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Market Analysis: May 07, 2010: Market Analyst Alan Brugler

posted on May 7, 2010


Commodity prices took a back seat to chaos on Wall Street this week as the trade pondered the impact of a rapidly strengthening dollar.

For the week, July wheat gained 7 cents and the nearby corn contract moved more than 3 cents lower.

Losses were more pronounced in the soybean pit, where the July soybean contract lost nearly 40 cents, while the nearby meal contract was down $14.70 per ton.

In the softs, cotton trended lower this week as the December contract posted a loss of $2.30.

In the dairy market, June Class III Milk futures rose 27 cents, while the deferred contract was up 37 cents.

In livestock, June cattle gained $1.40. Nearby feeders were down 43 cents. And the June lean hog contract declined by more than $1.

In other markets of interest, the Euro lost a whopping 480 basis points against the dollar. Crude oil was down nearly $11.50 per barrel. Comex Gold advanced $30 per ounce. And the Goldman Sachs Commodity Index shed nearly 50 points to close at 500.30.

Market Analysis: May 07, 2010: Market Analyst Alan Brugler Pearson: Here now to lend us his insights is one of our regular market analysts, Alan Brugler. Alan, great to have you with us. Welcome back.

Brugler: Good to be here, Mark.

Pearson: What a week. I'm not sure where to start. Obviously the chaos on Wall Street had a little bit of an impact, peripherally anyway, on the commodity markets. We still come back to fundamentals. But what is happening over in the EU particularly as it relates to the situation with Greece and a potential contagion over there? It is a factor. Obviously the euro being so weak against the dollar, a strengthening dollar worldwide tends to be a head wind for us.

Brugler: Yeah, it tends to affect our export capacity, most immediately into Europe, the things that we sell to Europe and there are a number of commodities, we have about a dozen on our list that we do export to Europe. But the key point is the stronger dollar does make it a head wind, it makes it more difficult to export two countries that float their currency. It doesn't affect us with China because the Yuan is fixed to the dollar. But it's having some ripple effects.

Brugler: In Brazil, for example, the real has dropped sharply against the dollar but that has changed the marketing pattern for soybeans there. So, it's not just a European situation, I think everybody is concerned about their ability to pay their debt whether the euro, in fact, can be maintained as a viable currency and it has also, to a degree, driven the activity on Wall Street and kind of a rush into bonds which has lowered short-term interest rates.

Pearson: All right, talk a little bit about the oil market and what you see happening on that front.

Brugler: It basically collapsed this week. The crude oil, biggest drop in a long time, we broke some trend lines that have been in place for more than a year now. It doesn't sound like supply is really affected that much, it's just with the dollar being stronger the value of crude in dollar terms went down. And, of course, with the concerns about the European economy and potentially spilling over you've got some worries about demand longer term.

Pearson: You mentioned China, there is concern there about what is happening in real estate. Could that be another issue as we go forward and another head wind for agriculture? As you look at what is happening in China right now what are your thoughts?

Brugler: Well, it's always difficult to get really solid data out of China on things like that. We know that the government has continued to increase the reserve requirements on the banks, trying to move money out of the system. They are basically trying to prevent what I called to my economists this week a Californiaesque real estate bubble. And I think they'll probably succeed. The question is how fast. Does it slow down gradually or do you have a bust type of a scenario that affects the rest of their economy?

Pearson: Alan, let's talk about some specifics. We have a big report coming out on Tuesday, let's talk about it as it relates to each one of our commodities. Let's talk first about the wheat market and what you see happening on that front. Crop conditions seem to be pretty decent.

Brugler: Crop conditions are very good, the best since 1998 for the current week using our 500 point index. It's surprising though that when the Kansas wheat quality tour was out in Kansas this week they found the crop yield to be about the same as last year. The ratings were better, there's fewer acres but they came up with about the same size crop and the same size yield as their forecast a year ago. So, the crop may not be quite as large as what we were thinking if that yield survey proves to be general to the rest of the western wheat growing area.

Brugler: But the bottom line is we've got plenty of wheat, 850 or 950 million bushels of carryout, probably 950. World stocks are still at a nine or ten year high. So, we can take a little bit of a loss here before the market is really going to get too excited.

Pearson: All right. And are you selling wheat now?

Brugler: Basically, no. We've got tremendous carries in the market, the variable storage rate scheme is coming into effect in Chicago, that has had the effect of making the deferred month futures and cash markets much higher. Basically that is telling you to store the wheat. The market wants some obviously at harvest but we're looking more at sales for deferred slots.

Pearson: Tuesday's report probably a non-factor for wheat?

Brugler: It will be surprising if there's a big surprise.

Pearson: All right. We'll be surprised if we're surprised. Okay, now what about the corn market and kind of what you see happening there? Obviously the crop is going in the ground very quick, most people are saying they're thrilled with the way things are going at this stage in terms of corn development. There's been some cold nights too.

Brugler: Yeah, and this weekend will be kind of a key test to that. We had forecasts for anywhere from 25 to 30 degrees across much of Minnesota and northern Iowa, the western part of the plains, Nebraska and South Dakota. That's always a concern when we plant this much this early. It could affect wheat as well as corn, by the way. But if we get past that early planting tends to mean earlier pollination and a good start to the crop and the odds are improved for yield that way.

Pearson: Absolutely. So, we have a big crop there, plenty of carry out. Anything to be optimistic about on the corn front at this stage?

Brugler: I like the demand side. I think we're seeing -- we saw the largest weekly export sales total the year this year this past week. We are seeing ethanol consumption go up fairly rapidly, it's difficult to measure because the reporting data is two months behind. But we know the inclusion rate, the percentage of ethanol being used in the gasoline blend is going up, we know the price spread suggests that it should. Ethanol is a big discount to gasoline. So, we're looking for USDA to raise their corn consumption for ethanol in their forecast. Probably won't raise the corn export estimate but overall we see the demand side as holding its own right now.

Pearson: All right. Do you want to sell corn? Do you hold corn? What's your thinking on sales?

Brugler: Well, we're fairly heavily sold on old crop. On the new crop we've been more conservative, we're kind of waiting to see how the E-15 decision comes from USDA. We're looking at this risk of the freeze and other issues coming up in corn here in the first half of the growing season. So, we're selling rallies but we're not selling aggressively.

Pearson: China corn purchases. What are your thoughts on that?

Brugler: Well, you can get a lot of different storage depending on ...

Pearson: They're buying DDGs, we know that.

Brugler: They're buying a lot of DDGS, possibly two million metric tons this year and, by the way, that's kind of a hidden factor in the USDA balance sheet for corn. It tends to mean we have to feed more corn to the livestock because the DDGs that we presume are there aren't really in the country. But China clearly has a problem, they are tight on supplies, their government auctions on the northern part of the country have been well subscribed, everything they have offered has been sold.

Brugler: In the south, which has the higher prices, they have been a little slower to buy the government stocks. We think that's probably where the export shipments are going if, in fact, they are going. So, we can make a case for them to buy quite a bit of corn. The biggest question is GMO varieties and some of the other restrictions.

Pearson: Some of those issues. All right, speaking of GMOs let's talk about soybeans. What do you see? Obviously the big crop in South America, you mentioned the cheaper real. What is ahead for the soybean market at this point?

Brugler: Well, I think we've got a little hidden support in the soybean market because of the real going up against the dollar earlier in the year. We had a situation where, for example, western Mata Grosso, the cash price of soybeans was actually below the cost of production after you worked in freight to the coast, to the ports and that dried up selling. But with this rally in the dollar the real has dropped, the bean price is now much more attractive to the Brazilian producer and they start to sell more and we've seen that in the price here in the United States going down.

Pearson: Selling beans?

Brugler: We're fairly well sold out of old crop beans and we've got puts against what we don't have sold. New crop, yeah, we're 40% or 50% cash forward sold and then we've got a variety of puts and short calls against the rest.

Pearson: Real quick, cotton market, your take on that?

Brugler: Cotton has had a tremendous run. It would be helped by the fact that U.S. ending stocks are probably going to be three million bales. We've got a bigger crop coming on or at least bigger acreage. We don't know yet how the yield is going to turn out. But the world stocks are still looking pretty tight. You saw India restrict exports with cotton, that is helping to support the price as well.

Brugler: But we did sell off this week -- if there is an issue with the European demand or global economic slowdown problems that will affect cotton as directly as anything else.

Pearson: Let's switch over to livestock, fed cattle market. It wasn't that long ago we were talking pretty depressing scenario and now we're looking at these much stronger feeder and fed cattle prices. Are they sustainable?

Brugler: It's going to be difficult to keep them at this level for a period of time the main reason being that we're going to come into some more numbers here, the ready numbers coming out of the feedlot ready to be turned into steaks and so forth are going to increase here in May and June. We already know that because those cattle were placed in the lot months ago. So, we've got a bigger supply coming on. Offsetting that exports have been excellent for beef the last three or four weeks, export sales as much as 20,000 tons per week a couple of weeks ago.

Brugler: That is helping prop up the price. Consumer demand has picked up as more people have gotten jobs. There are 230,000 more people, they've got more money to spend. So, we're thinking there's going to be a little bit of a pullback here but it's not going to be severe because the pork situation is still being fairly tight.

Pearson: And the cattle feeder -- also a much stronger calf market too. The feeder market has been pretty strong.

Brugler: Yeah, and it's going to stay that way because we had a smaller calf crop and frankly the call cow prices are so high. Beef, what they call 50CL beef or hamburger is extremely tight supply, imports are down. So, what am I saying? Cow prices are up. Producers are making a decision to maybe call a few more cows but that means you get fewer calves. So, that keeps that feeder cattle supply fairly tight and prices are up in the $114 range on the board and you're seeing a lot higher prices than that for calf.

Pearson: That's right in the cash markets. A minute left, let's talk quick about the hog market, again, the nice recovery that has occurred there. How sustainable is this one?

Brugler: Well, you're staring at prices near all-time highs for the pork, $90 plus for the carcasses. That matches the 2008 peak. Futures match the 2008 peak. We assume we're going to get some consumer resistance here and it's starting to show up. But, again, we've been helped by the export trade to Mexico particularly and we know that the third quarter supply of pork is going to be the tightest of the year. So, probably -- futures may have already built that in, they are very high for summer contracts but it will be hard to break it until we get more hogs in the pipeline.

Pearson: All right, again, interesting about the consumer starting to tighten up just a little bit with all this tightening of protein supplies out there.

Brugler: Well, they're being forced to consume less. USDA has per capita consumption lower but it's not because the consumer doesn't want it, it's because the price is higher.

Pearson: Good point. Alan Brugler, as usual we appreciate it. That will wrap up this edition of Market to Market. If you'd like more information from Alan on where these markets just may be headed be sure to visit the Market Plus page at our Web site. You'll find expanded Market Analysis, audio podcasts and streaming video of our program and it's all free at the Market to Market Web site. Of course, join us again next week when we'll examine the government's latest agricultural supply and demand estimates. So, until then, thanks for watching. I'm Mark Pearson. Have a great week.

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