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Market Analysis: Oct 16, 2009: Market Analyst Alan Brugler

posted on October 16, 2009

Grain markets continued their unusual harvest rally this week with the nearby wheat contract testing the $5 mark.

For the week, December wheat gained more than 30 cents, while the nearby corn contract moved nearly 10 cents higher.

Harvest delays and uncertainty in the southern hemisphere supported oilseed prices. For the week, November soybeans moved 13 cents higher while the nearby meal contract fell more than $15 per ton.

In the softs, cotton moved sharply higher with the December contract posting a gain of $5.19.

In the dairy market, Class III Milk futures erased all of last week's gains with a loss of nearly 70 cents.

But in livestock, October cattle gained $1.48. Nearby feeders gained 40 cents. And the October lean hog contract was up $3.25.

In other markets of interest, the Euro gained 190 basis points against the dollar. Crude oil moved sharply higher this week with a gain of $6.76 per barrel. Comex Gold continued its sojourn above the $1000-mark with a weekly gain of $2.90. And the Goldman Sachs Commodity Index gained more than 30 points to close at 510.40.

Market Analysis: Oct 16, 2009: Market Analyst Alan Brugler Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Alan Brugler. Alan, good to have you back.

Brugler: Good to be here, Mark.

Pearson: Well, it looks like people are talking a lot about inflation, it looks like we've certainly seen some inflation, if you look at what crude oil did this week and gold and, of course, the commodities all being higher. One factor has been pointed to many times and that has been the weakness in the dollar, a little bit of an up trend Thursday and then still a little bit softer. What is your outlook for the dollar, Alan?

Brugler: Well, basically we're having a little trouble turning the dollar around. Currencies tend to trend, they tend to be fairly strong moves in one direction and then equally moves in the other direction. Right now the perception is that the U.S. is creating more money, it's creating more money as part of the stimulus programs, you're starting to see the velocity of money turn up. The bottom line is you've got a little too much money chasing too few goods at the moment, you don't have enough of the industrial production yet, enough for the other consumer issues. So, gold up, gold is a measure of the dollar's strength and, of course, crude oil is traded like a currency in many parts of the world.

Pearson: Should you buy gold here?

Brugler: I'm a little skeptical about buying it over $1000 an ounce. I think technically it could go to $1100 and change but it wouldn't be a high profitability investment.

Pearson: Not that we recommend people trade gold on this but I'm just curious because this is a question I seem to be getting, what's happening to gold. And then crude oil had a big jump. There were fewer supplies available with crude near term. Is this a fundamental thing happening?

Brugler: Well, it's mostly technical, it's mostly tied to the value of the dollar and you look at the correlation, it's .92 or something, a very strong inverse between the dollar and the crude. Supplies are starting to tighten up a little and you would expect if in fact the world economy is starting to pick up that crude supplies would tighten up as we go forward here.

Pearson: People are traveling again. So, trucks are moving and ships are moving. So, better global economy, how does that translate over to the commodities world right now? Obviously you've got a very slow corn and soybean harvest. I want you to talk about that in a minute. Let's first talk about the wheat market where, again, prices were jumping up there this week.

Brugler: Well, we had a couple things happening in wheat here. First of all, there is a weather component because the soybeans aren't being harvested the winter wheat for next year isn't being planted so you're starting to want to own this year's crop. We had a couple of big export sales, Iraq bought a couple hundred thousand tons of hard red winter wheat, you've got that market moving. And then you've got some speculators that have been short that made pretty good money and if they start to see prices going up they want to buy back their positions and get out. That aggravates the rally which is a good thing if you're a producer.

Brugler: Well, we had a couple things happening in wheat here. First of all, there is a weather component because the soybeans aren't being harvested the winter wheat for next year isn't being planted so you're starting to want to own this year's crop. We had a couple of big export sales, Iraq bought a couple hundred thousand tons of hard red winter wheat, you've got that market moving. And then you've got some speculators that have been short that made pretty good money and if they start to see prices going up they want to buy back their positions and get out. That aggravates the rally which is a good thing if you're a producer.

Pearson: If you're a producer on that are you selling this wheat rally?

Brugler: Not very aggressively.

Pearson: You think we've got better times ahead?

Brugler: I think you normally don't sell the first rally out of a major bottom like that, that doesn't mean you can't check it again but I'm feeling a little more positive about the wheat market now.

Pearson: So, maybe some better times ahead in the wheat market. Let's talk about the corn market, sluggish harvest to say the least so far. We're not zipping around this as we had hoped. It's been an ideal year so far, big crop out there, most of the people I've talked to have been harvesting corn and have been seeing moisture levels in the 20s. So, with that kind of outlook near term and some spotty rains around the Corn Belt the last couple of days what is your take on this corn price?

Brugler: Well, corn had a pretty good rally here. Part of it is tied to the international trade aspect and the dollar. But, again, part of it is just the world big crop is coming but we're having a hard time getting it to the trucks and the trains and the boats that are waiting for it and anticipating it would already be there. As you point out the crop is late in its maturity, it is not drying down quickly, the weather has been poor so that is aggravating the slow dry down and it also slows the harvest pace. So, what we're seeing is a fairly stout cash price level right now. What little corn is moving is readily demanded. But as we finally get some good looking weather here and it looks like we might have four or five days here in part of the Corn Belt and part of the southern tier of the United States we'll start to see more bushels move and that will either affect the futures or it will affect the basis, the spread between cash prices on the board.

Pearson: The world economy is picking up, that should be one good thing for demand for corn. Take us into 2010, if I look at December 2010 contracts well above $4, should we be making sales there?

Brugler: I don't think so. Basically I'm looking at the ethanol market, we're seeing pretty good margins there, you're seeing a bunch of those shorter plants coming back online, the high crude oil prices that we mentioned. The one thing that will slow that down is using more ethanol. We tend to forget that side of the equation. Ethanol actually makes fuel cheaper. But it would mean using more corn. So, I think that as that goes forward we'll tend to want to attract more acreage next year and we'll probably have to have higher prices than we're currently seeing to do that.

Pearson: So, the current offerings out there, that far out doesn't entice you at all.

Brugler: No.

Pearson: All right, so in terms of those who haven't made much in the way of sales so far, they haven't been listening to you because you've been telling people to sell here for a long time. For those who haven't been what is your strategy for those folks?

Brugler: We have recommended a little bit of catch up sales on the cash side in the last week here just because we had a 60, 70 cent rally off of the fall low there, what appears to be a fall low and we felt it was time to reward the market for someone who is way behind and needs some cash flow. But, again, we're optimistic that eventually we'll see higher prices than this. We may see a pull back first. But we don't want to commit our whole inventory to this current rally.

Pearson: Talk about the soybean market and what you see happening there, obviously the same issue there, slow harvest.

Brugler: Slow harvest driving costs. In Nebraska and Iowa you'll notice a lot more soybean fields have been harvested than corn and that is normal. But, again, the issue there is we've got this huge export program, China in particular has got a big forward book. We need to ship beans fairly quickly and we need to get them to the boats. The crush plants use their inventory, drew down their supplies that they have on hand and so they are trying to intercept what beans are available before they get to the boats. So, again, a fairly strong market environment at the moment for beans until we get further into harvest and free up some more supply.

Pearson: Same thing, catch up cash sales, you're looking forward to doing that?

Brugler: I haven't done anything on the cash sales recently, as you mentioned, I was very aggressive for this fall, we're mostly just delivering against those contracts. I think you start putting tens in front of the beans or the high tens then you probably have to be a little more serious about it.

Pearson: Same thing, you're not interested in selling any next year beans at this point?

Brugler: That's correct although our patience won't be probably as high there because of our anticipation. There will be a big South American crop and that would tend to depress prices later on.

Pearson: With these higher prices here at harvest I'd assume that's probably adding a little incentive to folks down in South America to put more acres out.

Brugler: Well, it certainly translates into higher potential revenues. The fertilizer costs have come down quite a bit since last year, the Brazilian real is very strong which helps them with any of the inputs they need. On the other hand, it does take the edge off of our prices, our higher prices aren't necessarily being translated to higher prices for the Brazilian producer, at least not to the same degree. But we are looking for a 62 or 63 million ton crop in Brazil soybeans, Argentina could be as high as 52 million tons compared to 31 million last year. That is a combination that yield better and also much more acreage because they didn't plant all their corn and wheat.

Pearson: So, normal crop this year could change the balance a little bit for soybeans.

Brugler: Yes. The bigger question is how fast can the logistics be handled, if they have that large of a crop how quickly can they make it through the port and get loaded on a boat?

Pearson: The infrastructure is still under weighed on there. So, let's talk real quick about cotton, big move in December cotton.

Brugler: Yes, cotton is a beneficiary of all of the forces we talked about. It is a consumer good, if you think the economy is getting better you need more of it. We've got problems with the harvest, it's been wet down there, the bulbs have been damaged in some cases so you're not getting a lot of good quality cotton out of the field yet. The export market is still a little slow, less than 100,000 bails this past week export sales. But, again, people want to own the thing because they think it's going to be more valuable in the future.

Pearson: So, there's some speculative thought on there that we're going to see better value and a stronger world economy. We saw that certainly as we opened the show talking about the growth of this manufacturing sector in the United States, best in four years. So, maybe it is starting to turn around but our general economy, how is that going to translate for the livestock producer out there, that cattleman, that pork producer, the dairymen out there. Talk beef first.

Brugler: Well, the beef market has kind of been in a trading range. Cattle prices have been about in the $80 or $90 range really since the end of last year and it's been a combination of cutting the herd size but losing demand from the consumer because of the economy, mostly on the high end which hurts the price, the average price of a pen of steers the most. We are seeing fairly tight inventories of beef now, not tight tight but supportive to prices where they're at. I think as the economy improves you'll start to see more consumer demand. First, you'll see more volume at the low end, then you'll start to see more people showing up at the restaurants and eating the choice steaks and the prime rib eventually. So, the cattleman has just got to wait it out. But as we've mentioned before the one thing that really will drive cattle in 2010 is that when that demand occurs we can't add more steers, it takes two years to get another steer. So, if you get more demand and you don't have more supply that tends to push prices back up.

Pearson: That's right. So you're looking for 2010 to be a decent year in the cattle market – maybe a really good year in the cattle market.

Brugler: It will depend a little bit on those input costs and what the corn and the meal are doing. But relative to the cattle price itself, we think, yes, there's some possibilities.

Pearson: With this rally on corn, some pressure on feeders?

Brugler: Feeders have been under pressure. They dropped down to about $93 on the nearby futures because of the rally in the corn primarily and the fact that the cattle have been going sideways. If we were to get a little bit of a bounce near cattle, it would help the feeders as well.

Pearson: All right. Let's talk about pork, which is the meat that's so plentiful out there and certainly a great buy for all you consumers. Get a pork tenderloin today. What's your take on the hog market? Who's going to blink? Who's' going to start reducing the sow herd?

Brugler: Well, we've seen some reduction in Canada. We've seen much smaller reduction in the United States. We know from the hogs and pigs report September 30 that we do in fact have a smaller sow herd, down about three percent. The problem is really that the hogs we've got to slaughter are clumped up, up front. Now, the fall quarter of this year – the winter quarter of this year is where all those hogs are. Then it drops off fairly sharply. We've got a lot of pork to go through. Weekly slaughter is running almost as high as a year ago despite the fact that the herd is smaller overall. And they're tending to be a little heavier hogs too. So we do have a lot of pork to work through. The weak dollar is helping us to a degree. We think we're getting some extra export sales now. Data lags about six to eight weeks, but they think there's some sales being done, particularly in Mexico and some other areas that are starting to turn that pork cutout a little higher and that will help in the long run.

Pearson: Obviously, the other factors, the demand side, the global turning and the weaker dollar, obviously that's where the hog business has really been saved is this export side. What's your outlook there?

Brugler: Well, we've been hurt by actual demand for the meat. The weaker dollar can't compensate for people just not having spending money. You're starting to see a recovery in Mexico after the H1N1 last spring. You're seeing a seasonal drop in Japan right now but they're holding their own relative to a year ago – two years ago as far as what they're buying. So I think probably 2010 will be a little better than 2009 in terms of exports.

Pearson: And hopefully that will turn into better prices. We've got about a minute, Alan. You talk about input costs. That impacts the whole livestock sector and, of course, corn has been rallying here. We've been seeing some stronger prices. I want to talk to you just a minute about the dairy sector. Class III milk futures we pointed out earlier in the program kind of wiped out the gains we've seen in the past few weeks. What is your take on the milk market? We've been taking a lot of cows out of production.

Brugler: Well, we need to take a few more. It's a constant battle between rising productivity. Farmers are very good at getting milk out of those cows and we just don't need as many cows right now. We need cheese prices to rally in the fourth quarter, which they normally do. Consumers tend to buy a little more cheese around the Christmas holidays and into the New Year. Get that manufacturing milk price up. I see some optimism ahead but, again, it wouldn't hurt to get rid of a few more cows yet.

Pearson: Good point, Alan Brugler, thank you so much. That wraps up this week's show. But before we go, we want to remind you about the special "Economic Rural Summit" we'll be taping in Shenandoah, Iowa on October 22nd. It's the first of four special "road editions" examining the rural economy. We'll assemble a panel of experts and you're invited to join the discussion by submitting your questions at the Market to Market Web site. And we want to get the conversation started by asking you the following: How has the economic downturn affected you and your community? Visit the Market to Market Web site to share your story and submit your questions. And be sure to join us again next week at our special "Rural Economic Summit." Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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