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Market Analysis: Aug 28, 2009: Alan Brugler, Market Analyst

posted on August 28, 2009


With development delayed in many regions, the big question now is how mature the crops will be IF and WHEN "Jack Frost" comes to town. This week though, the trade didn't appear to be too concerned.

For the week, September wheat was up about 7 cents and the nearby corn contract traded fractionally lower.

The real action was in the soybean pits where a strong export numbers supported prices. For the week, the September soybeans gained more than $1, and the nearby meal contract was up a whopping $54.00 per ton.

In the softs, cotton traded in a mostly sideways fashion, this week, as the December contract posted a loss of 29 cents.

In the dairy market, Class III Milk futures gave up last week's gains and ended the week with a loss of 50 cents.

In livestock, October cattle were down nearly $2.. Nearby feeders were off more than $2.50. But, the October lean hog contract eked out a gain of 22 cents.

In other markets of interest, the Euro lost 49 basis points against the dollar. Crude oil was down more than $1 per barrel. Comex Gold gained $4.00 per ounce. And the Goldman Sachs Commodity Index lost nearly 6 points to close at 466.20.

 

Market Analysis: Aug 28, 2009: Alan Brugler,  Market Analyst

Pearson: Here now to lend us his insight on these and other trends, one of our regular market analysts, Alan Brugler. Alan, welcome back.

Brugler: Great to be here, Mark.

Pearson: I wanted to touch upon a report that came out from USDA and that was on net farm income. It's a substantial year over year drop from the big numbers we've had the previous years down over $30 million.

Brugler: USDA said that 2008 was 87.2 billion and they're saying that 2009 looks like it's going to be about 54 billion.

Pearson: We've got some problems coming up in farm country do you think?

Brugler: Well, these are for 2009 so a lot of those problems are already here and it's a combination -- on the grain side it's lower prices than we had in 2008 which were the highest prices ever on the selling side and higher input costs such as fertilizer. On the livestock side conversely grain prices while they are down are still higher than they were a couple of years ago but the livestock prices are down substantially.

Pearson: So, we've got a real squeeze in both sectors of the farm economy.

Brugler: Right, and USDA went on to say that it's starting to affect land prices just a little bit although we haven't had the issues that we've had in urban real estate because the farmers built up some pretty good equity over the years.

Pearson: The cyclical business is cyclical. Now, talk about this, internationally we're starting to see a trade pick up, we're starting to see some more momentum at least in the domestic economy. Are we starting to see that worldwide too, Alan?

Brugler: Yes, it's very spotty, some areas are doing much better than others. There's a lot of debate about China in particular as to whether the stimulus worked or not, whether it's somewhat a figment of the numbers but they are certainly buying a lot of soybeans and they had previously been buying a lot of iron ore and other commodities.

Pearson: I was down in Wichita this week seeing some friends and there's a lot of concern about what wheat prices are doing and where they're headed and we seem to have a hard time getting this spring wheat crop harvested. What is your take on the wheat market?

Brugler: Well, basically spring wheat is being harvested, it's been slow because it's been wet in a lot of areas, it was late planted so it was green too. What we're hearing is yields are excellent but the proteins are down a little bit which will affect how the millers and the bakers have to handle the crop. The biggest problem, of course, in wheat is the world wheat production is up. IGC this week said 662 million tons for this year, that's down from over 680 last year but it's more than we thought we'd had a couple of months ago. So, the futures market is basically having to discount that, the cash market has never really gotten as high as where futures were. What we're trying to do is have a sale here to try and get up some business just like a store would.

Pearson: Let's talk about making sales, producers right now what are your thoughts?

Brugler: Well, basically we're at a point now where we think you ought to hang on to what you've got. We pre-sold a lot of it last year even or earlier in this year for harvest delivery and we're basically wanting to sit on it and wait for a rebound. Technically the market is very oversold and there should be some kind of a post-harvest bounce in here somewhere.

Pearson: Get the crop put away and bid it back out.

Brugler: Particularly if you've got some of the higher protein wheat, we think there will be a good premium for that.

Pearson: We've talked about Jack Frost, we're not kidding. This crop is ten days, two weeks behind for corn and for soybeans as you go throughout the Grain Belt, cool nights are already being reported in many parts of the northern Grain Belt, nothing close to a frost yet but obviously with the crop this far behind you have to put back that frost free date ten to fourteen days and that's got a lot of people worried but not the traders in Chicago.

Brugler: I think they're kind of torn. They have got two stories, one is record yield if it doesn't freeze, the other one is we could lose some bushels if it does freeze but you'd never know until you get a lot closer to the date which areas and production is not evenly distributed, it makes a lot of difference if it's in Iowa and not so much if it's in northern Michigan. So, the trade has got I think a little bit of weather premium in there but not a lot.

Pearson: So, as we look at this going forward it's been a long time since we've had a serious killing frost.

Brugler: Yes, the last really big one was in the mid 1970s.

Pearson: '74 we had one.

Brugler: '74, we had a couple of smaller ones.

Pearson: '65 was a big one.

Brugler: Yes, there was another one in the early 90s but it only ended up costing us a couple hundred million bushels and that's really part of the debate. Every week you get a bigger percentage of the corn crop that reaches black layer which is maturity and you also get some of the late corn taken off of silage to where it doesn't count as grain anyway. So, it's going to be kind of touchy, there's probably going to be a case where a forecast comes out for a week or ten days later that looks like a hard freeze and then the market reacts to it.

Pearson: Is that a chance to make sales?

Brugler: Yes, I think if you're behind on sales that's what you are playing for, otherwise you're just looking for a normal harvest low and then the typical rally after harvest.

Pearson: Post-harvest rally would be the next chance to make sales for corn. What about soybeans?

Brugler: Well, soybeans are a little different scenario. We're frontloading the export program in a major way. China has got over 350 million bushels bought for new crop shipment already, that's more than half of last year's total purchases from them. It's no secret why, it's because South America isn't going to have much in the way of soybeans to export, they'll have some products because the crushers are still operating but not much in the way of full beans. We do expect a very large crop from South America next spring so what that's doing is it's concentrating all the beans in the big business in the front end. So, that says to me the cash market is going to be very strong all fall, you might have a little harvest weakness just because of logistics but the market is going to want you to bring those beans in now, not keep them until March.

Pearson: So, the producer's standpoint right now for making sales, you've been advocating making sales when we had much higher numbers, but if you haven't done much at this stage of the game what are you telling people?

Brugler: Well, you're looking for the strong basis bids, you're looking for if you get the frost freeze kind of a scenario certainly you want to reward that rally but, again, you're not going to get a big incentive to store it unless we have such heavy sales from farmers that the industry just builds in a carry to even out the flow.

Pearson: It's early I know but South America, soybean plantings, what do you think we're going to see?

Brugler: Well, we think right now they're going to be pretty large. Argentina has got the lowest wheat acreage since the 1930s, their corn acreage wasn't all that big either so there's plenty of ground there to plant the soybeans. They're having a little battle with the government over the tariffs again, in fact, the producers are on strike right now and basically aren't going to sell anything to anybody for a week but it looks like the potential is there for record plantings this fall in Argentina. Brazil will probably be a little larger than last year, their fertilizer costs have come down tremendously as they have here and they have got better credit.

Pearson: Just real quick we talked about the Euro losing against the dollar, what is your take right now on the dollar? We've got all these -- everyone has been out at their local congressional listening post and hearing about all this big spending the government has been doing. What about the impact on the dollar? Where do you see that? Is it going to break? It's been in kind of a trading range I guess.

Brugler: Well, it's been drifting down a little bit but, again, as you alluded it hasn't broken the levels that we had a couple of months ago, the dollar indexed around 78 points would be a fair number. It is reflecting this potential from deficit spending to impact the value of the dollar, basically diluting the value of the dollar and other countries, other currencies aren't happy with that. But at the same time a lot of that planned spending hasn't actually been done yet. Out of the original stimulus bill there's still $300 or $400 billion that hasn't actually been spent, it's geared for 2010-2011. So, some of this is anticipatory. If the government makes enough money on its banking investments and as things are repaid they may not have to spend all of that. So, there is potential for rallies in the dollar. The other thing you have to remember is that China is not repatriating the dollars that it holds, it doesn't want to convert dollars back to Yuan because a stronger Yuan would hurt their export potential. So, they are finding other ways to deal with the situation and they are one of our major trading partners.

Pearson: One of those buying commodities, they've been buying a lot of beans.

Brugler: They've been buying a lot of beans, they have been buying some aircraft, they've been buying a few other things.

Pearson: Let's talk the cotton market and what is your outlook there for cotton prices, speaking of China, our biggest user of cotton?

Brugler: Well, cotton is kind of stuck in the middle. We're basically below low rate, you can get an LDP of five cents a pound or so. The Chinese have a rather large inventory built up, they have had some tremendous production gains in Sinchang and some of the other areas in China and, of course, textile exports are down because of the recession. As the global recession improves, and we think it is, you'll start to see a pick up in that textile demand, the housing starts and sales and so forth are starting to look a little better and that is usually one of the first keys that maybe somebody is going to need some draperies and some carpet and some of the other goods.

Pearson: So, maybe a rally potential for cotton further down the road.

Brugler: Yes, we think there is demand potential there but right now, of course, we're harvesting cotton down in Texas in the southern part of the state and as that gradually spreads you'll get the normal harvest pressure.

Pearson: Let's talk livestock and what you see as far as the cattle market is concerned. Are you a little more optimistic this year for fed cattle maybe from the fourth quarter as these smaller numbers continue?

Brugler: Well, that's been my story for a couple of weeks is that the numbers are declining, the finish numbers are going to be down, the most recent cattle on feed report said that we had the lowest number since '99 for that month on feed. So, supply is down but, of course, the other side of that is demand consumption and we've got both domestic consumption to deal with and also export markets. The export market has not been as strong as we'd like it to be, we're selling nine or ten thousand tons a week but we had hoped to see more to help kind of bleed off the excess production and, of course, consumers have cut back a little bit on the high end product because of the recession.

Pearson: The restaurant trade fell off quite a bit this spring and summer and maybe that's starting to rebound some. Take us through the beginning of next year. Obviously we've had housing starts, durable goods and things starting to go in the right direction, maybe that demand perks up?

Brugler: Yes, we think the potential is there. There should be an intersection there between the reduced supply because fewer numbers being in the lot and frankly the whole U.S. cattle herd is smaller, we saw that in the inventory report and some improvement in demand. The reality of the cattle business is it takes two years to create more steers so if you get the demand to pick up the market will not be able to increase supply very readily and that usually would translate to higher prices.

Pearson: At this stage of the game can I buy a calf right now, a five weight calf and hedge a profit in that animal?

Brugler: Well, we monitor a formula called the cattle crush spread, it is offering tremendous opportunities for November placed cattle right now, as much as $40 a head that you can hedge, lock in the profit on right now. It's not quite as attractive for the first quarter of next year at the moment but, again, if you want to bet on the economy recovering certainly those 500 pound cattle might work.

Pearson: A pretty compelling story. The hog market, what do you see happening now with hogs? Are we ever going to see any liquidation in this sow herd? You've kind of been talking about that coming.

Brugler: Actually we're seeing it. The most recent statistics are showing lower prices for sows which tells you that they are getting some and the actual sow slaughter numbers are starting to pick up. So, yes, we've finally gotten to the point where some guys have run out of equity unfortunately, the banks are starting to call the notes or they're just forcing some downsizing to get things kind of right sized. We've had one round of that already but we need more because frankly we're just cranking out too many hogs. We had record large number of hogs in 2008, we got away with it because the export market was strong but, again, that has slowed down a little bit this year and the weak dollar should be helping us. A note of optimism, the price of hams, the ham primal has almost doubled since June. It was in the 30s, now it's in the 60s, $60 so that's a good sign, that has allowed the pork cutout to go up and so it suggests to me we're getting some demand repair, if you will, and so it's not only liquidating the sows but it's also getting the price up on the meat.

Pearson: Very good, Alan Brugler we appreciate it and especially on that upbeat note for livestock. We appreciate your insights. That's going to wrap up this edition of Market to Market. If you'd like more information from Alan Brugler 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 and you can download audio podcasts of our Market Analysis and Market Plus segments absolutely free at our Web site. Join us again next week when we'll examine the outlook for an economic recovery in rural America. Until then, thanks for watching, I'm Mark Pearson. Have a great week.

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