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Market Analysis: May 20, 2011: Mark Pearson and Alan Brugler

posted on May 20, 2011

Powered, largely, by TOO MUCH rain in the eastern Corn Belt and TOO LITTLE moisture in parts of wheat country, grain prices rallied this week... recovering all of last week's losses -- and then some.

For the week, July wheat gained 79 cents ...a move virtually matched by the nearby corn contract which marched 78 cents higher.

Soybeans also bounced back from last week's sell-off as the July contract rallied more than 50 cents. Nearby meal prices followed suit settling Friday with a weekly gain of $11.50 per ton.

In the softs, cotton trended higher this week as well, as the July contract gained $10.50 per hundredweight.

In the dairy market, June Class III Milk gained $1.08, and the deferred contract moved $1.37 higher.

Over in livestock, the August cattle contract lost $3.45. Nearby feeders slid $6.70 lower. And the July lean hog contract fell $2.25.

In the currency markets, the Euro gained 98 basis points against the dollar. Crude oil settled Friday with a weekly loss of 2 cents per barrel. Comex Gold advanced $15.80 per ounce. And the Goldman Sachs Commodity Index gained more than 7 points to close at 691-even.

Market Analysis: May 20, 2011: Mark Pearson and 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, Mark.

Pearson: All right. Well, the situation is Eastern Corn Belt extremely wet. Western Corn Belt is caught up, for the most part, and most of the corn is in. Beans are moving right along in that part of the world, but slow in the Eastern Corn Belt. I want to talk about the dryness in the wheat belt too.

Brugler: Yeah, the Eastern Corn Belt, first of all, is extremely wet. I've got a number of clients in Ohio. In fact, my family farms in Ohio. They haven't planted anything yet. Those other guys are 12 percent done. Those in the central part of the country have trouble relating to the fact that it's that bad. But that's definitely part of the reason the corn market has been up this week, because it's just -- the odds are increasing that some of that ground won't be planted. As you say, it's a double-edge situation because the Southern Plains in particular are still too dry. Much of that wheat down there is beyond redemption at this point. The insurance adjusters are out there zeroing it out. I talked to a gentleman in Texas who said he had only gotten a half an inch of rain since he planted his corn. He's just going to have to bush hog it off and try and plant cotton in the same field.

Pearson: All right. So we're going to see some of that switching around. Well, let's talk about the wheat market first, and kind of what you see ahead. Obviously some production problems here in the U.S. globally have we got a problem?

Brugler: Global situation is kind of unsettled. The Ukraine seems to be in pretty good shape. Russia is actually caught up on their planting progress. About I think 54 percent of their spring plantings for all grains is now done, so they've made tremendous progress the last couple of weeks there. Europe, though, has been extremely dry and Germany and France. And in fact, the French futures contract for wheat hit a new life-of-contract high this week, and that's one of the reasons that the U.S. Market pulled higher.

Pearson: What's your advice to producers at this stage on wheat sales?

Brugler: Well, we're about half sold in Kansas City. We've got a little less -- a little less aggressive approach in Chicago and Minneapolis. The thing you want to watch for is these global developments. We're getting fairly comfortable global supplies, but we're also feeding a lot of wheat because we don't have the corn. We're not wanting to sell that last 40 or 50 percent of the new crop until we get a little more evidence.

Pearson: Certainly global developments are everywhere with the situation in the Mideast. Wall Street Journal cover story, wheat prices impacting that region, very volatile already, so we'll see what happens down there. But you're about half sold Kansas City. A little less so on soft wheat in Chicago. What about the spring wheat crop?

Brugler: Again, it's been extremely wet up in Minnesota and the Dakotas, and our estimate is that spring wheat acreage will probably be less than 13.6 million when we get done. USDA in the March intentions report was 14.4. So that's a lot of missing acreage, and we think that's supporting the price. If you look at the September futures contract, it's in an up trend yet because the market is just not sure if that wheat is ever going to get in the ground.

Pearson: All right. Let's talk about corn. You mentioned the problems in the Eastern Corn Belt, in Ohio and other regions. A friend of mine sent me an e-mail that said a friend of his managed about 20,000 acres in Ohio. They had about 12 acres planted. From what you're telling me, that might be good.

Brugler: Yeah, 12 percent of -- well, that wouldn't be 12 percent.

Pearson: 12 acres out of 20,000.

Brugler: Another guy said -- another guy said 12 percent and then got rained out again. But that's a problem. We're estimating in the end about 300- to 400,000 acres reduction there. The rest of it will get planted, but it will end up being right up against the crop insurance deadline or a few days after. They may have to go to shorter season varieties which, of course, hurts your average yield down the road.

Pearson: Do you think majority is going to stay in corn?

Brugler: I think until the very last minute it will, because if you take preventive planting, then you've got to wait 25 days before you plant the beans. And the revenue per acre is still very attractive for corn versus for soybeans if you can get it in. So I think they're going to stick with corn, for the most part, until it's just so late in June that they just can't do it anymore.

Pearson: We just showed everybody pictures of what's happening down in the gulf. A lot of acres lost there. Those are cotton and soybeans and some corn. The situation in the Eastern Corn Belt and the situation in the Dakotas, like as you mentioned, I'd be really nervous about new crop. Apparently the market is. Is that really what drove this market it week, or are there some other factors.

Brugler: Well, there's a couple things going on. The old crop, the basis has been firming up, which tells you the cash market is getting nervous about the old crop supplies. Of course, the more concerned you are about new crop developing, the bird in the hand becomes worth two in the bush. You want to control those old-crop inventories. We're seeing tremendous basis pushes for old crop, 20, 30 cents over July futures if you'll sell today. So it's kind of a ratchet effect where the old crop is scarce and then the new crop gets nervous and then they both go up. So, yeah, we're pretty tight right now.

Pearson: What's this acreage number going to look like after all these problems?

Brugler: Well, I just did a state-by-state breakdown of what I think the acreage is going to be. Of course, it will be mid June or late June before we have a very go handle. But my total adds up to 90.2 million.

Pearson: Boy, that's not going to work.

Brugler: And that's even adding some acreage from what the March intensions were in the Western Corn Belt.

Pearson: And depending on where we are with the average yield, we could be tighter than we were last year.

Brugler: Definitely. We're probably looking -- if my numbers are right, and my yield guesses are right -- and that's all it is this early -- we'd have about a 13-billion-bushel crop and the ending stocks would be at least as tight as last year. Again, the market's job is to set the price so that the use fits the supply.

Pearson: Yes indeed. Well, what are you telling corn producers then? Are you getting aggressive here with this rally?

Brugler: We still have about 20 percent of our old crop from last year basically probably hold it into June. And the new crop we're 25 percent forward sold and then we we've got a few December 660 puts just to kind of protect -- headlines.

Pearson: Which has become a big deal. All right. So that's where we are on the corn market. Let's talk about soybeans. Now, are we going to see -- as you mentioned, the prevented plantings issue, this is not just an easy walk to a switch to soybeans.

Brugler: Soybean acreage could actually end up being down even if corn isn't all planted. Again, some of that flooded ground will be at zero for the year. You've got sold on it. You've got problems getting it dried out enough to work. We think that the acreage loss will be less than a million from the intentions on the beans but, again, it's not likely to inherit a lot of extra acreage. So USDA has a very tight forecast for next year, so you've got soybeans trading close to $14,1380 cash bids in Nebraska this week. So definitely not a market that's going to relax right away.

Pearson: But where are you on sales for soybeans? Are you in a hurry to move soybeans? Obviously we've got a lot of issues here.

Brugler: I think it's -- you want to have -- these are definitely attractive prices. You can make money as a producer at this level, but at the same time your input costs are going up. Your fuel costs have been widely advertised with how high gasoline and diesel is. So you don't want to part with everything just because it's a high price. You want to make sure you have the crop, first of all, and that you've got crop insurance on it. Then you can start to be a little more aggressive on sales.

Pearson: All right. Cotton market obviously the situation on the Delta is not good, and cotton certainly rallied this week. What's your take on the cotton market?

Brugler: Well, cotton, I think, is a little further down the curve. It was one of the first markets to rally. It's definitely pulled back from that $2 area that we spent some time at, record high prices in history. And so we've sold out of all of our old-crop cotton. There's very little for sale now, but you're starting to see cancellations. In fact, USDA has shown more cancellations for each of the last eight weeks than we've had sales in each of the last eight weeks for old crop. That tells me that the world market is having trouble digesting this level of prices, that they can't pass those prices on in the yarn or in the textiles. So I think you have to be a little more defensive on the cotton. These are still excellent prices and there's still obviously some production concerns. But it's acting like it's getting past that price rationing phase.

Pearson: Let's switch to livestock. Fed market, cash market wasn't very good this week. Futures not very good. Feeders were off. What's happening over there?

Brugler: Well, the cattle market is -- had a very strong situation back in March. We had strong exports because of Japan, because of South Korea, at a time when we had fairly low numbers of cattle coming out of the feed lots. Now we're into a period where the feed lot numbers -- the ready, we call them, have picked up and that global demand while still good doesn't have the fire under it that it did before. So we're backing off of the record high prices we had in cattle. We're seeing the beef come down. This week it was just a case of the board dropping so far below the cash that if you were a hedger, it made sense to sell the cattle. You could take less money for the cattle because you were still getting gain on your hedge position. So we think the market is getting close to some kind of a bottom here. It's had short report. We had a cattle-on-feed report on Friday afternoon. It did show a few more cattle in the lots than what the trade had been looking for, but it also showed you we were very current on marketings.

Pearson: By and large, a decent report?

Brugler: Decent report. We're saying 10 to 20 lower potentially but, on the other hand, because we've been coming down for so long, there's a thing we call buy the rumor, sell the fact. In this case sell the rumor, buy the fact. It could kick in next week.

Pearson: All right. Let's talk about the hog market. We've got about a minute. As you look at the hog market, we've had this good export movement. We've reduced sow numbers but we're seeing weakness there too.

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: The weakness is mostly in the futures. The cash market is still holing up pretty well. Had a big rally in cash hogs this week. The carcass cutout value last Monday -- that is the value of the meat -- was at an all-time record high as pointed out by USDA. So it's only the futures that are under pressure at the moment. Some of that appears to be liquidation, investors that want to go put their money somewhere else. Some of it may be anticipating weakness down the road in the cutout values, but we think the futures are probably as low as they need to be right now.

Pearson: All right. So you think the hog market should recover.

Brugler: We're looking for some kind of a bounce here.

Pearson: All right. And we've got five seconds. Feed needs, what do you do?

Brugler: We basically bought cash because of the basis situation. We want to control the inventory.

Pearson:Alan Brugler, thank you so much. That wraps up this edition of Market to Market. But if you'd like more information from Alan on where these volatile markets just may be headed, visit the "Market Plus" page at our web site.

Pearson: You'll find "Expanded Market Analysis," audio podcasts and streaming video of our program -- all FREE -- at the Market to Market Web site.

Pearson: And be sure to join us again next week when we'll examine the outlook for agricultural trade. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices corn markets news wheat