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Market Analysis: May 08, 2009: Alan Brugler

posted on May 8, 2009


Grain prices moved sharply higher this week as the trade factored sluggish planting and wet conditions in the eastern Corn Belt.

For the week, May wheat gained 23 cents, and the nearby corn contract moved nearly 8 cents higher.

Soybeans also rallied nicely with the May contract gaining 32 cents, and the nearby meal contract was up $5.80 per ton.

In the softs, cotton moved above $60 as the December contract gained nearly $2.50.

In livestock, June cattle gained 87 cents. Nearby feeders were up $1.90. And after another week of pork price volatility in the wake of H1N1 flu concerns, the May lean hog contract was up $2.65.

In other markets of interest, the Euro gained 35 basis points against the dollar. Crude oil jumped $5.43 per barrel. Comex Gold gained more than $26.00 per ounce. And the Goldman Sachs Commodity Index gained more than 31 points to close at 410 even.

Market Analysis: May 08, 2009: 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 with us.

Brugler: Good to be here, Mark.

Pearson: At the opening of the show we talked about the fact that we've seen some resurgence of the U.S. economy particularly in terms of the equity markets showing some strength here and really maybe making March 9th look like a bottom in this whole equity pullback, worldwide things seem to be improving. Is it going to shake out for commodities as well, Alan?

Brugler: I think you're seeing a little bit of an up kick in the interest in owning commodities right now. You're seeing a number of different commodities rally at the present time, you can see that in the CRB index or some of the other broad indexes that we follow for commodity prices. It would be typical at this point in the cycle if in fact the economy is starting to turn for commodities to lead the way out, that is commodity prices tend to be one of the leading indicators of a recovery.

Pearson: One that I've been told many times is that copper is the key one to watch and I think as one of our analysts mentioned in February we saw a little bit of a turn upwards in copper prices, other commodities have seemed to follow suit and we'll get down to specific cases here in just a moment but I want to come back to one other issue on the livestock front, obviously the H1N1 thing was such a debacle last week just as pork producers were kind of getting their house in order from the supply side and all of a sudden we get clubbed with a disease named after a specie. We came back a little bit on the board this week and we'll talk about that more in the pork segment but as you look at generally overall, Alan, the hog business has really faced some challenges here. Are we going to see a greater bump?

Brugler: Well, we currently had terrible timing on that H1N1 break that producers, particularly those who weren't hedgers, were anticipating a summer rally in cash hog prices which is a normal feature of the market, we have smaller hog numbers over the summer and instead of getting that $8 or $10 rally in hogs you ended up with almost a corresponding loss. We were seeing some pretty positive signs toward the end of the week, the wholesale pork prices were coming up fairly dramatically, ham prices were up which is probably an export program so I think we're going to get a chance to recover a lot on that ground that we lost. Whether we can get to the level of prices that we were anticipating is still pretty debatable.

Pearson: Let's talk more on the general economies worldwide. What are you hearing from China, South America, these other countries that were also impacted by the, especially Europe, that were also impacted by what's happening here in the United States with the subprime disaster and the financial meltdown?

Brugler: Well, there's still a lot of holes in the world economy. Europe seems to be really struggling right now. The EU Central Bank cut their interest rates again this week trying to stir things up a bit. China, at least on the surface, appears to be doing pretty well with their stimulus program. You saw the headlines this week on increased auto sales and some of the fast food restaurants that operate over there reporting very good results. We are hearing that Chinese hog producers have slowed down their expansion a little bit, though, out of concern that the virus may end up being resident in their hog herd.

Pearson: Before we get onto the general economic trends I've heard from a lot of dairy producers here in the last year and you've come from a dairy background, that situation is still pretty thick. What do you see ahead now for the dairy sector?

Brugler: It's still tough there, obviously there's a squeeze between milk prices and the cost of feed, feed prices are inching up right now, particularly soybean meal and actually corn is starting to come along too. We have seen a bit of a recovery in dairy but one of the things we're watching is the CWT program which is the voluntary liquidation program, those bids are in and they are being processed and evaluated right now but they haven't actually begun to take herds out of production.

Pearson: Crawford is working together, the entity behind those buyouts, seems like that would be putting a lot more of those cold cows out there as that CWT program continues.

Brugler: That's the idea and, of course, that has implications for the beef market, particularly on the lower end cuts.

Pearson: So, those are kind of the general economic trends that are happening worldwide that are impacting commodities. The final one I want to ask you about, Alan, is oil. Oil crept up again this week, we've seen gas prices rise. I think you've always talked about kind of the seasonality here as we get into the summer driving season even with this sluggish economy people are anticipating more demand but I keep hearing that we've got ships afloat everywhere stuffed full of oil and yet we see prices jump like this.

Brugler: We had an inventory problem in the crude oil side, again, the switchover to the summer driving season, the refinery changeovers and some other things have allowed the gasoline price to come up, heating oil which is diesel has also come up a little bit here just recently. From the ag producers standpoint you'd kind of like to see that because 35% of the corn crop is currently going to industrial use, a lot of that is going to ethanol, the ethanol price is derived from gasoline prices to a degree so it helps to hold down the gasoline price to the consumer but it does affect the corn price. The consumer demand overall is still fairly week and, of course, we've met a lot of changes in the vehicle fleet and we've got a lot, we're starting to work more efficient vehicles into the life cycle. As you know there are proposals to get rid of junk cars of certain types. That's all going to mute the response in terms of additional consumption of fuels.

Pearson: So, long-term energy prices heading higher?

Brugler: I think if they are it's more a function of inflation and the big quantity of money we're pumping out right now than it is the actual demand scenario.

Pearson: Still plenty of oil out there in the pipeline.

Brugler: To meet the known demand.

Pearson: Let's talk some specific cases, let's go down to the wheat market and what you see happening there. Last time we talked I just got back from Oklahoma where I got an earful from the folks down there saying we weren't talking enough about the frost damage down there, definitely a serious problem but worldwide still plenty of wheat?

Brugler: Yes, the world will see a smaller crop this year, partly because of the United States, partly because of acreage reductions in other parts of the world. Prices just aren't as attractive this year for growing wheat as they were a year ago. The big question continues to be, number one, the damage down south, the Oklahoma wheat tour this week said the crop is probably only 77 million bushels down there. The Kansas wheat tour found a much better crop, they're estimating 333 million bushels but that's still below where we were a year ago for Kansas. So, U.S. wheat crop is going to be down. The big market driver until this week was the spring wheat situation and it looks like acreage is not going to get planted in North Dakota, particularly, last week they were only three percent done and should have been half done planting. Canadian plantings are running slow. The market seemed to be backing off of the spring wheat argument a little bit but, again, the bread type wheats, the hard red wheats are going to be a little tight this year in North America, Australia could make up for some of that with their prime hard later on.

Pearson: Price wise where are we headed? Do we make sales here?

Brugler: Well, we're getting a little bit of a bounce here over the last three or four days. Again, the crop problems are starting to sink in and the probability that some of the spring wheat acres are going to be planted to soybeans instead, that's firming up the market a little bit. We're really waiting to see what the USDA tells us on Tuesday with their first winter wheat production estimate.

Pearson: Private numbers are looking like that's going to be a big report.

Brugler: Numbers in the 1.55 billion range or so, some of the estimates are a little bit higher than that. Hard red winter wheat somewhere between 850 and 900 million bushels. Those are the numbers we're watching.

Pearson: So, if we come in below that we could see a rally and maybe make some sales.

Brugler: That's right.

Pearson: Alan, let's talk about the corn market, a lot of issues there. The western Corn Belt, the tale of two corn belts, the western Corn Belt the corn went in easily and quickly, the eastern Corn Belt dad called me from over around Champaign and it's slow as can be over there, the northern part of the state is wet too, the eastern Corn Belt is wet, we're getting past our prime planting opportunities.

Brugler: Yes, we're definitely getting very nervous if you're a producer in those eastern states, Ohio, Indiana, Illinois, Iowa, part of Iowa, Michigan and we've got about two weeks, maybe three weeks and your yield potential starts to drop after the middle of May but given the price levels and the need for silage and part of the corn has to be planted just to give your cows something to eat, we will continue to try and plant that. But, again, we are slipping a little bit on the prime yield window here and it looks like it's going to be another week before some of these guys can even get in the field.

Pearson: Is this the rally to sell?

Brugler: It's a rally to sell some of your old crop. We know from the March grain stocks report producers are sitting on a larger quantity of old crop corn than they have had over the last several years. So, they were needing a rally to sell into and this is it and we're getting some farmer sales here even in May which is when they're not usually selling. If you can't be running your planter you might as well load the truck up and go onto town.

Pearson: So, corn price where are you target wise for new crop sales?

Brugler: Well, for new crop sales we haven't done much lately here. We're still about, on forward contracts we're roughly 25%, 35% for most of our clients. We have some December put options to kind of put in a floor. I think if we get another 20 cents we'll definitely have to make another increment.

Pearson: Let's talk about soybeans. You mentioned the spring wheat situation, fewer spring wheat acres, maybe more soybean acres, we've heard in some of the Kansas areas and Oklahoma areas you might see some canola, some soybeans, some other crop substituted down there. Is this acreage number going to grow for soybeans? Is it time to sell soybeans?

Brugler: Well, we expect the soybean acreage number to be larger than the March intentions. That was about 76 million acres. Between the spring wheat and the planting delays in the eastern Corn Belt we're likely to get some fields that end up being soybeans that weren't originally intended to be there. And so from that standpoint, yes, you ought to be selling your Novembers or your Januarys forward contracts or hedges. The issue though is the price discovery is all being done in the nearby, in the old crop, it's the May contract which is about to expire and then the July contract and they're basically dragging the new crop values higher because it looks like we're going to be very close to running out of old crop soybeans.

Pearson: It would be a very tight situation, we had this I think back in '04 when we had a similar situation, very, very tight old crop supplies but some decent crop coming on but it caused a lot of concern and we actually had some beans that were coming in from outside the United States that kind of surprised people at one point. So, with that in mind strategy wise where are you in terms of your soybean sales?

Brugler: Well, we're still sitting on about 20% of the old crop, what we call our gambling stocks, it has paid us very well to do that. We are concerned that China may be about done with their big buying program for several reasons. The world price is getting close to their domestic support price. They are shipping in four or five million tons a month of already booked beans to the port which is probably faster than they can use them up. So, if we get some indication that they're done for now we think we've got to reward the market with some more of our remaining old crop. New crop will sell even faster if we think the old crop has run out of steam.

Pearson: Real quick, South America, as you look at it, apparently smaller crops there than we thought.

Brugler: Actually Brazil USDA may raise their number slightly next week because the KONAB and IBGE basically said 57.6 million tons which is a little larger number than USDA was using. Argentina has shrunk dramatically though. The late beans that everybody thought were in better shape ended up to not be that high yielding because of the weather down there, the drought is kind of ongoing, could be 33, 34 million tons, USDA may possible only go to 35 but that's still a drop from 39 million last month. So, definitely a smaller crop in South America, that means you draw down world stocks dramatically and when they're tighter you're going to get some price impact from that.

Pearson: Let's talk about what's ahead in the livestock side. Again, it's been a struggle, we talked earlier about hogs and I want to get to that but I also want to talk about this fed cattle market. As we see this economy improve, we see the equity markets improve, we see the job reductions starting to slow a little bit, not as big as what many are anticipating are we going to start seeing this beef demand start to reassert itself?

Brugler: Well, I think the key is the cheap cuts of pork that we have to dispose of, if we're starting to get the pork loins and the hams and the barbeque cuts to recover here then I think you'll see a rally in the beef as well. We kind of got in a situation where we had too much beef in the cooler, packer offerings have been fairly heavy for a couple of weeks here and we lost a little export trade. A couple of countries weren't too discriminatory, they just said don't ship U.S. meat at all. As that backs off, as that situation calms down I think we see a recovery. Seasonally speaking you're getting into the growing season finally, the weather is still not great in a lot of the country for that but as we get closer to Memorial Day you'll see the retailers starting to load up with their beef features and that should help support the market as well.

Pearson: What are you seeing? What kind of prices? What should we be looking for in terms of opportunities? Are there hedge opportunities out there on fed cattle right now?

Brugler: Well, there are some opportunities to at least break even and lock in your hedges. Of course, we're sitting on some hedges we've had for quite some time and basically trying to decide if we still need them. I've encouraged producers to not do any short futures at this point. Again, everybody's situation is different and we can't, this isn't advice, but we think there's a possibility of maybe getting a little bit more later on.

Pearson: All right, as you look ahead in the second half of the year where do you think we'll wind up as far as these feeder cattle prices based on what we're seeing now and hopefully with some seasonal demand pick up and with the small numbers of this cow herd that we have in spite of the fact, as you mentioned, cold cows from the dairy herd are certainly impacting the hamburger side.

Brugler: Well, feeder numbers are down and the cash seasonal, the seasonal tendency for feeder cattle would be to go up in June and July maybe even into August. What we need, though, is either corn needs to come down or we need the live cattle, which we just discussed, to go up. Those are the two main price drivers for feeder cattle. If one of those two happens then the numbers will allow the prices to work higher.

Pearson: We mentioned pork, we mentioned the H1N1, again, it looks like on the supply side I think last time you were on we had that hogs and pigs report and it was like we're on our way. That side of it is looking good. Maybe we'll move some cheap cuts here this spring, hopefully get some bounce in that market.

Brugler: Yes, it looks to me like we've turned the corner barring some big resurgence in the H1N1 story. It looks to me like the retailers worked inventory down because they were uncertain about the consumer demand, consumers still have fairly good confidence in the U.S. meat supply and the export markets starting to recover it looks like. So, I'm fairly positive on pork going forward and therefore hog prices going back into summer. I do see a recovery from current levels.

Pearson: So, that's some good news there for the pork industry. They need some after the week that they've had last week so hopefully we'll be seeing some stronger prices for hogs. As usual, Alan Brugler, appreciate you being with us and appreciate your analysis here on Market to Market. That's going to wrap up this edition of Market to Market for this week. But 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. Also, you can download audio podcasts of our Market Analysis and Market Plus segments free at our Web site. Be sure to join us again next week when we'll examine the market impact of the government's latest global supply and demand estimates. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices corn markets news