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Market Analysis: Nov 27, 2009: Alan Brugler

posted on November 25, 2009


We're producing this edition of Market to Market on Wednesday to allow the people who bring you the program each week a chance to be with their families for Thanksgiving.

For the holiday-shortened week, December wheat lost nearly 10 cents, while the nearby corn contract moved 10 cents higher.

Soybeans followed suit with corn, with the January contract gaining about a dime, while the nearby meal contract was up $3.60 per ton.

In the softs, cotton held its head above the $70 barrier this week as the December contract posted a gain of 66 cents.

In the dairy market, November Class III Milk futures were up 8 cents, while the deferred contract advanced by 9.

Over in livestock, December cattle lost 28 cents. Nearby feeders were up 62 cents. And the December lean hog contract advanced $1.82.

In other markets of interest, the Euro gained 282 points against the dollar. Crude oil advanced $1.24 per barrel. Comex Gold gained more than $40 per ounce. And the Goldman Sachs Commodity Index gained 8 points to close at 516.50.

Market Analysis: Nov 27, 2009: 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, good to have you with us.

Brugler: Good to be here, Mark.

Pearson: Let's talk a little bit about what's been happening in this market and in the broader picture. We reported at the open of the show GDP was not up as much as the Commerce Department initially estimated, but it was still up. It was still positive. Worldwide we're seeing the economies around the world seem to improve, but we keep seeing this dollar continue to fade. What are your thoughts on the dollar and what do you think the impact is going to be for agricultural products?

Brugler: Well, the dollar is kind of key. While you can't explain all of the price movement that we've seen in the ag commodities by the dollar, they're going in the same inverted relationship. So a weaker dollar does tend to mean a little higher commodity prices, at least for those that are priced in dollar terms. We're still thinking that the bulk of the selling in the dollar is because of the carry trade. It's the low interest rates here versus higher interest rates in other countries, coupled with the deficit spending and the need to finance these trillions of dollars on the balance sheet of the government. So the – you saw a little bit of intervention type activity about a week ago from some of the Asian countries that were trying to keep the dollar from sliding further against their currencies. But technically speaking, if we can't hold 74, 80 or so on the U.S. dollar index it's probably going to have to drop back to 70 or 71, which is where we were in March of '08.

Pearson: So you expect that pressure, then, to continue on the dollar?

Brugler: If we can't hold in this vicinity here. Year-end markets are kind of tricky but if we can't hold here we'd expect another three points on the dollar index. And that would tend to be supportive for commodities.

Pearson: Let's talk some specifics here. Wheat market under a little bit of pressure. Again, hard to get a good test in this short period of time that we're talking about, but wheat has had a good rally. Do you want to make sales here or do you want to wait for more of an improvement for prices in wheat?

Brugler: Well, I think what we're seeing is that the wheat market got a little too cheap earlier in the fall. We've had a nice rally since then. It is a little overbought here. We fed a little bit of old crop wheat into the market in our recommendations, but we really are still waiting. We think that feed grains in general could get a boost if the dollar is weaker or just because of concerns about reduced winter wheat acreage here, due to the wet weather here in October and the first part of November, and actually reduced estimates for Australia as well.

Pearson: So with that in mind and with everything else that's happening in the world, what kind of a target would you have in mind to make some more wheat sales?

Brugler: Well, basically what we're looking for on old crop is probably another 20 to 30 cents higher than where we are today. For a small scale, kind of a scale-up approach. Obviously basis is shifting around the difference between the cash and the futures, so that makes the decision a little different for each individual producer.

Pearson: Let's talk about the corn market and what you see happening there. We've had really some strength in oil prices. We've gotten close to that $80 area. That's where the OPEC oil ministers say they're comfortable with the price of oil. We're seeing some more ethanol production occurring out there and some profitability at those ethanol plants. But every time I hear a report on exports for corn, it's fairly negative. What's your take on this corn market? Where are we going? We've got a big, wet crop out there.

Brugler: The big, wet crop, we've got adequate supplies into the system now to meet the export demand, to meet the ethanol demand in the short run. In fact, there's probably a few guys that are looking for a home to put those last few bushels because their bin is full and the main elevator is full that they normally go to. That will be more of a function of the cash market to distribute that out and find a home for all of it. The export market is a concern. The current prices are not competitive versus some other sources. But, again, the U.S. is the main world supplier of corn. So once we kind of settle the crop down, we think that that price pressure goes away. The livestock sector is another issue, of course. Profitability is not terribly good there. We're thinking that's stable on the feed use side. So ethanol is the success story at the moment. We need the fuel. The blend margins are good. The plants are running at close to capacity.

Pearson: All right. So with that outlook in mind and with the situation we have – 68% was the USDA number. We probably bumped up fairly strongly this week in terms of increased harvests. So at this stage of the game, your thoughts on making corn sales would be what?

Brugler: Well, again, we're thinking ultimately the price will be a little higher than what we've seen so far. We've gone fairly quickly out of a fall low year, so a pull back towards year end on profit taking and readjusting of positions is entirely possible. But we also have indications that some of the major index funds will have additional funds to put into the market in January in the grain specifically and that that will be supported in the market until that is all in there.

Pearson: All right. So you're not in a big hurry to make additional sales?

Brugler: Not in a big hurry.

Pearson: All right. Soybeans, the market there, again, the export demand on that side thanks to China has been huge. The crop is basically in for the most part. What's your outlook for price?

Brugler: The big story in soybeans right now is fulfilling that export demand at the same time that we've got strong crush demand. Since this crush report on Wednesday was $163 million bushels, that's the third largest monthly crush ever. So you've got a time when you need a lot of vessels going to China through the PNW or through the Gulf but the crush plants have excellent margins and they're trying to short – stop some of that cargo from getting to the Gulf. So we've got a little competition going. We've said it will either be the futures going up or the cash basis will have to go up. At the moment it appears to be the futures that are leading. It's possible we could see an $11 figure in front of these beans before we get done.

Pearson: So, $11 will be your target to make additional sales?

Brugler: As we speak today.

Pearson: All right, as we speak today. When we talk about the soybean market and we talk about the fact we had a late harvest – this has been an odd year. We haven't – last year was somewhat wet in the fall, but this year was exceedingly such. I know a much bigger issue for corn is the quality issue.

Brugler: Yeah, we've got quality issues with corn, soybeans, and cotton as far as that goes.

Pearson: And the cotton issue was – that's been particularly devastating down in the south and that accounts for some of this move we've had in cotton.

Brugler: And it also results in unusual behavior. We've got large cert stocks that are deliverable against December futures, but you're not seeing the December delivery notices because the cotton that's in the warehouses is mostly old crop cotton and might be a little better quality than some of the stuff that's going in the bin right now. So what we're seeing is fairly good demand for that old cotton in the warehouses despite the fact that there's an age penalty on it.

Pearson: Let's talk about the livestock side of the picture. It's been a relatively gloomy trade in the cattle market, Alan. What's ahead for fed cattle?

Brugler: Cattle, if you take the broader view, are stuck in a trading range, between $79 and $89 on the futures. Cash has been trading basically $80 to $86 for quite a while now. At the moment we're down towards the lower end of that range but we're in a time period that we normally don't have particularly good retail demand. Consumers, as you may have heard, us a lot of turkey and ham around Thanksgiving.

Pearson: Absolutely.

Brugler: We got a little bit of a bump up in the boxed beef prices, the wholesale prices this week, because the trade is looking ahead to that interval between Thanksgiving and Christmas where we might get a little more beef demand.

Pearson: A little more dining out maybe. A few more holiday Christmas parties would help some more prime rib out there. The calf market, as you look at that, it seems like we have a relatively small cow herd. It's called the smallest in decades, yet this calf market – even when we get a break on corn prices, the calf market didn't move very much.

Brugler: Basically, as mentioned, we've got a few less animals out there. The calf crop was smaller. It's less than a million head swing, but it's smaller. And then the big issue becomes that cost of production to the feed lot. The feed lot isn't able to sell the finished cattle high enough, given his corn costs to pay much more for the feeders. The feeder contracts for the first part of 2010 are actually creeping up a little bit here, but certainly it's not as attractive as we had six or eight months ago.

Pearson: A little bit of a bright spot on the dairy front. I talked to some producers who, with their premiums, are getting up over $15 on the mailbox price of milk. A little bit of improvement there. Is that sustainable? Are we going to keep that moving?

Brugler: Well, we seem to be seeing a little more strength in the cheese market. You know, we use a lot more butter for baking Christmas cookies, so there's some positive things on the demand side. Unfortunately, some of the producers I talk to say the break even on that milk is $17 a hundred and they're at $15.

Pearson: But it's still better than $9.

Brugler: They're not suffering as badly, but they're not whole yet.

Pearson: Hog business. What do you see ahead now for pork?

Brugler: Again, we're seeing a little bit of an improvement in the wholesale pork price, the value of the main cuts. The ham price has gone up some. We've seen some loin improvement. Export market is still kind of soft. It's not where we were two years ago, but it seems to be improving as the weak dollar has helped us out there. The best line I've seen is that the cold storage report was down this month. So that means despite large slaughter in October, we got rid of it all.

Pearson: All right. Well, we're into the eating season, so hopefully we'll see some demand for everything. Alan Brugler, we appreciate your insights, as usual. 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 might be headed, 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. And, of course, join us again next week when we'll focus on a 4-H program that is helping shutterbugs develop photography skills while learning more about rural America. So, until then, thanks for watching. I'm Mark Pearson. Have a great week.

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