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Market Analysis: Alan Brugler

posted on June 27, 2014

It was another wild week in livestock where prices soared into record territory yet again. Grain prices, on the other hand, traded sideways. For the week, September wheat gained half a penny, while the nearby corn contract moved 6 cents lower. Old crop soybeans rallied modestly as the July contract settled with a weekly gain of 17 cents. Nearby meal prices followed suit with an upward move of $7.55 per ton. In the softs, cotton lost all of last week's gain and then some as the December contract gave up $2.23 per hundred weight. In the dairy market, July Class III milk lost 23 cents, while the deferred contract gave up 25. But the big story again this week was in the livestock sector where, with prices already in record territory, the August cattle contract gained $4.80. August feeders advanced by a whopping $7.45. And the July lean hog contract improved by 67 cents. In the financials, the Euro gained 5 basis points against the dollar. Crude oil declined by more than $1 per barrel. Comex Gold advanced by $3.40 per ounce. And the Goldman Sachs Commodity Index lost more than 5 points to settle at 663.50.

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 with you, Mike.

Pearson: Well, we're excited to have you here. We've got a lot to discuss. And if we start the week off here in the grain markets, taking a look at this wheat picture, we've got harvest going on. How do yields look so far?

Brugler: Well, they're all over the board. You've got a lot of the poor wheat because of the earlier droughts, some freeze damage in some places, hail damage as you usually would expect on occasion. But we have also had some 100 bushel field reports. So, it's not all bad. But bottom line is winter wheat crop is going to be small and we knew that. Spring wheat is, of course, still developing.

Pearson: And now your thoughts on the spring wheat as we look at Monday's report, what is the trade expecting?

Brugler: The trade is looking for acreage to be just a little bit smaller than the March intentions. I think the average estimate is about 72,000 acres smaller. We think that is too conservative, that the real number is probably more like 150,000 below the March intentions. But, clearly there was some wheat that didn't get planted due to wet weather and probably switched to soybeans.

Pearson: As we take a look at Monday's report, if the acreage number is lower, how much smaller is the number, does the number need to be to get some bullish movement in these wheat markets?

Brugler: Well, it's difficult to move the wheat market because the global numbers are so big. The International Grains Council raised their estimate again for global numbers this week. U.S. stocks are the tightest since '07. But that doesn't help us if we're the residual supplier and everybody else, like the Russians and the Ukrainians, is undercutting us. So, we can find support in here from the technical standpoint, a little, you know, 200,000 less acres would probably help us a little bit. The Canadians helped us with Stats Can report today that said that the Canadian wheat acreage was down a little bit from the earlier intentions. But to make a stand we really need some help from the feed grain sector, from corn.

Pearson: Any advice for producers here who are working their way through harvest or are looking at their spring plantings?

Brugler: Well, we have basically presold about 60% of the crop for harvest delivery or thereabouts. And we've got some hedges in place and the rest. And we're not ready to lift those at this point.

Pearson: Okay. Well, now let's take a look at the corn market. You mentioned that we're going to need corn to pull some weight in order to get wheat to move higher. We didn't see it happen this week. We saw the old crop slide a little bit and new crop down a little bit as well. Where is this market headed on Monday? What are the trade expectations for corn acres?

Brugler: Well, the trade is looking for the corn acreage to be, again, fairly close to the March intentions. You've got two competing camps there. You've got the folks that think it was too wet up north and we switched some acres to beans. And then you've got the folks saying, yes, but the weather was perfect in three states, in Ohio during early May and the planters probably ran a little extra long. And there were some acres that weren't accounted for in the March intentions that were planted last year that may have ended up in corn. So, net that you end up with a number 91.6, 91.8 million acres and that's not far from the March intentions. I'm not going to make a bet on which way we want to deviate from that number. If it's that large, if it's 91.5 or bigger then we've still got a compelling argument for a record U.S. crop. There are some surveys floating around that suggest it might be 89.5 or 90 million. If that is accurate I think the market is probably too cheap right now. We're down on short support and there's a good opportunity for a bounce.

Pearson: Okay. Now, we do have some questions and actually this has been a question all over the Corn Belt here in these last two weeks. Justin in Rock Rapids sent us a Twitter comment. He has been riding around this week and he says there's a lot of rain and it looks like a lot of fields still need tile. So, the question is, after all of these heavy rains we've seen throughout the Corn Belt, the market is not offering any more support. Are we still anticipating here that rain is making grain?

Brugler: I think that's exactly the case. You can't have a drought if it keeps raining and the market has been conditioned over the last few years to respond to drought concerns more than flooding. And the flooding is very localized. It's not like 2011 where you had the entire Missouri River Valley under water. So, you do have some possible negatives here, you've got fairly shallow root development because there has been regular to heavy rains, that is a risk next fall. That is, you've also got, if this cool and wet pattern continues, there's also the risk of an early freeze or some other issue then. But in the short run we're going to assume that corn likes cool and wet temperatures and yields are going to be pretty good most places.

Pearson: So, advice to producers here looking at their fields of that new crop corn, do you go ahead and make some sales at this level knowing that 91.6 million acres or change could be in the ground?

Brugler: Well, we are against some technical support. We're near the January lows in the new crop, we're up against that seven year uptrend line on the old crop corn, just within a few cents of it. Those levels held us in January after the January stocks report. So, we want to see what the numbers say first and see if there is a compelling reason to sell it now versus say a month from now. We, on the other hand, we believe you need to have some put coverage in place going into the report either December puts or the serial puts that expire just a couple of weeks after the report that are a little cheaper to buy.

Pearson: Sure, they're short-term, short-dated options.


Brugler: Right.

Pearson: You bet. Alright. So, things to think about as that report comes out at 11:00 on Monday, correct?

Brugler: Correct.

Pearson: Alright. Don't rush into the elevator first thing Monday morning. Wait and see some numbers.

Brugler: That is our opinion.

Pearson: Alright. Now, as we take a look over at the soybean market we did see a bit of a bounce. Old crop soybeans up 16 cents. What was driving that this week?

Brugler: We had stronger than expected old crop export sales, over 317,000 tons of old crop sales. We're sitting here saying we shouldn't have any beans left to sell but we keep selling them, then why isn't Argentina and Brazil getting this business when they have clearly got some inventory? The world still wants U.S. beans. So, we had to have a rally because we don't think we have the beans. That is what the Monday report is going to have to tell us is have we had enough imports already to grease the wheel, so to speak? Or are we miscounted a little bit on old crop production, that there's more beans there? Or, in fact, are we selling stuff we don't have? In which case we're going back to $15 fairly quickly here.

Pearson: Okay. Now, as you mentioned, we've got this report on Monday. Where do we anticipate new crop bean acres coming in at?

Brugler: Bean acres probably around 82 million, give or take a few. Again, there's, the idea is there has been some switching in the northern plains to some more beans. The wild card there is double crop beans. We are a little behind on winter wheat harvest, which is where most of the double crop comes from. So, you can't maybe count all the double crop and we're not sure what USDA was picking up from the producer on June 1 as far as double crop.

Pearson: Okay. Now, as we take a look at new crop bean pricing, $12.34 as we close the market on Friday, knowing that there could be 82 million acres out there, do you go ahead and make some sales?

Brugler: I'm not comfortable selling it right here. Again, we've got some $12.40 puts just in case. But we are in an uptrend, there is a regression channel on the charts, the speculative funds have been buying the dips to that channel, that's at $12.20. And, you know, realistically Nov beans are very cheap compared to old crop. If we're making export sales, beans we don’t' have at $14, what is the argument for Nov beans at $12 to go down until you know you've got a real surplus.

Pearson: Alright. Things to keep an eye out for. Now, let's jump over to the livestock sector where there has been a lot of excitement this past week. We saw the fat cattle market futures closed at $151.12 on Friday. Cash cattle market still $2, $3 higher than that. Where is this headed?

Brugler: Well, we had a very strong cash cattle market on Friday, as you mentioned, $154 to $155 in the south, a $4 to $5 jump from last week. It is being supported by the beef, by the cutouts and there's frankly a shortage of ready cattle. Basically there's only two ways this thing ends. Either the consumer quits buying the beef and the packer can't pay what he's paying now. Or you get competing supplies, okay. In other words, you could have an economic argument, you know, incomes don’t' support it or you can have chicken and pork expand enough that beef doesn't have to be this high. But for right now we don't really see the end. It's an upward spiral and it's going to end ugly when it ends. And I worry that we're getting close to the end because cattlemen are getting a little too complacent about it. Oh yeah, it's up again this week, you know. When everybody gets comfortable with it is usually when it's just about over.

Pearson: Alright. Speaking of that uptrend spirals, we take a look at the feeder cattle market. Again, huge week, $7 on the board, auction trade has been hot all week. Do we see this feeder cattle market continuing its upward spiral?

Brugler: Again, it's in a realizing bull market. You have anticipatory bull markets, we had that six months ago knowing we had a problem coming. Now we know we're in the problem, we can't get the cattle that we want. The live price being as high as it is, is allowing the feedlots to chase what few feeders are out there. And then, of course, we're pulling back heifers out of the feeder mix in order to try to rebuild the herd now that we've got better pasture conditions.

Pearson: Does the market have an idea of how many heifers we are retaining?

Brugler: We've got a rough idea if you look at the placement data and, of course, we'll get a USDA cattle inventory report here in July.

Pearson: Okay. Now, as we take a look at the hog market we did have the hogs and pigs report out today. Could you walk us through those numbers a little bit?

Brugler: Yeah. They found a few less than the trade was looking for as far as the published estimates. The trade was looking for a little over 97% over a year ago for all hogs and the actual number was 95%. The market hog numbers were also down approximately 5%. And the breeding herd, the sow herd was expected to be higher, 101 or so, was actually only 99% and change. So, all in all, fewer hogs than what the trade had stated it was looking for going into the report. Now, I want to be a little careful with this because the futures are carrying a fairly substantial premium into the cash hog market already, anticipating this type of scenario. So, it's possible we only get $1 or $2 bounce out of this thing and then --

Pearson: $1 or $2 on the board.

Brugler: On the board. But the cash should start to reflect the tighter scenario that we just saw.

Pearson: Now, the breeding herd number being down a percent or two after six months of these record prices in the hog market, is that pretty surprising? Or was that something that you were anticipating?

Brugler: No, it's surprising in that we assume that because there's not, we don't have the mortality in the sows, the assumption was with feeder pig prices in the 70s we ought to be trying to get more pigs. But I think what has probably happened, I did not have an opportunity to really go through the numbers, but I suspect that we've had some depopulation efforts in order to control the virus and that the survey has picked up some of that.

Pearson: Alright. Well,  Alan, we appreciate your thoughts on the markets 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 Twitter feed, Facebook page and the rest of our social media outlets exclusively at the Market to Market website. And be sure to join us next week when we'll learn how one entrepreneur is combining land and lake in hopes of catching a profit. 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