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Market Analysis: Jan 21, 2011: Alan Brugler

posted on January 21, 2011

Corn prices trended modestly higher on EPA's announcement Friday, while flooding concerns in Australia and a weaker dollar sparked a rally in wheat.

For the week, March wheat gained 51 cents, while the nearby corn contract settled Friday with a weekly gain of 9 cents.

Despite strong demand from China and favorable export inspection numbers, soybeans retreated a bit from last week's trip to a 30-year high. For the week, the March contract gave back about a dime, and nearby meal prices declined $8.50 per ton.

In the softs, cotton traded limit up on Friday, and flirted with a record high, as the March contract posted a weekly gain of $15.50.

In the dairy market, February Class III Milk futures gained 88 cents while the deferred contract moved more than $1.00 higher.

Over in livestock, fed cattle prices traded in record territory Wednesday before the April contract settled with a weekly loss of $1.08. Nearby feeders were off $1.75. And the April lean hog contract rallied more than $1.30.

In the financial markets, the Euro added another 238 points to last week's 425 point gain against the dollar. Crude oil fell $2.43 per barrel. Comex Gold declined by nearly $20 per ounce. And the Goldman Sachs Commodity Index lost 5 points to close at 639-even.

Here now to lend us his insight on these and other trends is one of our regular market analysts, Alan Brugler. Alan, welcome back.

Market Analysis: Jan 21, 2011: Alan Brugler Pearson: Alan Brugler, thank you so much. That wraps up this edition of Market to Market. But if you'd like more information from Jamey 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.

Brugler: Good to be here, Mark.

Pearson: Well, let's talk a little bit about where we've been. Obviously near record highs on soybeans, a big up move in wheat this week. Still concern about the world wheat situation. Plenty here in the u.s. the corn market is extremely volatile. A dollar that's getting weaker and weaker. Let's start with the wheat market. Obviously more problems out in Australia, more flooding, more quality issues for wheat. What's ahead for wheat prices?

Brugler: Well, I think the story right now is that we're seeing a number of the buyers come into the market, and they're buying u.s. wheat. You saw deals with turkey. You saw Jordan buying wheat. You saw Japan buying their usual 149-, 150,000 tons. USDA is basically projecting a stronger-than-average sales campaign between here and may because of the things that are going on in other parts of the world. We actually started to see that in the numbers this week, and the market reacted accordingly.

Pearson: Well, this is a big reaction. Do we have more to come here with the cotton -- with the wheat issues that we have?

Brugler: I think there's some potential here. We're getting up against the next layer of technical resistance, Kansas City wheat around 912 and so forth. But the demand seems to be pretty strong right now. We're not in a period where there's a lot of active harvesting around the world. Australia is basically done harvesting. Argentina is done. So we're going to see good demand on the old-crop side, and we're, of course, still fighting the acreage war. We know what the winter wheat acreage is, but we still need some spring wheat to be determined and pulled away from corn or soybeans.

Pearson: All right. That will be another big question that will get answered a little bit later on. The quality of the winter wheat crop here in the U.S., how do you read that right now?

Brugler: Well, the crop condition ratings in Texas actually improved a couple points last week in the good to excellent category. They got a little bit of moisture, but still quite a bit of the crop in Texas and Oklahoma that's dry and suffering condition rating wise. The ninety-day forecast just came out here from the National Weather Service. They look for that dryness to continue over the next ninety days and extend all the way up into Nebraska. So we don't see a lot of improvement in those condition ratings. The real question in Texas is whether some of that wheat will be ripped up and planted in cotton.

Pearson: Which will be interesting and, of course, very interesting because we've got these record cotton prices. But also we've got -- these are pretty amazing wheat prices here too. We're over $9 on wheat. Should we be making sales here?

Brugler: Well, we're sitting tight right now because, again, the chart action has been positive and the fundamental picture appears strong with the export program.

Pearson: New-crop sales?

Brugler: We sold 20 percent. We're basically standing pat right now.

Pearson: All right. Let's talk about the corn market and, of course, the continued volatility there. We finished up a little bit for the week. There's been a lot of concern about when we're going to start rationing this crop, and people seem to say $7 would be where the rationing starts. Are we seeing any rationing by any groups at this point, Alan?

Brugler: You're seeing a little bit, particularly in the export sector. Our commitments are only 4 percent ahead of a year ago now. That slowed down considerably from where we were two months ago when prices were lower. I think you're probably going to see a drop off out of South Korea. South Korea is a major importer of corn and other feed grains, but they've liquidated 12 percent of their livestock because of foot and mouth disease and avian flu in the poultry herd -- poultry flock, excuse me. So you're going to see some slowdown in that sector. Here in the United States, we're seeing a little bit more liquidation in the hog herd particularly but, on the other hand, cattle-on-feed report on Friday showed some expansion, yet.

Pearson: All right. Sell corn here?

Brugler: We're hanging onto about 40 percent of our old-crop corn, and at this point we still have 90 percent of the new crop to price.

Pearson: All right. So waiting for some higher prices. Soybeans, what do you see there? Very strong prices again this week.

Brugler: Very strong. The soybean oil was firmer on the week. Meals suffering a little bit. Basis has been weak. We've got basically too much soybean meal sitting here in the country. But the big story there is Argentina and the dryness that they were experiencing back in the November December period. We think that La Nina pattern is breaking down a little bit, at least relative to the rainfall in Argentina. It's effectively late July if we think in U.S. terms for Argentina. So there is still time for the yield to recover if the rains pick up here.

Pearson: All right. So we've still got a weather market going, so you're not in a big hurry to make soybean sales right now?

Brugler: That's correct.

Pearson: All right. Let's talk about the cotton market. This was a huge move this week, $15 move. This thing has been crazy, Alan. I mean we haven't seen this since the civil war. What do you tell cotton producers right now? They're trying to make some decisions.

Brugler: Cotton producers are basically scrambling to find seed, find equipment. In some areas the gins have closed down over the last couple years. They need to find a home for the cotton if they're going to grow it. But again, profitability is pretty good. Corn still looks better, if you can do either one. But cotton prices are high and we are going to see some acreage expansion.

Pearson: All right. Let's talk livestock for a minute. Fed-cattle market not a great week on the board this week, but certainly in other underpinnings, cow prices at sale barns are at prices we haven't seen in a long time. There seems to be really good demand for these heavier feeders for the most part, almost yearling type feeders. What's ahead now for fed cattle? What do you see in that market?

Brugler: Well, we think the cattle market itself is trying to keep up with the input costs. It's rallying when the input costs are going up. Cattle producers have a little bit of leverage there. Boxed beef prices are very high right now. Choice was over $173 this week at the wholesale level. The real question there is as those prices flow through to the consumer level to the meat case, will the U.S. consumer continue to pay for the beef or will we have a demand problem. That's offset to a degree by the export market. We're seeing a big uptick in beef exports, and that's good for the cattlemen. Going back to the cow question, we do think that the size of the calf crop is probably shrinking a little bit here because of all the liquidation in the cow herd.

Pearson: We seem to be moving hamburger. Diners I talk to say their retail demand is strong there and hanging in there.

Brugler: Retail demand is excellent and we've reduced our imports of beef trimmings from Australia and New Zealand, which are major contributors to that.

Pearson: What's your take for fed-cattle prices for the next quarter? Where do you think we're going to hang?

Brugler: We think that the cash cattle at the 105 to 108 will hold us for that time period.

Pearson: We've got about thirty seconds. And I apologize to pork producers. We don't have much time. What's your outlook for pork?

Brugler: We think short term it's trying to go up. The carcass values are very high, that is the pork being sold by -- pork belly prices were very strong this week. We do have some put protection in place at these levels, but we're not real concerned at this point.

Pearson: All right. So we'll see what shakes loose on the pork front, but it looks like good demand and good export story there too with pork.

Brugler: Yes, definitely.

Pearson: And, of course, join us again next week when we'll examine the outlook for renewable fuels production in the months ahead. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices corn Environmental Protection Agency markets news wheat