careful here because there's probably no deliverable stocks against the May futures so there's potential for a little bit of speculative short squeeze there.  The commercial elevators already are moving their bids to the July though so that doesn't mean the farmer will necessarily see it.  If the cash business based on the July but it's the May that is going up, you don't get the benefit.

Pearson: Sure.  Sure, now taking a look at new crop, what is your best advice to producers out there?

Brugler: Defensive.  We are talking about the largest acreage since 1936.  I think we're going to get a little nervous about late planting here.  The USDA is probably going to come out with their first actual planting progress report for corn this week, just remind people that while we had, you know, 15-20% of the stuff planted last year the average for this week is only 4%.  So we're not that far behind long-term history, we are behind last year.  Where that will become an issue though is if we plant average or later and then have a hot summer.  Okay.  The advantage to the early planting is that you get better pollination.

Pearson: Certainly.

Brugler: So, any delays in planting, while maybe not technically a problem, are a problem if it is followed by a hot, dry summer.

Pearson: If we get a repeat of last year's summer temperature wise.

Brugler: Or even two years ago when we had the heat, with adequate moisture it still hurt the yield.

Pearson: Certainly.  Certainly.  So go ahead and plan on selling into this rally if you've got some uncommitted bushels for new crop do you think?

Brugler: I think there's a lot of producers that are not as far sold as they probably should be given the potential for the down side.  Now, flip side of that is that 33 out of the last 37 years December corn futures have rallied enough on a weather scare to take out their January high.  That was $6.05 a bushel.  So there were four years it didn't but the odds are pretty good that we'll have some kind of weather scare at some point.  So it doesn't mean you have to load up the sales here to the max.

Pearson: Alright.  Well let's talk soybeans.  Soybeans are also being carried along on this recent little rally we've got.  What are your thoughts on old crop beans?  How did the market interpret the supply and demand estimates there?

Brugler: Well, actually that was bullish as well because USDA left the ending stocks at 125 million bushels, trade had been looking for 10 or 15 million bushel increase there, a little looser stocks use situation.  USDA raised the exports another 5 million basically saying we're still selling more.  They were cautious I think in that because there are cancellations.  There is a potential that some of the sales that are already on the books don't end up getting shipped.  People question why they didn't go a little further on the export sales estimate but that's why.  And the other reason is we're basically running out of beans at the rate we're going.  So it's bullish but, again, South America has got a record crop.  USDA did not cut the South American production which had been anticipated.  They left the numbers fairly high and so there's a very narrow window for the U.S. to export in and, in fact, the last five weeks our exports have been running below their normal pace.  So the South Americans are already starting to eat into our ability to ship.

Pearson: And that has been something we've been talking about for a while now, they're actually beginning to ship out of South America and get caught up.  So looking at that what sort of resistance levels do you see on old crop beans?

Brugler: $14.40, $14.50 is pretty stout resistance and we're not that far away from it for old crop.  The new crop has been unable to rally really.  We've got this short covering type of thing going in the old crop in the December, excuse me, November is just kind of laying there.  So, again, I think you have to be fairly heavily hedged on the new crop, maybe not so much on the cash side if you're not sure about your weather and your production.  But have some protection against that long-term trend to go down here.

Pearson: Okay.  Because it's -- but we still could get that weather scare this early in the year.  It could happen.  Let's take a look at the softs.  Looking at cotton we saw a little bit of a selloff last week.  We're down a little over $1.20.  What is your thought on the cotton market?

Brugler: Basically the market rallied, the new crop, the December rallied trying to buy acreage.  We actually had an 18% change in price from the fall low until the recent high.  So that's a fairly substantial move.  And then USDA told us in the planting intentions report it really didn't succeed, it really didn't get that many acres but apparently we've given up, okay.  The profit taking has kicked in.  The exports are still doing well in the old crop but USDA left the projected old crop stocks unchanged at 4.2 million bales.  So a little speculative steam is coming out of the market and we do know that there's record large world stocks of cotton.  So it's hard to argue that we need to go upright here.

Pearson: So there is a ceiling, just looking at that record large world there's a ceiling on cotton, we're not going to get a lot of excitement into the market.

Brugler: Yeah, we started to move up both our -- we've just about finished our old crop cotton sales and we recommended people move up their new crop as well.

Pearson: Alright.  Well let's take a look at livestock.  We saw cattle futures get huge on the 28th after we saw the limit down days in corn.  Since then we've trended down a little bit this week.  Can you talk to us about where you see live cattle headed?

Brugler: Basically the meat business is the key here.  Alright, we've got 94%, 93% of last year's cattle numbers on feed.  That is a positive, less supply.  On the other hand, export sales have been iffy, not that good in February, March got better because the Japanese came in and made a big order.  But the box beef price is hanging in there at fairly high levels.  Historically still 6 or 8% above a year ago.  But unable to crack the $2 per pound for the whole carcass, alright, the $200 mark.  As long as that is the case the futures are kind of limited to $128 or $130 for a maximum price.  And that is basically what we've been seeing.  Cash trade this week was $128.

Pearson: Okay.  So we're going to have to wait and see if grilling season can get people out there, get some of this meat sold and consumers willing to pay a little bit more.

Brugler: You nailed it.

Pearson: Alright.  Let's talk about feeders.  As we look at that in the live cattle market we saw feeders pretty good selloff this week, just about -- just shy of $4.  Where do you see the feeder market headed in this environment?

Brugler: Well, feeders are fairly scarce in terms of numbers, you know, the calf crop is down 50 year low and so forth.  but the problem is, of course, corn rallied this week, 30 cents per bushel rally it gets priced into the other inputs, which the number one other input is the feeder cattle.  So feeders were going to go down unless you saw a big rally in the live cattle so that the feeder could pass that on and that didn't really happen this week.

Pearson: So now as we look out to the future on feeders we're just going to be keeping an eye on corn.  Is that going to be the main determination on price in your opinion?

Brugler: Well, the live cattle price has statistically a stronger correlation but the corn is the other main variable.  So if one is moving and the other isn't that will drive the price.  We think there's pretty good technical support chart, support in the $133 area.  The funds had had a record large long position in feeder cattle, now they're actually back to negative position so we washed out all that selling, that's out of the market now and the market should be a little clean technically speaking and if you get a little break in corn or if the cattle gets some traction here with the grilling weather then I think you could see the feeders go back up.

Pearson: Alright, well let's take a look at hogs.  We saw a bit of an increase in hogs.  Where do you see the hog market headed?

Brugler: Seasonal tendency would be for hogs to go up into the summer here because we have smaller slaughter numbers, less production, you get the barbeque season going and some other things.  Right now we're struggling a little bit because the export market is not doing well.  The Census Bureau put out the February data this week, we were down 12%.  USDA started a report, weekly pork export sales, first week looked pretty good, 34-35,000 tons, last week was in the teens.  So the market -- world market is saying we'd like to pay a little less for your pork and once we get that to happen then the market will go.

Pearson: Alright, good things to keep an eye on.  Thank you so much, Alan, for being with us today.

Brugler: My pleasure.

Pearson: 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.  And be sure to join us next week when we'll examine the impact of record-breaking growth in the wind energy sector.  So until next time, thanks for watching.  I'm Mike Pearson.  Have a great week.

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