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Market Analysis: Mar 05, 2010: Alan Brugler, Market Analyst

posted on March 5, 2010

Private estimates for a larger South American grain crop pushed U.S. futures prices lower.

For the week, May wheat lost 25 cents and the nearby corn contract lost nearly 15 cents.

Despite gains last week, private estimates on the South American crop only served to push soybean prices lower. For the week, the March contract lost more than 15 cents, and the nearby meal contract followed suit with a decline of more than $15 per ton.

In the softs, cotton built on last week's gains and moved almost 70 cents higher.

In the dairy market, March Class III Milk futures declined 46 cents, while the deferred contract was down 15 cents.

Over in livestock, April cattle gained $1.03. March feeders were up $1.15. And the April lean hog contract gained 30 cents.

In other markets of interest, the Euro gained 270 basis points against the dollar. Crude oil gained almost $1.85 per barrel to close over $80. Comex Gold declined $16.30 per ounce. And the Goldman Sachs Commodity Index lost nearly 9 points to close at 527 even.

Market Analysis: Mar 05, 2010: Alan Brugler, Market Analyst Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Alan Brugler. Alan, good to have you with us.

Brugler: Good to be back, Mark.

Pearson: It seems like more and more world economic conditions and issues are impacting us more than ever. We're certainly seeing that's what's happening in the European Union these days with Greece and the situation over there and the concern. A little bit of a bounce back in the euro this week, but the dollar, I guess, has been the big story, which has been strong overall.

Brugler: Well, it's been strong because of the uncertainty. I think we're starting to see a little bit of betting, if you will, on the global growth and who's going to grow how quickly and who's going to pull out of it. The Greece questions and, to a lesser degree, some of the other countries have been rather slow to rebound here. That's making the dollar look a little stronger, because the U.S. economy is starting to pick up, as was mentioned earlier, with the -- some of the other domestic indicators.

Pearson: All right. So what's going to happen over at the EU? Are they going to get everything squared up and plumbed up eventually? Are Germany and France going to be bailing out Spain and Portugal too, maybe Ireland it sounds like?

Brugler: I think there's a limit there. They're meeting with the Greek prime minister, I believe, this weekend. We're expecting a show of solidarity but not a whole lot of banking commitments. The German banks have a big exposure in Greece, of course, and there's definitely an interest in stabilizing that situation, but then you see the cameras rolling with the strikes too.

Pearson: All right. And of course, we've got that going on at the same time we're seeing some better numbers coming out of China, some increases in reserve rates at the People's Bank of China and some other issues. That economy looks really strong.

Brugler: Well, the Chinese have done a pretty good job of stimulating the economy, maybe over stimulating it, to a degree. The reason they're raising the reserve requirements is because things are a little too inflationary. They want to slow things down just a little bit. But based on the numbers that we get at least, the Chinese are looking pretty stable there. They're obviously looking to increase their exports and get that sector growing again. U.S. imports from China have slowed down -- actually slowed down fairly dramatically in the middle of the recession. Then they picked up and now they backed off a little bit again this spring.

Pearson: All right. Let's talk about oil, up over $80 a barrel. And obviously the dollar fell off some, so I'm sure that was a factor. But are we going to see stronger oil prices now in 2010, do you think, Alan?

Brugler: Well, if the global economy is recovering, I think you're going to see some underlying support to that crude oil, trend line supports in the low 70s, the mid 70s. So we can have $4, $5, $6 pull backs at any time. But if you're expanding -- gradually expanding demand and really not pumping a whole lot more, there should be a bid, if you will, on the market.

Pearson: You've been pretty aggressive about covering inputs. Have you covered some inputs as far as fuel needs where farmers are concerned?

Brugler: We recommended back in February that our producers cover all their diesel needs for this spring. We won't go as far as next fall yet, but we have everything bought through May or June news.

Pearson: All right. Now, let's start looking at -- of course, some of the other factors -- we can go to March 10 USDA report. I want you to talk about that. Let's talk about some specifics, though. Let's talk about the wheat market. Decent winter weather. I was down in Albuquerque, spoke to some friends of mine from southwest Kansas, western Kansas, Oklahoma, and Texas. Good moisture finally in a lot of those areas up there. Feel pretty good about the wheat crop of 2010.

Brugler: Yeah, a pretty promising start to the year here. Things are just starting to green up. I talked to some folks down around Amarillo. They said they're starting to get a little color there. But good moisture going into the season, but it's also raising some questions. With wheat prices down, should they keep the cattle on the wheat or take them off? Cattle prices are doing pretty well right now. I also talked to a couple of producers that said, well, this is the most moisture we've had on our dry land for several years. Maybe we'll go to cotton instead of some other crops next time.

Pearson: Do you think we'll see much of that switching?

Brugler: I don't think it will be major. We're already down quite a bit on winter wheat acreage. That was, of course, one of the big issues in the January report. We certainly don't need any more winter wheat, and we don't need any more spring wheat really either. We need to kind of work our inventories down. Mathematically it looks like we could only have 53, 53.5 million acres and still end up with the same carryout that we've got this year. That's not particularly bullish.

Pearson: No. And I think the last time you were on, you talked about plentiful world supplies and a lot of wheat being out there. USDA reports coming up next week. What are your thoughts as it relates to wheat?

Brugler: Basically it looks like probably as big as last month or maybe even a little larger. The Indian crop appears to have gotten a little bigger. They're starting to talk about maybe exporting some wheat later on this season. Again, the Ukraine is in pretty good shape coming out of the winter, very little winter kill. Again, some of those countries, they may not make a revision at this time, but the world stocks -- world production is not shrinking right here. And use is pretty good. It will get better if the world economy picks up.

Pearson: All right. Are you kind of counting on that? Have you made a lot of wheat sales? Where do you stand on wheat?

Brugler: Well, we probably wish we had a little bit more done than we do. They made some sales but not -- everybody would like to be 60-percent sold at $7 or something like that. That's not the indication. Again, we think you have to have a fairly defensive posture in wheat. But at the same time, we note that we've had all this bearish news, but the market has repeatedly gone down around that $5 level and found buying. So the bulk of the bad news may already be in the price. What we've mainly got to deal with is season factors here.

Pearson: All right. Let's talk about the corn market and what you see happening on that front. We heard Secretary Vilsack earlier talking about CRP acres signing up again, getting some more acres set aside. Obviously the EPA has looked at the E15 issue. I know a lot of this the market has already digested, but what could we see with this revision or this re-audit that they're talking about in the northern corn belt and all this corn that's still out there.

Brugler: Well, I think what you're seeing relative to this acreage surveying these six states is the trade has no idea what USDA is going to find. The bulls are basically saying, well, we had some harvest loss. Some of it went down. Some of them may never be taken out or may not go out till May. The bears, of course, are spreading the stories about the 220 bushels that came out of a field -- that had been in a snow drift, and presuming that that was better than the guy's other corn. So we really don't know what they're going to show. I'd say, in general, we don't expect a major revision. The history of these resurveys have been fairly minor tweaks. The bigger question is if USDA does anything more on the demand side. We see some positive things going in ethanol in terms of some export sales and some discretionary blending because the ethanol has dropped versus gasoline. But the flip side of that is ethanol margins are dropped fairly sharply here.

Pearson: All right. So where do you think this demand could come from, then?

Brugler: Well, I think in the short run, ethanol is still the best horse to ride there. Again, we should see some more discretionary area blending. Feed use will grow up gradually. We're starting to see a little bit more activity in the broiler sector. We're not seeing as much in turkeys. And the hog guys have got some excellent profit opportunities they could lock in if they're hedgers. But they've been bloodied pretty badly over the last two years on the cash side.

Pearson: All right. So we could see increased feed usage. All right. For sales, would you make sales on corn at this point or would you hold off?

Brugler: Well, I think you have to look at where you're at in terms of your total sales. I don't think you ought to go to a hundred percent sold on old crop unless your condition is so bad that you just can't store it till summer. That, by the way is a very big debate in the industry right now. You hear horror stories about the corn going out of condition and so forth. My take on it is there are pockets of light test weight corn. There are pockets of heavy -- corn. There's also some corn out there that's 58 pounds per bushel and in pretty good shape. You're not hearing about that much and, unfortunately, we're not seeing much in the way of premiums for the producer that happens to have it.

Pearson: All right. So again, are you in a hurry to sell new crop corn then?

Brugler: Basically what we've done is we've got some forward sales that were made back in January, and we've got some short call options as a light hedge. But we're not looking to make any more sales right at the moment.

Pearson: Basis strengthening for the most part at this stage of the game, or are we seeing enough corn deliveries that it's starting to stretch out.

Brugler: Basis has been running about 10 to 12 cents below last year. That is weaker than last year. It has improved since January but that's just earning the carry. It's just earning the storage and interest that it cost to keep it.

Pearson: Is that symptomatic maybe of people trying to get some of that winter corn moved?

Brugler: I think it's a symbol that there is some corn moving. It's also a function of the price level. If the price has rallied back, which it has since the first week in February, that basis tends to slip a little bit.

Pearson: All right. Let's talk about the soybean market and what you see happening there, Alan. Obviously all those stories we keep hearing out of South America is you know, it's just great, great, great, great, great. You know, I've been around a long time and I've always heard these great, great, great South American crops, and then somehow at the end of the day they're not achieved.

Brugler: I think there's a risk of that again. We've tended to look at the big numbers. I was looking at my Argentine crop estimates from February a year ago and was stunned by how far they dropped off from February until final. Of course, they were in the middle of a drought last year, and they don't have that same scenario. But what they are getting right now is a lot of the wet weather in Argentina, a lot of fungal disease development. They're not so used to that compared to, say, the Brazilians. Brazil got a little ahead of schedule on harvest, but now they're faced with very high freight costs, and the farmers are paying as much as $3 a bushel to ship the soybean support. As a result they're slowing down their sales.

Pearson: So what's your take on this South American crop at the end of the day?

Brugler: I think it's pretty good sized. I'm not in the camp of the 55 million tons, as one of the analysts came out, for Argentina this week. I think it's probably based on, from what we hear at least, still in the 52 to 53 million ton rage. Brazil probably is 66 million tons. But again, we have to remember that in North American terms, this is still August and there's still things that could happen to the crop between now and it all hitting --

Pearson: All right. I've heard some of your colleagues say we could see $8 beans here before this spring is out.

Brugler: Well, we've got some support levels in the $8.40 area on our supply/demand models. We see below $8 numbers for November futures or potentially January 2011, but not in this old crop slot.

Pearson: I know you've made some old crop bean sales and some new crop bean sales prior to this. But for someone out there who hasn't done anything, what would you tell them to do?

Brugler: I think you have to ask yourself if the train is coming. If that big South American supply is really going to hit the world market, how long do I want to hold on? I know there's some tightness in the old crop contracts. We could have some movement in that spread. Probably you need to look at that one directional risk that you have as a producer and do some kind of a floor, whether it's a minimum price contract at the elevator or cash contract or if it's a put spread of some type.

Pearson: Real quick, cotton. You mentioned maybe some acreage switching. That's been a pretty dynamic market.

Brugler: The cotton has been on fire. The U.S. stocks declined rather dramatically. The market needs at least a million and a half and maybe two million more acres this year, depending on what you want to assume for yields. Should be able to get them, although one of the stories that we're looking at relative to CRP and USDA is that their ten-year model says that some of those acres are disappearing, that the pool of acres for these eight major crops is shrinking. So cotton may have to work a little harder than it appeared initially to get its share.

Pearson: So are you thinking stronger prices for cotton?

Brugler: That's what's driving the strong prices in the old crop. The new crop is lagging because it's assuming it's going to get some of them.

Pearson: You finally turned a little friendly to this cattle market I think the last time you were on. So far, so good. What's your outlook going forward on fed cattle?

Brugler: We're seeing -- first of all, we've got tighter numbers. And the ready cattle numbers, the ones that are finishing, will be going down seasonally here in March and April. So that's supported in the market. What we need is a little more evidence of some consumer demand, particularly on the choice side. It looks like the ratio of choice to select cattle is a little high right now, so that's pressured that spread. But overall friendly market probably a little overdone here. Could be due for a slight correction here. Overall I think we're still friendly. And if the economy continues to improve, we can't ramp up production that quickly. So that's supported the price.

Pearson: And the calf market also has been pretty strong.

Brugler: Yeah, the corn has come down, of course, from where it was back in November and December. Cattle prices are up. That's a good combination for feeder cattle. Again, the calf crop was down about 9/10 of a percent in the January inventory report, so we don't have quite as many cattle out there, and pretty good demand for them.

Pearson: Are we going to build the herd this year, Alan? It's been a while.

Brugler: We don't have the cow numbers out there. The beef cows are down. The beef pre-placement heifers were down a couple percent. Very unlikely that we increase it. Particularly the feeder cattle prices going up, that tends to attract heifers to the feed lots. If feeders were to back off, then you might see more heifer retention but, on the other hand, if that happens, why would you want to.

Pearson: Right. All right. Well, let's talk about the hog market and what you see happening there, how that's going to impact everything too.

Brugler: We've seen really strong pork prices for the components, the cutouts, the primals, the loins, and the ribs and so forth. Appears to be some export business in there. That's kind of a lagging number in terms of knowing exactly what's happening. But pork carcass cutouts up around $75 or $76 now. That implies the hog index $72 or $73 and the boards rallying because of that underlying strength in the cash hog market.

Pearson: All right. Do you want to start picking up some feed needs right new if you're in the livestock sector?

Brugler: We did a little bit probably three, four weeks ago. We probably need a little bit more on corn. I'm sitting very tight -- very, very tight on soybean meal because of the weakness of the meal market, the weakness of the basis, and the large inventory that the census bureau told us we had at the end of January.

Pearson: Alan Brugler, as usual, we appreciate your insights, sir, very much. That's going to wrap up this edition of Market to Market. Now, if you'd like more information from Alan on where these markets just may be headed, visit the Market Plus page at our Web site, where you'll find streaming video of our program. Of course, you can also download audio podcasts of our Market Analysis and Market Plus segments absolutely free at our Web site. And, of course, join us again next week when we'll explore an effort by USDA and the Justice Department to examine the effects of increased concentration in agriculture. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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