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Market Analysis: Alan Brugler

posted on November 22, 2013

The Obama Administration’s proposal to roll back the Renewable Fuels Standard appeared to have a muted effect on grain prices.  For the week, December wheat gained a nickel, while the nearby corn contract moved fractionally higher. Strong foreign demand was friendly to soybean prices as the January contract settled with a weekly gain of 40 cents. Nearby meal prices followed suit advancing by more than $17 per ton. In the softs, cotton’s rally last week proved to be short lived as the December contract declined by nearly $2 per hundredweight. In the dairy market, December Class III milk gained 15 cents while the January contract moved 3 cents higher. Over in livestock, December cattle lost $1.93. Nearby feeders declined by $2.32. And the December lean hog contract posted a weekly loss of 28 cents. In the financials, the Euro gained 3 basis points against the dollar. Crude oil advanced by 35 cents per barrel. COMEX Gold lost $43 per ounce. And the Goldman Sachs Commodity Index rose nearly 10 points to settle at 625.05.

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: Well, let's get right into the grain markets.  We've seen wheat treading water for the past couple weeks.  Talk to us a little bit about what to expect here in the next week or so in the wheat market.

Brugler: Well, wheat is trying to bottom from a technical standpoint.  We had a big rally earlier because of strong export sales and some spread trading against corn.  People unwound those spreads and basically couldn't find any buyers but now we're cheap, we're competitive, we sold some wheat to Egypt again this week to a private buyer.  So we're competitive in one of the major import markets again.  So I think we're trying to put in a low here.  Globally we've got a little bit of a pick up in ending stocks and that has kind of got a lid on prices.  But for the most part wheat is going to go where corn goes.

Pearson: Okay.  And technically you mentioned we're near some short-term bullish signals?

Brugler: We're at some short-term support.  Some of the shorter term indicators like RSI are turning higher, particularly in the Chicago market.

Pearson: Okay.  Well now as we take a look over at the corn market, we've talked a lot about ethanol the past two weeks, both in the country and on the show.  Talk to us a little bit about what is happening in the ethanol market after these remarks by the EPA.

Brugler: Well, basically the ethanol market has gone higher and raising a lot of puzzled looks in the community.  But basically the fact of the matter is at the moment the ethanol stocks are the lowest they have been in the last three years when you look at the weekly inventory reports.  And this is despite fairly high production levels.  We haven't had any imports for seven weeks because U.S. ethanol is cheaper than Brazilian and so as a result we're using everything we're producing and we had a big spike up in cash ethanol prices this week and also in the ethanol futures.  So bottom line is the ethanol plants are making money and they're buying corn as aggressively as they can for processing here over the next three months.

Pearson: And now that leads right into an issue that is being talked about in the ag community today which is, where are we going to get this corn demand we need to help absorb a 2 billion bushel carryout?  And is ethanol picking up?  Where does corn look from here?  Have we put in a harvest low?

Brugler: Well, it certainly acts that way and I go mainly from the long-term charts.  There's a seven year uptrend line that goes back to 2006.  It is at $4.19 for nearby futures.  And we dipped below that for a day or two but now we closed the week above it again.  So the market knows it is there.  And the reason I point that out is every time we have hit that line it has looked like things were really surplused.  '09 after the '08 collapse, etc.  But the market has found buyers at those levels and turned higher, at least for a few months.  What are we looking at here?  Ethanol is probably not going to be the horse that saves us, maybe we get an extra 50 million or 100 million bushel usage if this demand continues.  But what we are seeing is excellent export demand right now for corn and also rising feed use, both the hog industry and the poultry industry are expanding right now.

Pearson: So now what is your advice to producers who have just finished harvest, they've got a lot of corn in the bin?  What's the plan?

Brugler: If you've got a lot of corn in the bin you have to look at two things.  You have to look at the carry that you can already lock in, you can ensure some return to storage by selling say July futures or May and rolling it or something of that nature.  The other thing is basis.  If the board doesn't rally then you need to be asking for basis pushes because we do have a tremendous demand for corn in the short run here between the ethanol plants and the export market.  So you should be getting a higher flat price than what you were a couple of weeks ago.

Pearson: Alright.  Now as we take a look at soybeans you mentioned export news, again, exports are driving the soybean market, 28 cent rally today.  Is that going to continue do you think?

Brugler: Well, it probably doesn't have a real long leash to it but, again, we know the mechanism.  We've already got export commitments for 90% of the USDA forecast for the year and we've still got eight months left in the year.  So the market needs to slow down the export demand.  If it doesn't we basically only have about a 50 million bushel room in the carryover.  USDA is 170, 120 is pipeline or minimum supply.  So we can't allow for a whole lot more export growth here.  What we do know is China has got over 13 million metric tons of purchases from the U.S. that they haven't shipped yet and the bulk of those are going to go out before March or potentially April.  So it looks like we'll continue to see very strong exports in the soybean sector.

Pearson: And as the market tries to restrict those exports we should see bullish price action in beans.

Brugler: You should see the price well supported, particularly over the next month or two.  There is that tendency to lock the bin door after harvest and what you haven't sold already needs an incentive to come out.  Now, the market is going to look ahead to South America, it's going to see, at least at the moment, a record crop coming out of Brazil and Argentina and Paraguay.  So there will be a tendency for prices over time to want to nudge down and to assume that at some point all of that Chinese and other global demand will shift to South America.

Pearson: Okay.  Price target on soybeans in the short-term?

Brugler: We've got some targets in the $13.50 area, we've got some others just a little over $14.00.

Pearson: Alright.  Let's take a look over at the livestock market.  We've seen some pullback in the cattle rally that we've been watching really since late this spring.  Talk to us a little bit about what happened in the fat cattle market this week.

Brugler: Well, basically we hammered it pretty hard the first part of the week.  The concern was developing on the meat side of things.  Could we sell the consumer a $200 choice cutout or higher?  And historically the consumer in the U.S. has been very resistant to that.  The only time we've been above $200 or $202 for choice for very long was when the Japanese were big export buyers last spring.  That, again, that was the case earlier in the week.  We dropped the cutout, the board followed it, we did get some sell signals actually on the December cattle chart.  Towards week end we ended up getting $131 for the cash cattle, that was a little better than it looked early in the week and so the board stabilized.

Pearson: Okay.  Any upside potential, downside potential in this next week in the fat trade?

Brugler: Well, what we know is that the ready numbers are tight, the number of cattle that are able to come to market right now that are ready for slaughter.  So that is the supporting factor.  The wholesale is the question.  This is, of course, a big turkey consumption time, big ham time, it's hard to push the beef prices up.  So I don't see cattle going very far right now.

Pearson: Alright.  Now as we talk about that we have seen feeders pull back substantially more than fats, down 2 and change this week.  Is that going to continue as we look to that limited upside potential in the fat cattle market?

Brugler: Well, feeders have to deal with corn as well as fat cattle.  Corn was at times this week pushing a little bit higher, at the same time the cattle were under pressure.  So that is why you saw the weakness in the feeders.  The one thing we've got going for the feeders is we are seeing some heifer retention, we've got better grass and historically high feeder prices so you've got some cow/calf guys trying to rebuild a little bit. That reduces the number of feeders that are available to put in the feedlots and supports the price.  So we think the feeders overall are still in a little bit of an uptrend.

Pearson: Okay.  Any price trends or ranges you’re looking at in the feeder cattle market?

Brugler: Pretty substantial resistance around $168 on the futures.

Pearson: Okay.  And we saw that touched last week, this week and bounce back.  Now as we take a look over at the hog market you mentioned we're getting into that time of year we do see an increase in demand for hams and some of those other cuts.  Is there a lot of upside potential in the hog market?

Brugler: I'd have to say historically, no.  There's a little room there but, again, most of the hams for processing, which is what we eat, have already been purchased.  They had to be injected or cured or otherwise prepared for consumption.  That demand is already gone at the wholesale level.  So what you've got is long-term you've got expansion, guilt retention, you've got reduced out slaughter.  We're trying to expand the hog herd in 2014.  In the short run because of the PED virus and some other issues there's a little fewer hogs out there than what we thought.  The cold storage report today did show a drop in the pork in cold storage versus a month ago.

Pearson: Alright.  So we're expecting this trend basically sideways in the hog market?

Brugler: For the most part, yeah.

Pearson: Alright.  Now, as you look out longer term you mentioned hogs and poultry continuing to expand.  Where do you see hogs trending here in the short-term, first quarter next year?

Brugler: I think the first quarter we have to assume they'll be a little lower than they are today, maybe into the mid 80s.

Pearson: And the PED virus we seem to be coming to grips with, the market is coming to grips with its effect on the industry.

Brugler: Yeah, we've been running a little light on the hog slaughter.  There's a few less there than should be there based on the most recent data we had which was the September hogs and pigs report.  On the other hand, producers are raising the weights of those hogs.  This cheap corn, the average carcass weight is 210 pounds instead of 206.  That kind of cancels out part of the lost hogs.

Pearson: It's kind of a wash.  Thank you so much, Alan.  That wraps up this edition of Market to Market.  But Alan and I will continue our discussion and answer some of your question 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.  And be sure to join us next week when we'll examine the battle over federal nutrition assistance programs.  Until then, thanks for watching.  I'm Mike Pearson.  Have a great Thanksgiving.

Tags: agriculture Alan Brugler analysis cattle commodity prices corn cotton dollar economy feeders gold live cattle markets Mike Pearson soybeans wheat