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Market Analysis: Apr 01, 2011: Alan Brugler, market analyst

posted on April 1, 2011

The post-report rally in corn continued Friday, while wheat settled a bit lower. Nevertheless both commodities put together significant weekly gains.

For the week, May wheat gained 26 cents, while the nearby corn contract moved nearly 50 cents higher.

The prospective plantings report also was friendly to soybeans as the May contract settled Friday with a weekly gain of 35 cents. Nearby meal prices followed suit, gaining more than $35 per ton.

In the softs, cotton also rallied on the report, but due to volatile trading in earlier sessions, the May contract settled Friday with a weekly loss of nearly $9.

In the dairy market, April Class III Milk futures were down 11 cents while the deferred contract declined by more than 60 cents.

Over in livestock, cattle prices traded at record-highs this week as the June fed cattle contract gained $3.50. Nearby feeders advanced $2.35. And the June lean hog contract was off 13 cents.

In the financial markets, the Euro gained 165 basis points against the dollar. Crude oil gained $2.54 per barrel. Comex Gold advanced $1.30 per ounce. And the Goldman Sachs Commodity Index gained more than 10 points to close at 730-even.

Market Analysis: Apr 01, 2011: Alan Brugler, market analyst 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, Mark.

Pearson: Well, I'll tell you what, some of the mysteries of the world have been answered to us. Others have begun. As we mentioned, the prospective plantings report was released. The quarterly stocks report came along with that, and it impacted everything. Let's start first and talk about the wheat market and the numbers -- the prospective plantings report. Of course that quarterly stocks report as well. What's your reaction, Alan?

Brugler: Well, basically the stocks report for wheat was 1.425 billion bushels, so that was a little bit more than trade had anticipated. The USDA will have to make a little tweak next week in their WASDE report to reflect the extra bushels we found. The planting report was also larger than expected, but it was almost entirely in the other spring wheat category. It was 14.4 million acres. There's a lot of questions, though, as to whether we'll actually get that 14.4 million acres planted. Spring wheat country is pretty much Montana, the Dakotas, Minnesota. A lot of that area is still under snow pack right now. And spring wheat needs to be planted in April or early may, so we need to get the snow out of the way first. If we don't, some of that ground may end up being soybeans.

Pearson: All right. As you look at the situation that we have -- and again, we'll talk about corn and beans as well coming up in just a little bit. But if you're a wheat producer right now and you see some of these variables that we have out there, do you want to step up some new crop sales, or have you been very aggressive on new-crop wheat sales at this point, Alan?

Brugler: We've not been really aggressive, 20 to 30 percent, depending on which class of wheat you're looking at. But again, we think that the overall commodity values are going up, the CRB Index, which is a very broad measure of commodities is above the 2008 highs now. So that's pulling all the commodities higher. So we're going a little bit slow on the wheat sales, trying to reward the rallies.

Pearson: All right. Reward the rallies and kind of keep it there. Let's talk about the corn market, again a bit of a surprise. Tighter stocks from USDA. Where are we headed next? Obviously we've got some weather issues as soon as we start getting planted too in the Upper Midwest.

Brugler: Well, the bottom line, the main reason for the rally this week was the corn stocks number. It was 6.5 billion bushels in change. It was about 167 million bushels lower than the trade was looking for. That basically says that we have to slow down second quarter -- or second half use. That second quarter number was 9 percent larger than last year. We needed to go to 2 percent lower than last year use for the third and fourth quarters just to make the current USDA forecast for ending stocks, which is extremely tight at 675 million bushels. So price rationing is the key term here. We've got to raise the price enough to discourage some usage, whether that's in the food, seed, and industrial sector, the livestock sector, or the export sector. Somebody has got to say uncle. Somebody has got to slow down a little bit here, and we're trying to find out what price it takes to do that.

Pearson: World agricultural supply/demand estimates, as you mentioned, coming out in a week. What's -- is that going to clear some of this up, because at this point it appears a little rationing hasn't started anywhere?

Brugler: They'll try and anticipate where that rationing might occur. We think they will lower the projected ending stocks temporarily, probably to 575 or 600 million bushels. But that's not a sustainable number for year end. That's just their way of saying, hey, you guys have got to do something about this. We don't know yet which of those three sectors is going to give way. We did get a little bit of help here in March, which is after the stocks report was calculated from wheat prices. Wheat got below corn for a couple of weeks there on a per-pound basis, and we did get some users to switch from corn feeding to wheat feeding. So that's a minor dent. More of those types of things have to happen. We also think that some of the ethanol plants, some of the other industrial users will probably shut down in July or August when corn gets really scarce, taking extended down time, get their plants fixed up before harvest.

Pearson: These look like good prices? Are you selling corn and where are you on new-crop sales?

Brugler: We still have about 30 percent of our old-crop corn, and we're -- we did finally sell the first 20 percent of our new-crop corn, but we're still sitting on 80 percent at this point.

Pearson: So you're looking at a price level higher than what we're at right now.

Brugler: That would be correct.

Pearson: So you're bullish on the corn.

Brugler: We're still bullish.

Pearson: All right. Let's talk about the soybeans, Alan. Again, not quite the impact from the stocks report on the beans. What's your take on the bean market? What's all this talk in South America with quality issues? Is that a real issue or is that just something on the trade floor?

Brugler: Well, it's an issue. The bean quality is not as good, and you probably have some harvest losses in some areas due flooding and so forth. But what's happened, though, is the total production numbers have been raised because of the same rain. You've got late yield development on a lot those plants. Argentina revised their corn estimate up this week, which caught some people by surprise. But again, they got the late rain. It kind of added some bushels. That's kind of canceling out the quality progress. What I look at is the FOB price at Paranagua Port in Brazil. If that's under the u.s., then they've got beans to sell and they're willing to discount them to get them sold. I'll they are cheaper than the U.S. offers right now.

Pearson: All right. What's your strategy on soybeans? Obviously I know we need good crops, and we're not going to get off to it looks like the perfect start in 2011. Have we got some upside on this thing still?

Brugler: The charts are saying we're trying to get back to 1473 on the nearby contract. That would be the May right now. The November chart is still trying to make sure it gets some acres. It doesn't want to encourage any more ground to go to corn because of this corn rally. We are tight enough on our old-crop stocks, 140 million or less, that we need to have some replacement. We need some bushels. And we want to make sure that we get adequate double crop bean planting as well as the wheat comes off in the south here in May and June.

Pearson: All right. Let's talk a little bit about cotton. And, again, it's been so explosive this year. Where are we going?

Brugler: Well, the cotton market to me is acting a little tired. We've got some technical formations that could be a top. We don't have confirmation yet, but the story is pretty clear. We increased acreage 12.6 million is what USDA said. That was actually low compared to what the trade thinks is out there. The trade was looking for 13 million. The cotton tried to rally on that news. But the problem with cotton is that we're starting to get resistance at the retail end. The prices are working their way through the system. You're starting to see the clothing and the yarn prices go up. That will tend to slow that demand over time.

Pearson: All right. Are you selling cotton in here?

Brugler: We finished selling our old crop cotton, and we're about 35 percent sold on new crop. We're trying to buy some put options right now with some more of it.

Pearson: Pretty pricey?

Brugler: Liquidity is a problem in the December options. There's just not that many people trading yet.

Pearson: Let's talk about a really hot one. Let's talk about fed cattle. These in the beef prices at two hundred bucks, fat cattle at 1.22. Things looks pretty good.

Brugler: Cattle have had a tremendous run here. You can't say that it's over. The actual -- like 2003 after the Canadians were out of the world beef market and we were the only player for a while there. And in fact, export market is where the action is. South Korea is buying beef to replace their shortfall of meat production. Japan is buying some replacement. And basically the u.s. consumer is being crowded out to a degree. But we've got this tremendous growth in world demand back to 2003 levels without the number of cattle that we had in 2003. So that's allowed the boxed beef price to go up. It's allowed the cash cattle price to go up. Again, no sign that it's over. We will start to see a few more cattle available as we get into mid-April and may, just looking at the cattle and feed numbers.

Pearson: It's going to be interesting to see what happens going forward. Let's talk about the -- let me ask you this. Can we hedge these cattle right now? Can we buy these high priced feeder cattle and make them work with corn prices the way they are?

Brugler: Well, the old crop slots are kind of difficult, that is the may crush, the June/July period, very difficult. Fall numbers you can lock in $15- or $20-a-head profit doing a cattle crush spread today.

Pearson: All right. In the hog market, what do you see there?

Brugler: Hogs are trying to keep up with cattle. Again, excellent export demand for hogs. Hog numbers were a little larger in that hogs and pigs report than what the trade had been looking for, but not enough to turn the tide here. Again, you've got improving demand at the meat counter and in the export sector particularly. That's supporting the hogs. I'm concerned that the summer contracts, well over a hundred dollars, are showing a really big increase in cash prices to get to where those futures are. I don't think we can do that so I'm looking for a place to hedge those summer hogs.

Pearson: We've got about thirty seconds. Energy outlook, crude oil, what do you see? Where are we going? Now, I know it's hard to predict when it's such a volatile world.

Brugler: Well, it's a volatile product and, of course, it tends to trade opposite the dollar. If you think the dollar is going to continue down, crude will probably go up. Our technical objective on crude oil is $116 right now.

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 high flying markets just may be headed, visit the "Market Plus" page at our web site. You'll find "Expanded Market Analysis," audio podcasts and streaming video of our program -- all FREE -- at the Market to Market Web site.

Pearson: Be sure to join us again next week when we'll examine the market impact of USDA's latest estimates on global supply and demand. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices corn markets news wheat