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Market Analysis: Alan Brugler

posted on March 28, 2014

Grain futures contracts posted modest gains this week on supply concerns and strong foreign demand.  For the week, May wheat gained 2 cents, while the nearby corn contract moved 13 cents higher.  Soybeans extended last week's rally as the May contract rose 28 cents.  Nearby meal followed suit with an upward move of $12.50 per ton.  In the softs, cotton continued its march higher as the May contract rose 43 cents per hundred weight.  In the dairy market, April Class III milk gained 32 cents, while the deferred contract lost 21 cents per hundred.  Livestock prices were mixed this week as the June cattle contract gained $2.23, nearby feeders bounced back from last week's decline with a gain of $3.00, but the June lean hog contract retreated a bit this week with a decline of 75 cents.  In the financials, the Euro lost 5 basis points against the dollar, crude oil gained $2.00 per barrel, Comex Gold lost $41 per ounce and the Goldman Sachs Commodity Index advanced by 10 points to settle at 650.50.

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 here.

Pearson: We're glad to have you.  It's been an interesting week.  There's been a number of articles this week in different news sources talking about the advantages of trading commodities versus equities in 2014.  What have you seen or heard, where is this money going in the broader market sense?

Brugler: Well, we're definitely seeing some inflow into commodities.  It started back around the 1st of February after, if you recall, the stock market had a little bit of a selloff in mid-January.  So I think they're back to playing the idea that commodities are inversely correlated to the stock market and the stock market, of course, had a huge year last year.  So you would expect a little backing and filling and that makes commodities attractive as an undervalued asset.  We're seeing those money flows in a number of markets.  We had MACD buy signals in corn and soybeans and wheat, cattle and hogs and cotton.  That's a pretty good inflow.  Oats had a wild time there for a while too.  So plenty of evidence that there's some money moving into commodities.

Pearson: We're getting some compelling stories out of the ag commodities in particular recently.  And as we look over at wheat, I mean there's an example, as we look at the Ukrainian situation.  What else is driving the wheat market here this last week and into the next one?

Brugler: Well, it's primarily -- the trigger event was the Ukraine.  The other event is the condition of the U.S. crop.  The crop condition ratings have been going down in the states that are reporting.  USDA won't start until next week as far as a national number.  But the state numbers have been going down a little bit.  There's dryness in some areas.  There was some winter kill because of the very cold temps with no snow cover.  And so you've got some concern about just what the state of the U.S. crop is. We'll get a wheat acreage number on Monday from USDA, trade is looking for around 56 million for total acres.  So you've got U.S. supply concerns, U.S. stocks are at a four year low and then you've got this Ukrainian situation and questions about their production this year.

Pearson: So we've got some nice carry in the wheat market now.  Do we expect to see favorable prices going forward?

Brugler: Well, I think we're putting in a weather premium so that the U.S. can fill any world need for missing wheat from the Ukraine or Russia because of some kind of political embargo or something.  I don't know that it's necessarily going to hold in through harvest because if the crop is looking good we're a residual supplier, there's other places in the world like Canada that have a lot of wheat to ship.

Pearson: Alright.  Now, as you mentioned, we are expecting the acreage number on Monday.  Anything producers should do in the Sunday overnight into Monday to get prepared for the prospective plantings and grain stocks?

Brugler: Well, I think you have to be pretty defensive on wheat just because we've had a pretty good run up here.  There's an old saying that wheat takes no prisoners.  It went straight down and it has been going straight up.  But we are overbought, we're up against some technical resistance, there's some more 30 or 40 cents higher.  We have been suggesting that you ought to have at least some put options in place and maybe make a few cash sales if you haven't got much sold for this year just to reward the rally.

Pearson: Alright.  Now, let's take a look at the corn market. Again, decent little rally this week.  What is driving us there?  Is it export demand really moving that market?

Brugler: That is the number one factor.  We had 1.4 million tons sold this week.  The Egyptians bought more than 400,000 which was a bit of a surprise to people.  And it suggested maybe they weren't buying from the Ukraine.  The Ukrainian Ag Ministry continues to tell us how great their export program is right now but there's some evidence to the contrary.  So yeah, the fact that we've got more than 90% of the USDA's forecast for the year already on the books is very positive. I would caution that almost 5 million tons of that is to unknown destinations.  That's a little bit of a squishy number and it seems to be easier to get cancellations or deferrals out of that category.  But, again, tremendous exports and that is tightening up the perceived ending stocks for corn and has been pretty supportive for the price.

Pearson: Now, as we take a look at the new crop corn, again, we're seeing some nice stability out there, we have been pushing close to 5 basis -- a lot of areas is different -- but what is your advice, again, as we head into Monday?  How do we react on that new crop corn?

Brugler: Well, you have to look at your cost of production first.  What do I need to have?  If you're in the black and you've got very little coverage forward but you've got some exposure due to inputs I think, again, a little bit of forward contracting, we're basically 20-25% cash priced, is probably wise.  And then some kind of put protection.  What is called the short-dated new crop options have been pretty popular.  They expire in May but they're a lot cheaper to buy than a December option and give you that same new crop price protection.

Pearson: You bet.  Now, as we look at the report, trade is anticipating roughly 92 million acres on the report on Monday.  What sort of numbers would really move the market big one way or another?

Brugler: Well, I think if you're up at 94 that's going to be bearish.  That is more than most people are expecting.  There's probably a couple estimates out there that high.  Something in the 91, 91.5 would probably be bull friendly.  Normally though the grain stocks number is the big mover in this report.

Pearson: Alright.  And what are we looking to expect there?

Brugler: Trade is looking for 7.1 billion.  We think 7.15 to 7.2 is more likely. Anything in the 7.3 to 7.4 is going to be bearish I think and below 7.1 we continue the rally.

Pearson: Alright.  Now, let's take a look at soybeans.  Talk about continuing a rally, up another 28 cents this week.  Again, what is driving this market? Still foreign demand?

Brugler: It's foreign demand, it's basically that we have already sold 107% of the expected exports for the year and over 90% of them have already been shipped.  So they're out of the country, not subject to cancellation and we just don't have any room to make any more old crop sales, on paper at least, and we're still making some.  We sold another 11,000 tons this week.  And basically what it looks like is we're going to ship ours out and them import Brazilian beans this summer in order to fill the void.  The crushers are going to still need supplies that aren't going to exist here because we have shipped them out of the country.

Pearson: And we're already seeing that happen, correct?  China has been rolling some contracts north from Brazil to America?

Brugler: Yeah, the Chinese got in a bind here.  Their hog industry has been losing money, they're trying to cut back the hog supplies a little bit, that has hurt meal demand, therefore they have got more beans than they need right now.  So they have been trying to cancel, delay or otherwise dispose of some cargos and, yeah, we're told that several cargos that had been originally going to China are going to the U.S. Gulf or the U.S. East Coast instead.

Pearson: Alright, now on the new crop side we are expecting bigger acres in the report on Monday.  What is the trade anticipation there on Monday?

Brugler: Trade is looking for 81.2 to 81.5 million, depending on which survey -- there have been surveys that were over 83 million acres, which would be a tremendous swing from last year.  We think probably 81 is about the max we'll see.  That is still very dependent on what your final yield is as to whether that is enough beans to flood the market and have 300 million carryout or with the current demand we basically just have to have a little bit of a pullback.

Pearson: Okay.  Alright.  So that's what to keep an eye on there come Monday on the beans report.  And quarterly stocks numbers, anything -- are we anticipating any big shocks there or just not a lot of beans?

Brugler: Well, expecting to be below a billion bushels for March 1 stocks and that's a fairly low number for that time of the year.

Pearson: Alright.  Well, let's take a look at the livestock market.  Saw another rally in the cattle market this week, fat cattle side continues to climb.  What are your thoughts there?  Are we getting near a top do you think?

Brugler: Well, the key is the cash market.  We should be getting into some larger slaughter numbers here.  There's a seasonal uptick based on when the cattle were placed last fall.  And that should start to pull the cash back. Now, this week we saw pretty strong cash bids, $152 trade, $246 in the north and basically if we hold that another week or two, April futures have to rally because we're going to go into deliveries and there's just too much of a spread there.  Right now April is kind of hanging in there waiting for cash to come down thinking it's going to but it's not delivering the goods.  So it's hard to be short the futures right here given the discount to the cash.  I'd point out it really does help hedgers though because with that kind of a basis you're not fully reflecting the amount that the market has gone against your short position.

Pearson: Yeah, because it's a $5 to $7 basis to the producer in a lot of places.

Brugler: They're getting much more than they originally were trying to get when they locked in the hedge.

Pearson: You bet.  Now, let's take a look at the feeder cattle market.  We saw a $3.00 move this week.  Are we going to see continued strength throughout?  Are we seeing feeder numbers pull back as guys retain heifers to grow herds?

Brugler: Well, we're definitely seeing some heifer retention.  We'd see more if the grass was better.  I mean, you look at some of the pasture conditions in the south, which is the only place we've got anything growing yet, they're not that good.  And so we're seeing some limited retention.  The biggest question if you're a cow-calf guy is, can I keep the feeder prices high enough long enough to have something to sell?  And so it's a bit of a gamble.  Supply and demand wise there's definitely, with cattle prices where they are, there's good demand for the feeders and if corn were to pull back next week that would actually jack up the price of feeders further I think.

Pearson: Does $180 look like it could be -- where is the next level of technical resistance I should ask?

Brugler: Technical resistance is a little over $180.  That is the Fibonacci expansion count on the long-term, the monthly chart.

Pearson: Okay.  Alright.  So things to keep an eye on should corn pull back if we get a bearish number on Monday, we might see a little bit of resistance there the market would have to push through. Alright.  Now, let's take a look at the hog market.  We had the hogs and pigs report out today.  Can you break down those numbers for us?  What did we see?

Brugler: Well, the numbers were a little larger than the trade was expecting.  We had -- on the breeding side 100.2% over a year ago for sows.  So not real evidence of anybody having to close too many houses to handle the PED virus.  On the other hand we were expecting to have by now 2-3% expansion and that isn't happening yet because of the issues.  But the main story is in the lighter weight categories, the under 50 pound pigs, the 50-120 pound pigs we were only down 3-4% versus a year ago, under a year ago technically.  The trade has been trading, the futures have been trading a 7-9% shortfall in hogs.  So this basically says there was less loss from PED than what the trade had been anticipating and I think that's a little bearish for the market given the size of the rally we've had.

Pearson: You bet.  Come Monday we might see a bit of a selloff in the hog market.

Brugler: Probably limit down.

Pearson: Alright.  Well, thanks for being with us, Alan, appreciate your time tonight.

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 online.  You'll also find audio podcasts and streaming video of our program as well as links to our social media outlets exclusively at the Market to Market website.  And be sure to join us next week when we'll assemble a blue ribbon panel to examine the impact of USDA's prospective plantings and quarterly stocks reports on a special edition of Market to Market.  Until then, thanks for watching.  I'm Mike Pearson.  Have a great week.

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