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Market Analysis: Nov 12, 2010: Alan Brugler, Market Analyst

posted on November 12, 2010

But the rallies ran out of steam later in the week when China announced its consumer prices rose 4.4 percent in October, fueling concern that the world's second-largest economy is barreling ahead at an unsustainable speed. As you'd expect the three C's: cotton, coffee and, of course, corn all retreated precipitously...

For the week, December wheat lost nearly 60 cents, while the nearby corn contract moved 54 cents lower.

Despite bullish fundamentals that yielded "beans in the teens" Tuesday, soybeans also were pressured late this week. The January contract moved 15 cents lower. The nearby meal contract followed suit with a gain of $10.30 per ton.

Cotton traded at levels not seen since the Civil War Tuesday, before getting caught in a broad commodity sell-off, and the December contract expired Friday with a weekly loss of $2.

In the dairy market, December Class III Milk futures lost about $1, while the deferred contract moved 44 cents lower.

In livestock, the December fed cattle contract gained 85 cents. Nearby feeders rallied more than $3.50. And the December lean hog contract advanced by $2.

In the financial markets, the Euro lost 348 basis points against the dollar. Crude oil lost nearly $2 per barrel. Comex Gold lost $32.20 per ounce. And the Goldman Sachs Commodity Index moved 16 points lower to close at 576.50.

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: Nov 12, 2010: Alan Brugler, Market Analyst

Brugler: Good to be here, Mark.

Pearson: Well, it's a weird week. Hugely bullish USDA reported on Tuesday, and then the markets just kind of falling apart, the situation in China, but also the dollar. We referred to the losses of the dollar against the euro. Is this the start of a change in direction in terms of the dollar?

Brugler: Well, the dollar did get down to technical a couple weeks ago, right around the time of the initial QE2 announcement, the qualitative easing from the Fed. The market had what we call a buy a rumor; sell the fact reaction to that announcement. It's been going up ever since, so the dollar is rising right now. And again, we've had some new concerns about European debt situation, and that's helping to fuel that bounce. That's part of the reason for the sell off in the commodities this week.

Pearson: Well, certainly the situation in Ireland is one that's come into question. We've been through these before. Also the situation as far as the dollar is concerned with the qe2 and the $600 billion out there. How is this playing out in the commodity world?

Brugler: Well, the intent is to drive down interest rates, create extra money, create a little inflation. And to the degree that it's successful, commodities prices and the dollar should go up. The problem is that in the initial buy today, the fed did their business, bought their billions of dollars for this week, and then the and rate went the wrong way. It showed zero influence for the Fed's activity today. And that kind of spooked some of the commodity bulls saying, well, hey, is this going to work or not going to work. But long-term, I think the Fed kind of has to do what they're doing. And you saw the president having to defend that in the G20 meeting.

Pearson: Absolutely. We've been after China for some time on currency issues. He brought that up again today. Despite 25-percent increase in the wages year to date in China, 4.4 percent inflation in a month, there's some real issues there, but aren't they going to have to cool themselves down?

Brugler: Yeah. China is getting some very bubble type behaviors in there in a lot of sectors, in real estate, in wages to a degree, certainly in the price of cotton which is over $2 a pound over there. So they're taking some steps. They're raising interest rates, putting some more capital restrictions on. They're threatening traders if, hey, you better not be hoarding this stuff if you're buying physical commodity. One of the government affiliated agencies was even told to quit buying because they thought they might be causing part of the problem. So they know they've got an issue. Where the U.S. market gets concerned is we're very dependent particularly in cotton and soybeans to selling to China. If they slow down their economy very significantly, then we can't shift, we don't sell as much. I happen to think, though, that if they do it properly, they basically maintain the demand, and that's good for our sales to China long term.

Pearson: All right. Let's talk about some of the commodities and specifically obviously the wheat number came in. Wheat had that big spike in August with the issues in the Soviet Union, had a nice big rally up. USDA report really kind of confirmed where we stood as far as wheat is concerned. There still seems to be plenty of product worldwide.

Brugler: We've got plenty of product, but it's not all in the right places. A simple illustration is Australia. They've got a nice crop; I believe USDA said 24 million tons. But this year the exporting part of the country, which is the Western Australian wheat crop is down because of drought. They've got a record production in the east, but they don't have the infrastructure to get it all onto ships and send it somewhere else. It's very cumbersome. On paper you've got more supply than is actually available to the market. USDA here says basically we've still got more than 800 billion bushels that will be left over next spring. So we've got plenty of wheat. Globally prices kind of crept up because corn was going up. Wheat is a substitute for corn in a lot of places around the world. In fact, USDA showed an increase in wheat feeding in this most recent report.

Pearson: All right. So is it time to sell wheat?

Brugler: We think it's time to sell a little bit more. We've been sitting pretty tight on the last 30 percent of the old crop and also most of the new crop. We did make some more sales here at the end of this week, basically because we're up against the old highs and the market, as you know, was acting a little soft today.

Pearson: New crop sales there?

Brugler: Yeah, we made some July future sales in both -- and Chicago.

Pearson: All right. Let's talk about corn. Again, short crop. I think everybody knows the story, incredibly shrinking crop from USDA. Were the surprised by the reduction of USDA's number in this report? Was it bigger than what you thought?

Brugler: Actually, it was about where we thought it was going to be. We knew the yield was going to be down a little bit. It was just a question of how many acres, and they don't typically change the acres in November and what they did on the demand side.

Pearson: All right. Based on what we know right now, I still hear rumblings and a lot of the analysts out there are still saying they're going to shrink it some more. But after what happened on Friday, do you think this corn market is still strong? Is it still fundamentally a strong bull market, or was this the first crack, maybe, in a market that's going to soften up for a while?

Brugler: Well, it's definitely a crack when you have four down days and including a key reduction reversal on the report day. It started higher and ended lower. Basically you said this bullish news is already in the market. We already know that you were going to say that or something close to that. So we're getting a correction. We do need to keep it in perspective, though. We're only four days off of the high for the year. It's been a rather violent correction but at the same time we're still very close to very high prices historically speaking. The revenues per acre are still excellent for both this year and also for what you can lock in for next year.

Pearson: Are you seeing much farmer selling?

Brugler: We saw some at harvest. We saw some in the initial post harvest rally? Most the bin doors are locked up now, and I think what you're -- what you're going to see is a little bit of movement at the end of the year for tax adjustment purposes. But most of them, what they've got left, they're holding on till January.

Pearson: Are you about out of old-crop sales now?

Brugler: We've got about 25 to 30 percent remaining, and we're going to hold some of that probably until next spring because of the perceived acreage tightness?

Pearson: New crop sales?

Brugler: We've done a few -- if the local basis was acceptable -- in most cases that's not true.

Pearson: New, we didn't talk about that in wheat, but that's another big issue here on these cash markets falling apart in the wheat market. Let's move onto soybeans. The soybean market, it looks like crops are decent in South America. Is that your impression at this early stage?

Brugler: They're doing very well. The USDA raised the acreage estimates again this week in the report on Tuesday, bumped up the production for Argentina a couple million tons, Brazil another half million tons. So they're not going to have quite the production they had last year because we don't think the yield is going to be record high like it was last year. But certainly a big crop coming along there and the futures market did it's best to its best to encourage last-minute acreage in South America.

Pearson: Yeah, timing couldn't been better for that one.

Brugler: And they got some. The producers there are now dealing with weather. Mato Grosso, which is the biggest production area in Brazil, looks a lot better than it did a month ago but you are seeing some dryness across the southern part of Brazil and into Argentina that's tied to the La Nina weather pattern.

Pearson: Okay. The huge move Tuesday, again some weakness. What's your feeling on soybeans? Do we still have a lot of showing to go?

Brugler: We got to our main price targets around 13.24 on the weekly chart. It was time for a pull back. I don't think we can say that it's over for the year. We have to see how that South American crop develops. We need to see what kind of acreage projections we're getting for next spring. If we only had, say, 75 million acres planted next year. We can easily see the carryout even smaller than this year, the surplus stocks. That's not going to be acceptable to the markets. It's probably not over but a little correction is due here.

Pearson: All right. Is this the point do we hold off? Maybe see another 10, 25-cent rally and then make sales? What's your feeling on sales?

Brugler: Well, if we're having an abc type of a correction, that's a technical term, but you'd want to sell the B Wave, which would be the corrective rally back up after the sell off we saw at the end of the week.

Pearson: All right. Again, farmer selling, are you seeing much?

Brugler: Almost none right now. It looks like the farmers have sold a lot of the beans nationally. If you take the commercial short position in the futures, multiply it by 5,000 bushels per contract, it accounts for almost two-thirds of the U.S. crop, so a lot of the crops have already left the farmers' hands.

Pearson: New crop sales?

Brugler: We're still dragging our feet on that. Haven't done them.

Pearson: All right. So you're still expecting this thing to make a jump here come spring, which will be seasonal.

Brugler: We may reward the market if this break starts to look more severe and unrelated to beans themselves, more related to the macro-situation. But, yeah, we're thinking you've got to wait and see how the acreage plays out.

Pearson: I want to come back to the weather things. You track weather. You track all these things. We've got a La Nina in effect right now. Is that bad news for South America or not?

Brugler: Well, again, it varies year to year because there are other influences, other weather pieces of the equation. But definitely the southern part of Brazil and Northern Argentina has a strong correlation to dryness particularly in November and December in a La Nina pattern. After you get into the first of the year, that correlation breaks down a little bit. We have a similar correlation across the Southern U.S. and, of course, up until this week it's been very dry in the southern plains and over into Georgia and Arkansas and so forth.

Pearson: And southeast has been dry. You can see that on the charts. Let me ask you the other question on soybeans in South America. With the weaker dollar than we thought we had going, now the dollar strengthening, how is that going to impact us versus South America in term of sales?

Brugler: Well, the Brazilian real had been extremely strong against the dollar. Of course, that makes them a little less competitive on exports but it also helps them to their input costs for importing fertilizer and so forth. With the dollar turning a little bit, it hasn't turned as much against the real as it has against the euro, but if the dollar were to firm, that would tend to give them a little more leverage on the exports.

Pearson: Most of the South America farmers, most of the Brazilian farmers that I've talked to that raise soybeans now, their real goal is to raise cotton. If we have a cotton market like we have right now, their tongues really have to be hanging out. Obviously this has been unprecedented.

Brugler: Yeah, what we're seeing, as you mentioned on the show earlier, the highest prices since the Civil War. Basically the Chinese market has gone ballistic. As I mentioned, it's over $2 a pound versus at our max $1.59 here. The Brazilian did see that. In fact, Brazilian production is estimated to be up 20 percent this year. So price did get their attention. It's going get our attention here in the U.S. too because you can forward contract now at the best prices for a year out than you've been able to realize.

Pearson: Are you going to sell this market? Is that the thinking out there?

Brugler: We've been boosting our sales on both old crop and new crop cotton. It's a scale up selling plan, but this is high enough and overbought enough that we think that we need to make some sales here.

Pearson: All right. Let's move over to livestock. The fed cattle market has been hanging in there. Demand is fairly good. We're fairly current?

Brugler: Fairly current. We are going to get into some bigger finish numbers based on when the feeder cattle were placed a couple months back. We're going to see some bigger numbers in November and December and January. So the supply side is going to get a little larger. We need a little more demand to help offset that. We're hearing restaurant traffic is picking up. That will help on the choice side and on the prime beef certainly. We need to keep the exports up so the dollar becomes a factor there. We don't want to see too big of a move up in the dollar. It will eat into those beef exports.

Pearson: Where do you think this beef market is going to hover then, in that dollar range?

Brugler: We think it's got good support around 99 cents. It gets around $1, $1.02; it starts to get a little tough to move it.

Pearson: The futures market you couldn't help but notice what happened in feeders with this I assume softer corn market boosting feeders.

Brugler: That was the big factor and the fact that the cattle came back a little bit too. But mainly it was the cheaper corn, cheaper soybean meal. That tends to get bid into the price of the feeders.

Pearson: All right. Hog market?

Brugler: Hogs are still struggling on the pork side. We've got the cutouts under pressure. They're down in the $75, $76 range. Actually the futures are anticipating them being even lower than they are. When the consumer actually stepped up and bought a little more pork, then the futures had to rally back this week.

Pearson: All right. Selling opportunities, hedge opportunities out there for the hog market?

Brugler: We've pretty much taken the approach of using long put options in the upper 70s as a price floor and then hoping we get a little chance to roll those up to a higher strike price.

Pearson: We've got about a minute left and I want to pick your brain about a couple other things. Crude oil, stronger dollar? Will we see it continue to weaken?

Brugler: Stronger dollar should make the crude oil -- crude oil basically is treated as a currency. There's other variables, of course. You know, what's your gasoline supply doing and so forth. But we are overbought technically on the crude oil. It's looking for a reason to pull back a couple bucks here.

Pearson: And the metals? Gold, what's going on there?

Brugler: Well, the interesting thing to me on gold was on Friday when everyone is bailing out of everything, normally that money would go into a defensive investment like gold. But it didn't. We saw a massive sell off in gold. I think what it's telling us is we don't have confidence in the commodity prices or the currencies right at the moment. Gold is probably overbought. It could easily drop off.

Pearson: All right. Alan Brugler as usual, some great comments. Appreciate it.

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.

And be sure to join us again next week when, we'll examine market conditions for a Thanksgiving staple -- cranberries. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture China commodity prices markets news