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Market Analysis: Jul 02, 2010: Analyst Alan Brugler

posted on July 2, 2010

Despite the reports' bearish implications, wheat prices followed corn higher.

For the week, July wheat advanced 32 cents while the nearby corn contract settled Friday with a weekly gain of 24 cents.

Soybeans moved in step with the coarse grains as the July contract was up 6 cents, while the nearby meal contract advanced $5.30 per ton.

In the softs, cotton trended lower with the December contract posting a loss of $3.38.

In the dairy market, July Class III Milk futures lost a nickel, but the deferred contract gained 57 cents.

In livestock, August cattle lost $1.48. Nearby feeders were off 53 cents. And the August lean hog contract declined $3.87.

In the financial markets, the Euro gained 164 basis points against the dollar. Crude oil declined $6.72 per barrel. Comex Gold lost $48.57 per ounce. And the Goldman Sachs Commodity Index lost 33 points to close at 480-even.

Market Analysis: Jul 02, 2010: Analyst Alan Brugler Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Alan Brugler. Well, Alan, there are a lot of things out there that are influencing these markets, Europe and the dollar, the other foreign currencies. But this week all eyes were focused on what USDA released in terms of their acreage intentions, a million acres under what most of the traders anticipating and then the stocks report that eliminated 300 million bushels of corn. Let's start with the acreage number first. You were a little dubious to this number last time.

Brugler: Yeah, we've had several questions about the acreage categories, particularly if you look at state-by-state totals. I think this one makes some sense to me, if you look at where the acreage shifted. We've had very wet weather in the western Corn Belt in Nebraska and Iowa particularly, northern Missouri, and that's where we lost the bulk of the corn acres. 950,000 acres shifted out of the intentions report in those states and went to soybeans. Those states also had increased soybeans along with Minnesota. So to the degree it makes sense just from a weather standpoint to have this shift from the March intentions. I would point out it's the first time in eight years that USDA lowered the corn intentions in -- or corn acreage in June verses the intentions in March. So it did catch the trade off guard. It kind of broke the pattern, if you will. I think we also have to remember, though, that the crop insurance guarantee prices that were set the end of February favored soybeans over corn. They were actually higher for soybeans this year than last year, and I think that probably tipped a few producers towards the beans who maybe in early February when the surveys were first being taken had been leaning the other way.

Pearson: How big of a deal -- we'll get to corn specifically in just a moment -- but how big of a deal is 300 million bushels in a year like this year?

Brugler: Well, what it does for corn is that it tightens up the old-crop stocks a little bit, not enough to say we're going to run out. We're still probably going to have 300, 400 million bushels more than we actually need for pipeline requirements in old-crop corn, but that also means that's 400 million or 300 million that's not in the bin to start next year. When you couple that with the acreage decline, it basically puts a lot more emphasis on yield development this year. In other words, we're going to care a lot more now about summer and fall growing conditions than we might have before because we don't have the cushion.

Pearson: All right. We'll get back to corn and strategies coming up in our regular markets. Let's talk about some of these other things that are happening out there. The euro had quite a rally this week. People feel more confident about, I suppose, the bailout over in the euro zone. Is that's what's driving some of that?

Brugler: That was a lot of it. We started to get indications that maybe they wouldn't need to draw down the entire batch of credit that had been lined up, the loans from the other EU countries, that maybe things were going a little bit better or that the fears had been overblown as to how bad the situation was in terms of defaulting on things. So the euro went back over 125 to the dollar. The dollar dropped against the euro and most of the other currencies in the U.S. dollar index. I thought it was interesting, though, that against the Chinese Yuan, it was at a new low. The Chinese Yuan went to a new four or five-year high against the dollar.

Pearson: All right. Talk about the Yuan now with the change occurring with China not being as closely pegged to the U.S. dollar. What kind of an impact will that have on the ag sector?

Brugler: Well, it offers the potential for us perhaps to make a few more export sales to China specifically. Basically with the peg in place, any weakness in the dollar was not benefiting us. They were following us down. They were following us up. With that peg widening out a little bit, it in theory at least changes the purchasing power just slightly. It gives them more purchasing power in terms of their currency converting to the dollars. It makes us look a little cheaper, if you're looking at it the other way. Now, it still boils down to do you need the products that are being sold.

Pearson: Are they going to need more product over there? What's the weather situation shaping up like over in China?

Brugler: Well, they've had a real dry spring. There were some losses really started back in the wintertime. They had some losses in southern China, mostly wheat and canola. Then the key northern areas that produce most of the corn and soybeans were very dry this spring, 20 to 25 percent of the planted area was really dry. They're starting to get some rain now. It's a little late in the spring for some of the crop development, but a little better than it was. We would consider their yield potential to still be down.

Pearson: All right. But we would maybe see them perhaps as a bigger player as the season continues for U.S. corn?

Brugler: Yeah, we think that the old-crop demand that China has had for corn is legitimate, that is their stocks were drawn down. They've had to get into their permanent reserves, what we would call our food security reserves in order to keep their feed mills running and starch plants and so forth. So we think there's possibly a little bit more old crop demand to come. Again, with the problems they've had in their spring crops, with the dryness in the north, if those yields are in fact down, then they'll probably need to come back into the world market for more.

Pearson: All right. Worst seven days for the equity since -- worst weeks for the equities since 2008. I see gold prices down almost $50 an ounce. We talked about that earlier. Crude oil down over $6, almost $7 a barrel this week. It looks like a lot of air coming out of commodities right now.

Brugler: Yeah, it looks like things are kind of pulling back in. In these kind of situations, though, you wonder where the money is going. All right. If it's being pulled out of all these items simultaneously --

Pearson: -- equities and oil, yeah --

Brugler: You can presume it's getting parked in a bank account or t-bills, but the yields aren't there. The interest rates are low in many places around the world, so I don't anticipate that money is going to stay parked for any extended period of time. It's going to find somewhere to go. Obviously some of it was going into corn this week and wheat. But the -- I think we have to be aware that this was the end of the second quarter -- calendar quarter, end of June. We've had a pattern in recent years of having a lot of portfolio adjustments at the end of that time period, and I think some of what you saw was just investment fund managers banking profits in order to collect their commissions or their bonuses and then come back after the holiday and decide what to get into next.

Pearson: All right. Tell me about the commodity funds. They've been such big players here. Where are they going right now?

Brugler: Well, of course there's several different flavors of funds. The index funds are still accumulating, as far as we can tell. Obviously if the stock market were to really fall off here, some of that money might have to leave. They've had redemptions. But at the moment they're still in there -- in fact in corn they had a larger position two weeks ago than they did in 2008 at the peak in terms of the number of contracts held. Now, the more in and out, the hedge funds, the managed money, folks had cut their positions down -- their long positions down considerably as of last Tuesday which, of course, was the day before the USDA report. So they were kind of leaning the wrong way coming into the reports, and that probably magnified the impact of those reports.

Pearson: All right. Let's get down to specifics. Let's talk about the wheat market first. We're getting a lot of mixed signals there regarding world production. Alan, shake it out for us. What do you see?

Brugler: Well, I think we're losing some world production overall. You're going to see USDA talk about that on the 9th. But we've got Canada, of course, indicated they've got a large number of acres that were not going to get planted this spring due to wet weather. Kazakhstan is having some problems with drought. There have been more localized problems in Europe, and some other places were mentioned earlier in the show. So I lean towards USDA showing a smaller production number. Here in the United States they might bump it up a little bit. Of course, the acreage report confirmed the spring wheat acres were all planted. What we had in the intentions. Durham acres were actually up a little bit more. What we're hearing on yields for hard red winter wheat is pretty positive in terms of yield. Protein very spotty. Some areas are pretty good. Some areas a little low on the protein compared to what the bakers would like for their flour. But probably bump up the production slightly. Of course, they did find a little more ending stocks, old crop on that June 1 stocks report, so they're going to have to raise the final ending stocks figure for last year for the wheat.

Pearson: All right. So what is a producer to do?

Brugler: Well, we're basically not wanting to sell anything right here. We've got a nice little rally going, but the market structure favors storing the wheat. There's a huge carry, money you can earn just by selling it through December or for March of 2011. So we want to be locking in the carry. If we're selling, we want to be hedging it for that time period. That does require you to have some storage, someplace to keep the wheat until then.

Pearson: All right. So we're not making sales here. Use the carry in the market and sell out the December-March contracts. All right. At this point would you wait, do you think we've got more to run?

Brugler: Well, it's always tricky around the Fourth of July holiday. You can come in on Tuesday morning and somebody thinks it rained somewhere or it didn't rain somewhere important. Our chart suggests there's a little bit more upside, but I'm treating it carefully because of the tendency every four or five years you get a surprise after the holidays.

Pearson: It's a volatile world. Let's talk about the corn market. We talked earlier about the disappearing stocks number. How much of that do you credit to maybe a little bit lighter test weight crop from 2009?

Brugler: I think this is probably a big piece of it. Of course, as you know, I was anticipating that back in the March report --

Pearson: I'll give you credit for it. That's right.

Brugler: Didn't find it at that time. But, yeah, it's residual use is what they cut. That's the only way you can slice it if you go back. The feed use is probably as strong as we can make it, given the fewer grain consuming animals. We're down about 1.5 percent on grain consuming animals, so they're just not going to eat that much more than last year. But residual use is a catch. I tell my clients it means it's gone and we don't know where it went. So it could be the light test weight where USDA thought that was a 56-pound bushel in the farmer's bin or in the field back in January, and it turns out it was really 53 pounds. Now you've overstated the size of the crop. Now June it's not there, so it either was fed or it wasn't there to begin with. Residual use catches that. And we've also had some damaged corn, corn that heated up and corn that got fungus on it.

Pearson: It's not going to be the best crop to store. I mean we knew that with the wet, late conditions. Okay, real quick, corn producer, do we take advantage of this rally this week and make some sales?

Brugler: I think if you're behind on old-crop sales, if you were really sweating last week and thinking, man, I might have screwed up, I've got too much in the bin, you do want to reward this rally. If you're 80 or 90 percent sold on your old crop, you could probably wait another week or so. See what USDA comes up with for the July report and how the weather is turning out. Crop condition ratings have been dropping the last couple weeks because of all the wet weather and the stress. If that continues, then we're going to start to wonder if the yields are really going to be record large, which up till now the market had been assuming without really challenging that assumption too hard.

Pearson: All right. Let's talk about the soybeans. What would you do there?

Brugler: Basically we're pretty well priced on old crop and new crop, and we don't see a real large rally potential here from the standpoint of world stocks being record large. We are a little concerned about, again, the yield potential for this year's crop. Soybeans historically don't like wet feet. The western Corn Belt has been extremely wet.

Pearson: There was a little bit of rally in the beans despite the fact the reports weren't overly friendly. So are we making sales here now, Alan?

Brugler: Well, again, we're only carrying 5 or 10 percent of our old crop beans. We'll hold those into mid July to see how that weather development is playing out. We have recommended two, three, four months ago, selling a lot of $10.40 and $10.60 November calls just above the markets, saying please come and get me. If you don't, that's a bit of a hedge. And kind of taking it from there.

Pearson: All right. Let's talk livestock. You see these unemployment numbers and you have to wonder how much beef we can move at the meat case and in the restaurants. And even with a little bit better number, we've got 650,000 people no longer looking for work, no longer collecting benefits, we're at 9.5 percent. It's never been a great scenario for a bull market in the beef business, and yet we had one. We had a decent bull market going. What's ahead? Where do you see this fed-cattle market going for the balance of the year?

Brugler: Well, I think we've got kind of a contradiction between two trends here. On the cattle number side -- the finished cattle number -- the cattle-on-feed number, we're going to see declining numbers in the July and august reports. So from the supply side, I think we're in pretty good shape. We should see less tonnage. That tends to tighten up the market. You're seeing the boxed beef -- the wholesale price try and turn up a little bit here because it's anticipating that. The flip side of that is we had a tremendous number of speculators come in on the long side, the buy side back in March and April and the first part of May. They're starting to wash out those positions because they're more concerned about the consumer demand. There may be more of those that still want to get out of the market. Again, we think that the fundamental side is fairly stable. If the dollar continues to weaken against the euro or the Chinese currency, that helps the export prospect. USDA was basically saying per capita consumption was going to be down this year not because of the economy but because we were not going to have enough meat for the consumer to have the full amount at the price that he would normally pay. So we've got a little slack in the system here for that.

Pearson: And we're current? Your impression?

Brugler: We're current. We've pulled cattle ahead. Carcass weights are down from a year ago still. Again, that's -- that can change in two or three weeks, but right now it looks pretty good.

Pearson: On the beef side we shrunk the factory pretty good. Are you pretty friendly toward these feeder prices?

Brugler: I think feeders with the calf crop running 99 percent of a year ago or thereabouts -- and of course, we'll get new numbers here in July, the semiannual cattle inventory report. But the calf crop should be down, which means the total supply of feeder cattle is down. That's going to tend to support the price but, of course, the other part of that is what's going on in feed costs. If corn were to end this rally and back off, that tends to push feeders higher.

Pearson: Absolutely. Let's talk about the hog market and what you see happening there. It was a tough week on futures. We've had a nice run on the hog trade. Is it over for the time being?

Brugler: Well, we're starting to look ahead to the end the seasonal. The seasonal tendency is for hogs to hold up into July or sometimes into August, and then we get into larger marketings in the fall and it tends to drop. Right now the carcass price is trading in the $82 or $83 range. That basically would allow your futures to trade $78 or $79. The consumer is buying pork but we're seeing more competition coming from chicken too. I believe broiler placements are up 4 percent this week -- or excuse me -- egg sets are up 4 percent, placements are up 2 percent. So there is some expansion on the chicken side that could eventually start to impair the pork consumption just a little bit.

Pearson: Are we still shrinking the sow herd, in your opinion?

Brugler: We're breeding herds at 97 percent of a year ago. That's what we found in the hogs and pigs report. The farrowing intentions for the summer, that is the plans to have more little pigs, we're at the multiyear lows in terms of the actual numbers. So, yeah, we're still shrinking the overall Canadian and U.S. herd.

Pearson: All right. For your outlook then as far as pork, some opportunities here to make some sales? With this rally, obviously we've pulled back this week.

Brugler: At this point you can still hedge, lock in profits for the next twelve months out in hogs.

Pearson: Very good. Alan Brugler, thank you so much. That will wrap up this edition of Market to Market. If you'd like more information from Alan on just where these markets may be headed visit the Market Plus page at our Market to Market Web site. You'll find expanded market analysis, audio podcasts, streaming video of our program and it's all free at the Market to Market Web site. And, of course, join us again next week when we'll explore advances in biotech seeds that could make corn planting less complicated. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices corn markets news wheat