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Market Analysis: Alan Brugler

posted on September 13, 2013

USDA's supply and demand reports had bearish implications for coarse grains but the bulls came charging through the soybean pits.  For the week, December wheat lost 6 cents while the nearby corn contract moved a dime lower.  Soybeans rallied strongly on the report as the November contract settled Friday with a weekly gain of 14 cents.  Nearby meal prices followed suit with a gain of $13.85 per ton.  In the softs, the December cotton contract rallied $1.25 per hundred weight.  In the dairy market, October Class III milk rose 26 cents, while the November contract gained 32 cents.  Over in livestock, October cattle fell 42 cents, nearby feeders gained $1.25 and the October lean hog contract posted a weekly loss of 20 cents.  In the financials, the Euro gained $124 basis points against the dollar.  Crude oil lost $2.32 per barrel.  Comex Gold lost more than $75 per ounce.  And the Goldman Sachs Commodity Index lost more than 9 points to settle at 651.55.

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: Always good to be back.

Pearson: Alan, we did have a bit of a run up in the stock market this week.  What is driving that?

Brugler: Well, I think part of it is just that all the traders were on vacation in August, came back to work, you had some IRA money and some 401K money to put into the market and some positive feelings about the economic growth overall.  So they key point is I think you're getting a little asset allocation shifting here.  There was a big rush towards bonds, excuse me, out of bonds.  There's still money leaving bonds but people are saying, well, with a 4% yield maybe I ought to put a little back that way. You're shifting the mix of stocks that you're buying.

Pearson: And the shift is coming, it's not being reallocated towards commodities, we're not seeing a compelling story in any of the commodities?

Brugler: That would be a little bit of a stretch but there's a lot of commodities that we're seeing net outflows yet.  Yeah, you saw some money coming into the soybean pit, the soybean complex actually.  Obviously hogs are still fairly high.  But yeah, there's other like the feed grains that have been under pressure and they're just not getting any money flows.

Pearson: Well, let's talk about wheat as an example.  We didn't see any change in the wheat in the USDA's WASDE report, came out Thursday.  Is the market expecting to see a change in numbers here at the end of the money?

Brugler: Well, we are looking for that small grains report on the 30th and the grain stocks report on the 30th.  I think the grain stocks report for wheat is going to be fairly positive.  It's going to show probably September 1 stocks below 2 billion bushels.  We've had phenomenal first quarter exports for wheat and also pretty strong feed use because of the lack of corn.  So we've drawn down that wheat supply pretty nicely.  USDA, as you mentioned, didn't make any adjustments on the wheat production because they've got a full report coming out in a couple of weeks here for it.  But the story in wheat is it is tied to corn.  You're dependent on the feeding to keep the balance sheet tight on wheat and if wheat prices go up then you don't feed the wheat, then you've got too much wheat and the price has to come back down.  So they're kind of married until corn bottoms out, gets some kind of a harvest low established.  Wheat will be slow to go up.

Pearson: Alright, so not looking for anything bullish here at least through the 30th.

Brugler: There's a little tendency for it to go up from the end of September into November but that is, again, we're not there yet.

Pearson: Okay.  Now let's talk corn a little bit.  When are we going to touch that bottom?  We did have a report come out of raised production in corn.  What are your thoughts?  Is the market trading that 155 number?

Brugler: I think we're adjusting to that number.  We were convinced that it was a little lower, you know, we had that couple of week rally there out of the August crop report and now we're getting a continuous diet of pretty high yields out of the southern parts of the Corn Belt that are really fully into it and even some of the test cuttings further north are better than expected.  So yeah, we've got to adjust to a little higher production.  Frankly the problem is that even if you lose two or three bushels off of the USDA number you're still going to have a billion and a half bushel carryout.  So with this many acres planted there's just too much supply no matter how you slice it.

Pearson: And that being said, looking at the export reductions through 2012 into 2013, is there hope that we can gain back that export market going into '13-'14?

Brugler: I think we're going to pick up some.  We've actually got a multi-year high for export commitments coming into the start of the marketing year.  Best in at least five years and actually I think it's a lot longer than that.  So the lower prices do attract some of that business back.  Now, that said, some of our traditional customers are buying feed wheat or they're buying Ukrainian corn or some other source.  We're going to have to get the price down to convince them to come back to the U.S. market.

Pearson: Alright.  Now, all of that being said, looking at the price just shy of $4.60 on Dec corn what are your thoughts?  What sort of target ranges do you have out there?

Brugler: Well, we know that the swing low there in August was $4.45 area.  On the longer term charts, the weekly and monthly charts there's pretty good support at $4.35 and at $4.16 and we're really thinking one of those is going to hold here.  Maybe the $4.45 will hold but it's a little soon to tell.  Again, the big problem is just we know it's a big crop plus or minus a couple hundred million bushels.  The wild card is probably the planted acreage.  USDA didn't do anything with that this report, weren't expected to.  The FSA will come out with updated farm program numbers on the 17th of September and then USDA will incorporate them into their data set for the October report.  So we're fairly sure we're going to lose some planted acres by the time we get to October.  And if you were, hypothetically, to take 2 million acres off that would be 300 and some million bushels and it does change the equation a little bit.

Pearson: So, best chance for a rally looking at the way things stand now would be around that October report most likely?

Brugler: Yeah.  There's always potential with that grain stocks report on the 30th but the new crop number would be the October crop report.


Pearson: Alright, well let's take a look at soybeans.  Did get some bearish news yesterday.  We did see yields reduced about 3%.  Is that where the market -- actually it was right on market expectations, that 41.2 number.  But we did see a pretty nice rally.  Gave some of it back on Friday.  Where do you think it's going to head next week?

Brugler: Well, I was impressed with the amount of buying interest on Thursday.  The market basically didn't get anything it didn't already know.  As you mentioned we were trading at the trade average guess for yield.  The market tried to break early in the report day session and then saw pretty strong buying, up 35 cents or more in the November contract.  A lot of that was tied to soybean meal which was limit up on Thursday.  We're having trouble early in the marketing year making enough meal to meet the export commitments and domestic demand that we've already got.  So meal is kind of the key to that strength.  November beans have had trouble every time we've gotten above $14.00 though including today so I think that's kind of the key market, $14.00 to $14.10.  You take that out then the bulls will start running again and the specs will probably throw a little bit more money at it.  But you've got to have meal go another leg higher to support that.

Pearson: And so it's going to be meal that is going to get beans over that $14.00.  Is there anything else that could, news event, headline that could drive us over $14.00?

Brugler: Well, I think we were getting a little more comfortable with rain the forecast for the next week in most of the Corn Belt thinking that we'd slow the deterioration of the crop.  There's definitely later beans would still benefit from a one inch rain.  So the bullish input there would be if the rains are less than expected or you get some more harvest results that show that we did have a lot of pod abortion due to the temperatures and weather in August.

Pearson: And we'll just have to wait for the combines to roll to see what we're really looking at in those numbers.  Now let's take a look at cotton.  We've been on a roller coaster ride this summer with cotton prices, we've been steady the last week or two, now we saw a little bit of an uptick.  What was driving that move in cotton?

Brugler: Well, cotton is kind of difficult to discern here because globally we've got record stocks.  316 days of use if you just didn't grow anything, that's over nine months, where you wouldn't need any cotton at all other than what is already in the warehouse.  From that standpoint, prices ought to be a lot lower.  But the reality is a lot of that cotton is tied up in China, it's not leaving China, if they free up the reserves it would mainly affect the import program there, okay, U.S. would lose exports if the Chinese start to work down the stocks.  But yeah, basically USDA made minor changes to their export forecast and to their ending stocks forecast.  There's a little money flow there.  As the world economies are picking up you do see some additional demand for cotton goods.

Pearson: Okay.  So it's going to be China longer term as the price mover on cotton.

Brugler: Right.

Pearson: Now moving over to cattle, as we take a look at livestock we have seen a lot of support here around that $125 level, cash cattle staying pretty steady.  What are your thoughts as we roll into September, kids get back to school, where are cattle headed?

Brugler: Well, we've got a couple of cross currents going there.  The wholesale price has been under a little bit of pressure, that's not unusual right after you go back to school.  The finished numbers, the numbers of cattle coming out of the feedlots will be declining from here until November, that is a supportive factor, gives the feedlots a little more leverage.  We've had excellent export sales, the second largest month in history in July according to the recent census release and the weekly sales numbers suggest pretty good movement.  So we think the market will be well supported from the product side and the declining numbers will be supportive as well.  So futures in the $125 area make sense right now.  Probably later on $127, $130.  The biggest problem frankly for beef and for pork as well is rapid expansion in chicken production. 

Pearson: Meeting the lower cost protein needs, some substitutions.

Brugler: Yeah, the ag sets and the broiler placements have been running three to five percent over a year ago each week over the corresponding week.  So it takes a little while to feed those birds out but you're going to have additional poultry competition and it is typically cheaper than pork or beef.  If the consumer goes that way the demand side is a little iffier than what we've seen in the last year too.

Pearson: Okay, so keep an eye out on consumers maybe with some sticker shock at the meat counter.  Now, taking a look at feeders, where do you see us headed in that market?

Brugler: Well, if corn hasn't done going down yet, hasn't finished that decline then feeders probably have a little upside.  Basically there's a trade off there.  If we assume the cattle market is steady to higher and corn gets a little cheaper or meal starts to pull back then you'll tend to see that bid into the feeders.  So the weekly chart says nearby feeders can go back to $161, $161.5.  That would be higher than we are today.

Pearson: And that would be close to a high for the year.

Brugler: Yeah, actually $161.50 would be the record high for nearby futures.  So that -- and, of course, numbers are down.  We're at a 50 year low in the herd size in the calf crop and so forth so as long as you, it works into the feeding equation and the cattle crush spreads are all positive for the rest of this 2013, there should be demand for those feeders.

Pearson: Alright.  Now as we take a look at pork, as you mentioned, increased poultry production, where does that leave the pork market here in the short-term?

Brugler: Well, we're trying to expand pork production, the sow number suggests that, we'll find out about guilt retention here with the hogs and pigs report, quarterly hogs and pigs report comes out before the end of the month here.  The complicating factor is the PED virus.  We had pigs on the ground that may not still be there because of the disease issue.  So that affects what your hog marketings are for the fourth quarter, if it turns out we did have more extreme problems then that is supportive to the pork price.  Cash hogs normally do come down into October-November from where they are in the summertime and that is happening but the degree of the decline will be affected by the numbers that actually make it to market.

Pearson: And consumer demand for pork products, particularly bacon, we know is driving the market over the summer.  Is that predicted to continue?

Brugler: Well, bacon typically slows down.  The price of the bacon component, the pork belly component goes down as we get into fall.  Normally if you're going to have further strength in the cutout it's because of the hams or some other component picks up the slack.

Pearson: We get into holiday season.

Brugler: Right.

Pearson: Thank you so much, Alan, appreciate you being with us today.

Brugler: You're welcome.

Pearson: That wraps up this edition of Market to Market.  But Alan and I will continue our discussion and answer some of your questions in our Market Plus segment on our website.  You'll also find audio podcasts and streaming video of our program as well as links to our Twitter feed and Facebook account exclusively at the Market to Market website.  Be sure to join us again next week when we'll learn how a full-time grain farmer is testing the waters of aquaponics.  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