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Market Analysis: Alan Brugler

posted on July 5, 2013

Commodity markets were closed Thursday in observance of Independence Day. And during an abbreviated trading week grain prices were mostly flat to lower this week as the trade reacted to a surging U.S. dollar.  For the week, September wheat gained 2 cents, while the September corn contract moved 22 cents lower.  Old crop soybean prices, however, traded sideways, as the August contract gained a penny. Nearby meal prices, however, lost $6.15 per ton.  In the softs, cotton pulled out of its recent slump with an upward move of $1 per hundredweight.  In the dairy market, July Class III milk lost 50 cents while the August contract moved 25 cents lower.  Over in livestock, the August cattle contract lost 7 cents. Nearby feeders advanced by $2.35. And the August lean hog contract posted a weekly gain of 30 cents.  In the financials, the Euro lost 190 basis points against the dollar. Crude oil soared to a 14-month high Friday capping a devilish weekly move of $6.66 per barrel. Comex Gold lost $11 per ounce. And the Goldman Sachs Commodity Index gained more than 20 points to settle at 633-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: It's always a pleasure to be here.

Pearson: And we're glad to have you.  Alan, there's been a lot going on, on the world stage.  As we look over to the Middle East, as we look at Egypt and the recent events that have transpired there, talk to us a little bit about how that is playing in the markets, particularly in crude.

Brugler: Well, you got a big break out in crude oil prices this week, both the Brent and the WTI that we trade here, basically out of concern that supplies either -- the domestic production, which isn't that large in Egypt, or more importantly the flow of the oil through the Suez Canal.  If that gets interrupted, Brent crude in particularly, becomes affected.  That is the European market.  There's some question if that were to happen if the U.S. would start to export some of our crude back to Europe or to the other countries that are affected there.  Obviously that would have an impact here so we did see a big jump in crude oil prices this week.

Pearson: And this spike in prices, obviously it's fear trade, probably going to continue until things settle down, until Egypt, the riots sort of stop or at least slow?

Brugler: Well, certainly there's uncertainty, okay, and yes it could continue, technically with the break out we could go to $114 a barrel pretty easily.  So there's potential for it to go up if the uncertainty continues there and in fact something happens with the Suez.

Pearson: And with nothing on the horizon we'll just keep trading until we see some news, until that uncertainty becomes certainty one way or another.

Brugler: Yes.

Pearson: Well let's take a look at the wheat market.  As we saw, the September contract climbed a little bit this week.  Harvest is ongoing.  What are your thoughts?

Brugler: Well, what we're seeing is that the soft red winter wheat, which is traded in Chicago, has continued to show very good yields.  Harvest has slowed down a little bit because of the rain in the eastern Corn Belt, Ohio, Indiana area particularly.  But the yields have been as advertised with those high crop condition ratings.  The hard red winter wheat was drought inflicted, as you know, and yields are a little lower there. You are getting some positive yield reports but it's mostly from people who had very low expectations.  We did get a report from one of the major consulting firms this week that lowered their hard red winter wheat production, they are 50 million bushels below USDA now and we'll see next week with the USDA report if they agree with that private assessment.

Pearson: And with that in mind, what is your trend for prices?  What is your advice to producers out there?

Brugler: Well, normally we get some kind of a seasonal low for Kansas City and Chicago wheat during the month -- it can happen anytime between May and September but frequently it is in middle to late July.  The market is technically oversold so I'm looking for a low here in the next week or two.  Could get extended if the global situation deteriorates but we're thinking the low pretty soon here in those two classes of wheat.

Pearson: Alright, and the best way for a producer to capitalize on it?  Just look at selling?

Brugler: Well, you lift your hedges, when you find that low try and ride a bounce back into September and then decide if you need to sell some more.

Pearson: Alright, well let's take a look at the corn market.  We still have that inverse continuing with July obviously going, expiring and the September contract still trading as new crop.  We've seen it continue to drop in this recent sell off.  What are your thoughts on folks with old crop corn -- let's talk that first of all -- with anything left in the bin?

Brugler: Well, you're counting on the basis to bail you out there.  The September is clearly not following the July.  Sometimes you get a little kick up as July goes off the board but we don't anticipate September would try to go off, up where July is at.  The inverse will be maintained.  But what you are seeing is the basis against the September is improving, we were gaining three or four cents on flat price this week even though the September board was going down.  So the market still needs that old crop corn.  Sometime late July, early August your end user is going to decide he is covered, he's got enough to make it, he's feeding wheat or something and then you tend to break the basis and slide into a harvest low.

Pearson: Alright, now as we look at new crop potential out there as now we've got a 4 in front of December corn.  What is your advice to producers?  How do you handle this?

Brugler: What I've been characterizing it as is it is a bear market, the bear is running towards $3.80 or $4.00.  We're shooting at him, okay.  He's got -- there's three bullets.  The first one he dodged which was the crop report on the 28th of June.  The second one would be pollination in late July, early August.  The crop is running late.  In fact, the forecasts right now are for cooler than normal temps for the next couple of weeks which will not help it catch up.  The third one is that you have some kind of an early freeze or even a normal freeze that causes some loss of production.  If he misses, if we miss with all three bullets then we're going to be in that $4.00, perhaps even sub-$4.00 range for the fall low.  If one of those bullets hits because of pollination or an early freeze we can still see $5.80, $5.90 prices at some point.

Pearson: Okay.  So for producers who maybe haven't sold as many bushels as they would have liked to as they were hopefully, as they were waiting for that crop report maybe to spark the bulls into action, hold off?  What is the best way to market in this uncertainty?

Brugler: I think the market is oversold at this point.  It could go down another 15, 20 cents potentially but we've got the crop report this week and, of course, a tendency to get more nervous as we get into August and into that late July pollination period.  So we've recommended you buy $5.40 Dec puts or at this point you'd probably buy $5.00 puts to try and put a floor under the price if you don't have enough sold and then just kind of wait it out.

Pearson: Until we get a scare, something to potentially push the market higher.  Now, as we take a look at soybeans, we're still seeing a fair amount of international demand for beans.  How is that shaping prices as we work through the rest of summer?

Brugler: Well, as you point, we're getting good demand, even on old crop.  We've sold another hundred and some thousand tons last week on the export sales report for old crop.  And that means that we are going to be very tight on supplies right up into the end of the marketing year.  And we will start to see some limited new crop harvest in August, in beans particularly.  But I think things are going to stay tight.  You're going to see August be fairly well supported as a futures contract because getting delivery of August beans is still, means you can still use them before the next marketing year, okay.  Corn, with September corn, it's too late by the time you get the deliveries.  So I think you'll see some pretty good support there.  The meal export sales continue to run very strong.  We're at 102% of USDA's forecast for the year in terms of commitments and that means the crusher has to keep trying to buy these remaining old crop beans.

Pearson: And that's going to continue.  We're not seeing any signs of a slowdown in meal demand looking to the future.

Brugler: Yeah, you're seeing a little bit of resistance.  They're trying to find ways to blend in some DDGs or a little bit of feed wheat or something to ease the dependence, if you will.  Probably the biggest threat to beans would be if we start to see a big import program out of South America that supplements the U.S. supply before the end of the marketing year.  And there's definitely been attempts to do that but they have been kind of stymied by the delays in shipping.  Brazilian shipping is still 60 days behind, Argentina about 30 days.

Pearson: And that's been the story all summer coming out of South America.  Now, as we look at new crop beans what is your thought there?

Brugler: Well, it's bearish if we get the kind of crop that everybody thinks we have.  All I hear is, yeah, they look pretty good.  Okay, I'm sure somebody will call in and say no, they don't here.  But for the most part the crop is in pretty good shape.  The private estimates are 3.3 to 3.4 billion bushels.  If that happens we'll have a 250 to 300 million bushel carryout and that does lower the price estimate.  Having said that, the Chinese are clearly having another small crop.  They're already fairly aggressively buying new crop.  It looks like they'll probably buy at least 6 million tons more this coming year than they did the past year.  The rest of the world market is still trying to deal with the balance sheet of the U.S. and South America having big crops simultaneously.  But I think it will be fairly well supported. The long-term trendline in soybeans is around $12.00 or $12.20.  We could go below that because of new crop supplies being abundant.

Pearson: Okay.  As we look at exactly how this harvest and how this marketing year is going to play out.  Now, advice to producers?  Again, maybe they haven't sold everything that they'd hoped to.  Would this be a good time to --

Brugler: Well, we've been more, actually more aggressive in selling soybeans than we have on corn and wheat just because of this, the fact that South America is such a big competitor compared to the U.S.  At this point, again, my best solution is probably a put spread of some kind to put a floor under it and then wait for something to happen weather wise either here or in South American planting next fall.

Pearson: Get some margin protection in place and then wait for a potential --

Brugler: Protect the margin while you still have some.

Pearson: Certainly, certainly.  Well now let's take a look at livestock.  As we look over at live cattle futures we'd been on a bit of a run recently, past two weeks, we'd seen a nice rise in live cattle futures.  This week seemed to stall out a little bit.  How would you interpret what happened this week in --

Brugler: Well, two things.  Well, really three.  Fundamentally we have a problem with cash trade at $119 and the board is now ahead of the cash whereas for most of the spring we were inverse, we had strong basis.  Secondly, export sales have not been that good.  This strong dollar is hurting us there.  And then third was technical.  We got up to the 100 day moving average, the market was overbought after that run up that you mentioned and we just need to let a few of the longs out of the market and kind of ease off the overbought conditions.  So I think the market takes a little bit of a breather here but we're still fairly positive and the market is too.  If you look at the futures for December they're considerably higher than the August or the October.  So we're still anticipating fairly tight beef supplies in the second half of the year.

Pearson: And since we're looking at that premium into December the market is anticipating continued economic improvement, you assume, to help get us to that premium?

Brugler: Well, we've got tighter supply, just looking at the way the numbers finish off.  But we're assuming some improvement in consumer demand or at least being able to pay the prices that we're asking.  Wholesale beef prices have backed off from the peak.  Choice had been up to $210, now we're down 20 some dollars off of that and that's making it a little easier to sell the stuff.

Pearson: Alright.  Now taking a look at feeders, we did see some strength this week in the feeder cattle market.  How much of that is attributable to having a 4 in front of that December corn contract.

Brugler: Well, I think that's a lot of it.  The equation is if live cattle go up, feeders can go up.  If corn goes down, feeders can go up.  And in this case corn -- cattle kind of held their own this week but the corn got cheaper.  So you saw that bid into the price of the feeders.  To the degree that pasture conditions are improving that also tends to make you think maybe they'll keep a few more feeders out on grass rather than market them.  So that's part of the equation too, although a relatively minor part.

Pearson: And speaking of that, what does the supply side look like as we get into fall?  How are doing on the supply of feeder calves throughout the rest of the year?

Brugler: Well, we know the macro number, which is we're at a 50 year low in cattle numbers and we know the calf crop was down.  Unfortunately we don't have as good of data with some of the USDA budget cuts as far as the cattle inventory.  But at this point we're still, we have fewer animals probably to come into the feedlot and where that will really become important is if the feeder cow-calf guy decides he wants to hold back some heifers, typically when you bought on the cattle cycle then you have a shortage of feeders because more heifers go back to be mama cows.

Pearson: They keep them retained and that is going to cause a shortage looking at the feeder side.

Brugler: Right.

Pearson: Now, let's take a look at lean hogs.  Again, we've had a story of strength recently in the lean hog market.  What is driving it?  And how long can we expect it to continue?

Brugler: Well, basically we've had a real strong move in the pork carcass cutout value, what the packer receives for the major pieces of the hog.  And that bottomed back in March.  It is a fairly normal pattern to rise into summer because hog marketings decline during this time of the year.  It has been given a real boost by bacon demand.  I saw the other day there's over 3,000 different menu items that have bacon in them now and even some things you drink.

Pearson: That's right, that's right.

Brugler: And that has translated fairly strong pork belly demand which is one of the major components off of that hog carcass.  That could be the seed of destruction though also because that, the peak of bacon demand typically is BLT season here in the summertime, your bacon, lettuce and tomato sandwiches.  If it starts to fall off then we need to see demand for hams or loins or some other component pick up.

Pearson: Okay.  So it's kind of all hanging on bacon, more or less, at this point.

Brugler: Yeah.  We're somewhere close to a top in the hogs, between now and August for sure, just from a seasonal standpoint.

Pearson: Alright.  Well thank you so much, Alan.  Appreciate you being with us tonight.

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.  Be sure to join us again next week when we'll examine the impact of the government'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 analysis cattle commodity prices corn cotton dollar economy feeders gold live cattle markets Mike Pearson soybeans wheat