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Market Analysis: Sep 10, 2010: Alan Brugler, market analyst

posted on September 10, 2010

Despite bearish implications for old crop wheat, the reports were friendly to deferred wheat prices.

For the week, December wheat lost a nickel, but the March contract gained 18 cents. Corn prices also rallied, with the nearby contract moving 14 cents higher.

The reports, however, were not friendly to soybean prices and the November contract lost 40 cents, while the nearby meal contract settled Friday with a loss of more than $10.

In the softs, cotton exceeded the $90 mark this week as the December contract posted a gain of nearly $2.

In the dairy market, October Class III Milk futures advanced 17 cents, while the deferred contract moved 18 cents higher.

In livestock, the October fed cattle contract lost $1.30. Nearby feeders were off $3.25. And the October lean hog contract eked out a nickel gain.

In the financial markets, the Euro lost 161 basis points against the dollar. Crude oil gained $1.85 per barrel. Comex Gold declined $1.60 per ounce. And the Goldman Sachs Commodity Index gained 7 points to close at 522-even.

Market Analysis: Sep 10, 2010: Alan Brugler, market analyst Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Alan Brugler. Alan, welcome back.

Brugler: Good to be here, Mark.

Pearson: Well, some of the veil has been lifted on this 2010 crop for wheat, corn, beans and cotton. Let's get started with the wheat number which was a little bit confusing! Obviously we've had all of these concerns with what has happened in Russia, the Ukraine, Kazakhstan with the terrible drought over there and some confusion over the numbers coming out of Russia. But when it's all shaken out there's still plenty of wheat, Alan.

Brugler: Still plenty of wheat. The world is scrambling though to figure out who is going to have it in the end. As you mentioned, there is great uncertainty about the Russians and whether they'll export any more. Clearly USDA had to show 3 million tons of exports for Russia because they already shipped them. Those were the things that were done before the embargo was announced. I think what caught a couple of people by surprise in this morning's report was that world consumption was cut outside the United States and that resulted in not as large of a reduction in that projected world ending stocks as what traders had been looking for. So, in that regard it was not as bullish as the trade had thought going in.

Pearson: How do you determine just what was the cause of that reduced world -- is it strictly because of the price jump that we've had?

Brugler: Yeah, it's basically price rationing. The price had a substantial run up after the Russian drought intensified and after the embargo particularly in August so what you're seeing is substitution. You're seeing people coming to other countries, buying other commodities so that they can be used in place of feed. One thing that gets overlooked is that 114, 115 million tons of wheat each year are fed to livestock around the world. That is not all human consumption but obviously there's a lot of other things that you can feed to those same livestock. And when the prices went up they came to the United States and bought corn, for example.

Pearson: So, that was one of the shifts. Of course, that's some good news for corn. I want to get to that in a minute. What is your outlook now? What are your targets for wheat sales and wheat prices as we go forward?

Brugler: Well, we think wheat has kind of explored the high side when it got over $8.00 in Chicago, it is trying to get back to that level. We've had a nice little rally the last couple of weeks here, kind of the secondary wave, if you will, of demand. Saw excellent export sales this morning from the USDA, over 1.6 million tons. So, we think another shot at $8.00, $8.04 is probably a possibility here.

Pearson: A good place to make sales then.

Brugler: We're definitely looking at that. We haven't sold any 2011 crop yet but we're still looking to move some more of the 2010 here.

Pearson: All right. So, move some of the 2010 crop but you'd hold off on 2011 for wheat.

Brugler: Stocks are still shrinking.

Pearson: Absolutely. All right. Let's go from wheat to corn now. The USDA shrunk their corn crop number, not as great as what Informa had anticipated. They were talking about maybe 158 bushel average. 162.5 is a pretty substantial drop for USDA.

Brugler: It was a 2.5 bushel drop from their August estimate. To be fair to the outfit that you mentioned they didn't think the number would go that low in the September report. Their September number was 164. So, they are anticipating further cuts later. But USDA did what we think they had to do, they lowered the yields by six or seven bushels per acre in Illinois and seven in Missouri based on the harvest evidence that we already have. The southern crops have already been started into the combining, we're probably ten percent done as we speak today. It is quite possible this is the lowest yield estimate of the year. If, as we go further north and get into what has been some of the better rated corn, it is possible USDA will have to raise their estimate again in October or November.

Pearson: All right. Well, that's going to be interesting to see. If that would be the case that might change the outlook. How much does this tighten things up, though, at this stage of the game?

Brugler: Tremendously. We're down to 1.116 billion bushel ending stocks forecast, pipeline supply which is essentially the number you can't go below because it's in a train or it's in a barge or it's in the bottom of somebody's bin is probably 950 million bushels. So, there's not a lot of wiggle room here. If we were to below 160 bushel on our final yield and not have any compensating changes in demand we would be effectively out of surplus corn.

Pearson: Would you agree with the regular viewer of this program who called me last night and said, on this corn market you better be long or be wrong?

Brugler: Well, I agree with the statement. I'm not sure I want to chase the market here. If I'm already long it's okay to stay long. If I'm not in and I'm not sure that I would want to buy feed coverage, for example, more than 30 days or 60 days out here.

Pearson: All right. What is your sales target for corn now that we've got this number?

Brugler: Well, we've put those out to our clients. I'm afraid I can't publicly divulge those. I can say that we do have a target about a dime higher for the old crop, for the September that is based on a weekly chart retracement objective and those who are technically proficient will know what number that is.

Pearson: Mm-hmm. All right. Well then, what about new crop or 2011? Are you making sales out there?

Brugler: Still haven't made any 2011 crop sales. We have encouraged a couple of producers that had already locked in their input costs, some of their major costs like fertilizer for next spring to go ahead and book a little bit of new crop. But, again, the market has been behaving itself, it's been going up and we think that if that old crop number ends up being lower than today's 162 bushels you might have to have a $5.00 number in front of that new crop corn.

Pearson: You mentioned fertilizer. There's an input that has already started to make the move higher. So, your big producer there was pretty smart to get those inputs locked in.

Brugler: Yeah, we're seeing a lot of demand basically. You've got China and India and people like that who have discovered that if you put a little more fertilizer on it you get a bigger yield. So, they're starting to come in here and try to take the fertilizer away from the U.S. consumer.

Pearson: All right. Now, explain to me the soybean situation. This was a big yield number on soybeans. We're hearing better yield results, what little we're hearing so far on soybeans, it's going to pick up dramatically in the next five to seven days. But this soybean number, 44.7 bushel average, that's pretty big. We seem to have plenty of soybeans. It looks like the carryout was doubled. So, soybean prices, what are your thoughts on that?

Brugler: Well, based on what we know today they are probably pushing the upper end of the range. We've got the record yield, 44.7 is an all-time record if it comes to fruition, and we've got 360 million, 350 million carryout tonight, that is 50 million bushels higher than the trade was looking for and that's why you saw a little bit of a sell of on Friday. The one thing USDA is consistently demonstrating, though, is that world demand is picking up. There's really strong demand for soybeans, they raised their soybean export forecast to a new all-time record for next year despite all the extra supplies we've got in South America. We're looking at world record ending stocks, leftovers but we're still seeing new record export sales. So, demand side is very positive, there's a lot of consumption for livestock, soy oil for biodiesel is a big thing in South America and Argentina and Brazil and so that is the positive story, that is what is keeping prices up but we may have seen the high for the short-term.

Pearson: All right. Sales? Move this stuff now?

Brugler: Well, it depends on how far sold you are. I think you've got to keep a little back if the speculators want to keep owning this stuff. But we did buy some puts within the last week, $10.40 November puts, we've also sold some calls above $11.00, if the market wants to go there we'll let them have some more beans.

Pearson: Okay. 2011 beans?

Brugler: Haven't done anything yet.

Pearson: All right. That's telling me you think it's going to go higher. Now, real quick, $90 cotton, Alan. Real quick.

Brugler: It's up there but, again, very, very tight stocks. USDA said 2.7 million bale ending stocks for next August. That is an extremely tight number. They see 15.5 million bale exports, very strong market. Again, we're high but we're not at the record high, that was $1.17 back in 1995.

Pearson: That's right. Let's talk about the livestock market. The fed cattle market stood a little bit on the board but the cash demand seems to be pretty good. I hear from packers that beef is moving okay.

Brugler: Beef moved really well up until Labor Day. The wholesale price has dropped off a little bit after Labor Day. Supplies from the cattle side will be tighter going into October and then into November but we do tend to have a little slippage as we get into the fall, a little more turkey consumption and not quite as much beef.

Pearson: All right. The hog market. What do you see ahead for hogs? It's been a good year but are we going to start seeing our seasonal push down?

Brugler: We would anticipate larger slaughter numbers coming forward. That tends to put more pork supply on the market. But, again, the market is holding up fairly well. We think there's some export component to that. Unfortunately since this export data is 60 days behind we don't know right away what is really happening there. But, again, the cutout hasn't dropped as far as the futures market would suggest that they thought it was going to so we're starting to see these rallies in futures for no other reason than the cash isn't dropping fast.

Pearson: All right. Again, we've got 15 seconds, your advice on feed purchases, not to be in a big hurry?

Brugler: We've basically owned soybean meal out to November and we bought another 30 days of corn last week and we're basically sitting tight here.

Pearson: All right. Alan Brugler, as usual, appreciate your insights. That will wrap up this edition of Market to Market. But before we go we want to remind you again about the special rural economic summit we'll be taping at Husker Harvest Days in Grand Island, Nebraska next Wednesday, that is September 15th at 1:00. We have assembled a distinguished panel of experts and, of course, you are invited to join the discussion by submitting your questions at the Market to Market Web site. Now, to get the conversation started we're asking you the following: What improvement are you seeing in your local economy? Visit the Market to Market Web site and share your story and submit your questions. And, of course, be sure to join us again next week when we'll check rural America's economic pulse at Husker Harvest Days in Grand Island, Nebraska. Until then, thanks for watching. I'm Mark Pearson. We'll see you in Nebraska.

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