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Market Analysis: Jan 15, 2010: Market Analyst Alan Brugler

posted on January 15, 2010

The report brought the bears out of hibernation. Corn traded limit down immediately after the report was released taking wheat prices along for the ride.

For the week, March wheat lost nearly 60 cents while the nearby corn contract declined more than 50 cents.

The notion of record production pressured soybean prices as well. The March contract lost 48 cents, and the nearby meal contract was down $6.60 per ton.

In the softs, cotton trended lower again this week as the March contract posted a loss of 46 cents.

In the dairy market, February Class III Milk futures gained 45 cents, and the deferred contract was up 46.

Over in livestock, February cattle gained more than $1.50. Nearby feeders were up $2. And the February lean hog contract gained $2.72.

In other markets of interest, the Euro lost 60 basis points against the dollar. Crude oil fell nearly $5 per barrel. Comex Gold declined $8.40 per ounce. And the Goldman Sachs Commodity Index lost nearly 26 points to close at 516.50.

Market Analysis: Jan 15, 2010: Market Analyst Alan Brugler

Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Alan Brugler. Alan, what a week you picked to be on the show, fella! Wow! This is the biggest pullback we've seen in the grain market since, really, 2007's big run up. So this has been a while.

Brugler: It's a pretty steep drop, a fairly rapid reaction to one set of numbers.

Pearson: And what does that tell us, Alan?

Brugler: It tells us we had a lot of people crowding it in on the long side of the trade from a speculative standpoint. Some of the fund reporting category, long 274,000 contracts of corn going into the report, that's a huge position. They were anticipating some kind of bullish news from the USDA, and then when they didn't get it, everybody headed for the door at the same time and put a lot of pressure on price.

Pearson: All right. So corn producers, wheat producers, soybean producers sitting out there tonight saying, boy, we missed this one.

Brugler: Well, for the moment at least. I think there's still some things we have to look at. If we talk about corn in particular, you've got USDA raising the feed use. I think we've got to look at what's going on with the livestock sector later on and the profitability there. We've got to look at exports. We've got to look at ethanol use. All of those things could be underestimated at the moment and make this reaction appear to be hasty. Certainly we've got more production of wheat and corn and soybeans around the world.

Pearson: And we've got a weather issue to get through and we'll have spring planting, so there will be some opportunities, I'm sure, to see prices improve. But one thing, I was in Orlando, Florida this week and visiting with a fella from Brazil. I talked to an Iowa farmer who is also a farmer down in Brazil. Both told me the same thing, unbelievably good crops down there. Is that what you're hearing?

Brugler: That's pretty much what we're hearing. The private estimates for Brazil, the soy for soybeans, for example, 65 million to 66 million metric tons. USDA went right in the middle of that at 65 million this week. But when you're getting all the privates to agree with what USDA and CONAB, which is a Brazilian entity, showing it's probably there. What we're hearing is it's a little wet down there right now, that the few soybeans that are mature this early in the season are not coming out of the field because of the rain, but at the same time the bushels are there.

Pearson: All right. And, of course, we've had the situation where the dollar became so weak in the fourth quarter, virtually the entire annual year of 2009, and then started showing some strength near the end. The dollar this week, was there much activity there? Was it a little bit softer? I noticed the Euro lost a little bit against it.

Brugler: Yeah, the dollar was down until Friday. Friday we had a big jump back up in the dollar, and that corresponded with what was going on in the other grains going down on Friday. But the dollar basically has been weaker since the first of the year. We had a short covering rally – profit taking rally, if you will, in December, and then we kind of resumed our downward course here in the first part of this year.

Pearson: All right. What are your thoughts on the dollar?

Brugler: Well, we haven't really changed the underlying mechanics that much. U.S. interest rates are still low compared to some other countries, so the carry trade still works. We're still not really addressing the deficit issues very well in terms of coming up with a solution, whether it's long-term or short-term. And, of course, as we mentioned earlier on the show, we're running a very large trade deficit yet, so we're pumping dollars out of the country that have to be sold to get back the currency of the other country. So those factors are all fairly bearish on the dollar. The argument for maybe a little more firmness in the dollar, of course, is it's still one of the safer places to park your money. And we've also got to consider that that's a well-known trait. Everybody has been beating on the dollar for a year. Sometimes you want to go the other way, and you think that the news is built into the price already.

Pearson: All right. World economy is improving. We saw that this week the Bank of China moved their reserve rates up about 50 basis points. That tends to be kind of a cooling thing. They're thinking that economy is heating up some. As we heat up around the world, that's going to be positive for this grain and soybean market as well.

Brugler: Yeah, you're starting to see demand pick up. There is some economic improvement in a wide variety of the countries. You see that in the manufacturing indexes for China and for the U.S., for that matter. So you start to see demand start to come back. The big drag, of course, right now is unemployment, not only here but in China. The Chinese thought that they were getting things going fast enough that they needed to slow things down with that rate increase and also with an increase in the reserve requirements by the People's Bank of China.

Pearson: All right. The final thing and then we want to get to the grains, this gold market. It's a little bit softer this week. What's your take on gold, Alan?

Brugler: Well, gold is pretty much a gauge on the value of the dollar. When the dollar is weakening, as it was earlier in the week, you saw gold going up. We got a little bit of a reversal on Thursday and Friday, the dollar turned around. It's still a refugee currency, a place to park money. If you're a little nervous on other commodities or equities, then gold tends to be attractive.

Pearson: All right. Well, it's always interesting to me what those long-term returns are. Of course, it's a great time, maybe, to sell your ex-wife's ring or whatever. So opportunities abound throughout the marketplace. Let's talk about some specifics. Let's talk about the wheat market. The wheat market fell apart this week and USDA said there were fewer winter wheat acres planted, Alan.

Brugler: Well, it's a tale of two different crop years. The old crop scenario continues to look kind of difficult. The USDA raised the old crop ending stocks to 976 million bushels from 900 million. They had to cut the U.S. export forecast by 50 million. They had to cut the feed use forecast. So basically we're saying we're not competitive at this price level to use up that old crop wheat. And that 976 million bushels is about 30 percent of an annual crop. So 30 percent of next year's crop is already in the bin, essentially, if that holds true through next May. The new crop story is much more bullish. It basically showed producers cut back on winter wheat acreage. Soft red winter wheat had been expected to be cut back.

Pearson: Late soybean harvest.

Brugler: Late soybean harvest, wet fall. But the trade was a little surprised to find out there were three million acres less hard red winter wheat, which is what's planted out on the plains. So that's a supportive factor for next year in that the U.S. is cutting back its production. Countervailing that, to a degree, is world stocks continue to go up. It's not just the U.S. prime. All the farmers in the world saw that $24 Minneapolis price two years ago and $13 Kansas City and said we can grow wheat.

Pearson: Absolutely. All right. So we don't have $24 anymore. We've got closer to $5, Alan. So what's your take on sales at this point?

Brugler: Well, we've tried to get pretty well cleaned up on old crop sales, and we've made a little light new crop sales. We're looking for the – to kind of prop up the marketplace here because wheat had dropped so far. And we did see some index funds buying but it didn't really carry the day after the USDA numbers were out. There's a lot that can happen in the next year and a half to that 2010 crop. I don't want to panic here but, at the same time, we've missed or passed a pretty good opportunity here.

Pearson: All right. So hold off on additional sales certainly. Let's talk about the corn market. Obviously this was – I think the bigger surprise between corn and soybeans was the corn number. The big – a record acre yield. USDA was seeing a big crop out there reflected in the report and this seemed to catch people off guard in a big way, and yet we knew that we had – we'd certainly seen some bigger numbers, but some people were concerned about the amount of corn that's still out in the field.

Brugler: Well, we knew that there were still, by some estimates, 500 million bushels that are still standing out there. They're stuck in snow drifts at the moment, where they're gradually being combined as the producer is able to work through that. USDA has been fairly transparent about that, that they were going to use their standing crop yields from the December 1 survey and count it as being harvested and in on-farm storage even though it's still in the fields. So it's open storage, if you will. The shock factor I think was that the – we were anticipating a little lighter test weight to drag down the yield, because USDA corrects everything to a standard bushel. We were also looking for the acreage to maybe drop just a little bit because of the risk of losing some of that grain that's out in the field. Instead, USDA raised the harvest and acreage estimate by 300,000 because they said we used less for silage. So you had this big bushel number, and then you threw in some more acres besides and caught everybody leaning 200 or 300 million bushels the wrong direction.

Pearson: Well, it certainly looks that way. A huge pull back. 50 cent move down. What do we do now if we have corn to sell?

Brugler: Well, I think it would be a mistake to panic at this point. We've got some charts poured within another 15, 20 cents that would seem to be a place to buy it. I think one of the things that's being overlooked is the export number. If you look at export commitments, which is shipments plus outstanding sales, we're now running 19 percent ahead on a year ago. The fact that it hasn't been shipped yet has been getting all the press. People have been arguing USDA is too high, et cetera. But I think the commitments are there. The bigger problem has been logistics. With all the snow interfering with rail freight and rivers freezing up, the barges couldn't get to the port. I think that problem will correct itself over time and we'll see some fairly high volume exports.

Pearson: All right. If you look at export commitments, which is shipments plus outstanding sales, we're now running 19 percent ahead of a year ago. The fact that it hasn't been shipped yet has been getting all the press. People have been arguing USDA is too high, et cetera. But I think the commitments are there. The bigger problem has been logistics. Wit all the snow interfering with rail freight and rivers freezing up, the barges couldn't get to the port. I think that problem will correct itself over time and we'll see some fairly high volume exports.

Pearson: All right. So maybe some better exports to get some better price opportunities later on. Soybeans, a big number there too.

Brugler: USDA found record yields 44 bushels to the acre. The positive part of that is that we also saw record exports. We raised the export estimate again. We raised the crush estimate because we're setting monthly crush records with this very ample supply of beans. But the issue there is we know it's a rare yard action. The analogy I'm using is there's a train coming. The train is pulling a big supply of beans out of South America. As we mentioned earlier, the crop 65 million tons of Brazil, probably 52 to 53 million in Argentina. If all that comes into the bin, it's an extra billion bushels compared to what those same countries produced last year. And prices are too high in the U.S. if we have to compete with all those bushels coming out of the field in March and April and May.

Pearson: All right. So you're not seeing a big improvement in soybean prices near term?

Brugler: No, old crop was holding up the new crop. And as we get closer to the availability of South American, the old crop will start to back off a little bit. New crop is definitely in danger of going below $9.

Pearson: All right. But you're not in a hurry to make sales? You want to hold off?

Brugler: Well, we've got some protection on the short-term.

Pearson: And you weren't a big advocate of making sales the last time you were on the show. You've been a big advocate for really about a month or so.

Brugler: We've got some sales made already. Yeah, I'm not the one to chase the big drop here. But, again, the longer term pattern for soybeans is very vulnerable to lower prices.

Pearson: All right. Real quick, cotton, what do you see up in that market? Up around 75?

Brugler: Basically cotton has backed off a little in the last two or three weeks. It's – the USDA gave us a lower ending stocks estimate. Cotton needs some more acreage for next year. That's one justification of prices being where they are. If the grains are going to roll over and play dead here, the cotton may not have to bid it up any further to get those extra acres.

Pearson: All right. Let's talk livestock, where the picture has changed dramatically. We have lower feed input costs. Great demand for these calves and yearlings out there. We're seeing nice improvement there. Let's talk about the fed cattle market first. What are you seeing happening on that front, Alan?

Brugler: Basically we're getting into some tighter numbers here. The placement numbers for February and March are lower. We're also seeing a little bit more export demand, a little better consumer demand. The USDA's weekly beef export sales numbers come up. So you've seen that choice cutout up $3.34 this week alone. Well, the packer has the ability to pass that on to the producer through higher cattle prices. And that cattleman is also benefiting from the drop in feed costs this week. So much better condition than we were two or three weeks ago.

Pearson: What's your outlook for 2010? Are we going to continue to see this market continue to strengthen?

Brugler: I think we can. The main thing as a consumer starts feeling a little better about his economic situation, he starts going back to the restaurants a little more than he has been, he starts buying a little better quality meats or higher value meats. We cannot expand beef production very quickly. It takes two years plus to get another steer. So if that consumer is in fact willing to spend a little bit more or the export market wants a little bit more – the USDA raised that estimate this week – then I think you can see higher prices.

Pearson: All right, let's talk about the hog market and what you see happening on that front. That's really going to impact total meat supplies out there. And there hasn't been much of a movement in any way to reduce numbers until about this last month.

Brugler: Well, we did get the sow numbers down. They're down 7 or 8 percent between the U.S. and Canada. But what's happened is productivity has been improved. There's more pigs per sow that are being saved. So we don't need as many sows. Pork producers in general did cut production about two percent here in the last year. And that allowed the market to firm up. We've seen a tremendous rally in pork values over the last six, eight weeks. We were up another $4.40 on the cutout this week. Hams are up. The bellies are up. All the various components. So again, that's got us in a profitable situation on the hog producer now after having been bled pretty badly in 2008, 2009. The futures market is offering profits of $10 or $12 per head, which is still not that great after you've lost money for two years in a row, but it is attractive for most of 2010. So I think you're going to see some additional farrowing intentions, some additional plans to produce more hogs particularly in the second half of the year.

Pearson: Very good. Alan Brugler, as usual, we appreciate your insights. Now, that's going to wrap up this edition of Market to Market. 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. Now, before we go, we want to remind you again about our next rural economic summit that will be in Madison, Wisconsin on January 20. It's the second of four special road editions examining the rural economy. You're invited to join the discussion by submitting your comments and questions at our Web site. To get the conversation going, we're asking you the following question: How is the economic downturn affecting you and your community? Visit the Market to Market Web site and make your voice heard. So until next time, thanks for watching. I'm Mark Pearson. Have a great week.

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