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Market Analysis: Apr 03, 2009: Alan Brugler, Market Analyst

posted on April 3, 2009

The report had bullish implications for the grain market, and both wheat and corn prices rallied on the news.

For the week, May wheat gained 56 cents, and the nearby corn contract was up 17 cents.

Soybean prices also rallied, with the May contract posting a gain of 17 cents, while the nearby meal contract was up more than $22 per ton.

In the softs, cotton also had a winning week as the December contract gained nearly $4.

In livestock, April cattle moved $1.73 cents higher. Nearby feeders were up $2.28. And the April lean hog contract was down 20 cents.

In other markets of interest, the Euro gained more than 180 basis points against the dollar. Crude oil was up 13 cents per barrel. Comex Gold declined $28 per ounce. And the Goldman Sachs Commodity Index gained more than 8 points to close at 376-even.

Market Analysis: Apr 03, 2009: Alan Brugler, Market Analyst 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: Great to be here, Mark.

Pearson: USDA's numbers came out, somewhat of a surprise to the market, 85 million acres of corn, 76 million acres of soybeans and, of course, we're also looking at some wheat acreage declining by 7%. So, a first glimpse anyway of what 2009 is going to look like for corn and soybean producers in particular. Were you surprised by the acreage reduction?

Brugler: Yeah, I think a lot of us were wondering where the extra acres went to. We've had an increase of more than 9 million planted acres over the past two years, prices have been fairly attractive over the last two years but they're still 40% or more higher than the long-term average price for the major grains and it doesn't seem like producers are going to take expensive farmland and leave it sit idle this year. But if you add up all of the principle crops you end up with 317.1 million acres and that is down 7.8 million from last year.

Pearson: So, keeping all that in mind what is this going to tell us now about 2009 and what could we expect?

Brugler: Well, basically it says that the market has got to track some of that missing ground. It may in fact be intended to be planted, it may be some dry land, crop land that can't be farmed every year in which case it's gone for this year, out of the picture. But I think what the market showed you this week with the rally is that it's trying to encourage some more double crop soybean acres, for example, if there's some marginal areas that did get a little precip in March after the survey was taken it's trying to encourage producers to go ahead and try to plant something in those acres.

Pearson: It's like we've had four years now with this planting intentions report and March has been so critical and yet by the time we get to June the numbers have changed quite a bit.

Brugler: That's an important point, Mark. The acreage can change in corn as much as three million acres between March and final, in the last ten years it has changed as much as 2.4 million acres just from March to June. The whole purpose of an intentions report is to tell producers what everyone else is planning on doing and if you're looking like you're going to overproduce or under produce for a certain crop it gives the market a chance to react to that before everything is in the ground and you can't do anything about it.

Pearson: It looks to me like the next issue is really going to be spring planting and what is happening with the U.S. wheat crop. Let's talk about the wheat crop first and talk about what it is you see ahead. We've had some problems no question about it in the domestic U.S. wheat production this year with extreme dry weather in big parts of the central plains. Are we starting to see some recovery from that? Could this crop improve?

Brugler: We're definitely seeing some recovery in the hard red winter wheat area because of the big snowstorm that we had about a week ago, some areas got twelve to fourteen inches of snow, that's an inch to an inch and a half of water, remarkable green up in those areas after that snow started to melt. There's certainly some permanent damage in terms of crop that wasn't able to till or they were running cattle on that will just be grazed out. But we do look for some improvement in the crop condition ratings on Monday in the hard red winter wheat areas. In particular we have another weather issue which is the flooding up in North Dakota, you've got spring wheat ground up there that if we were short on hard red winter wheat you would try and attract some additional spring wheat. It's going to be difficult to get that because of the wet soils up in that area.

Pearson: So, sales wise, a producer making decisions, in wheat production what are you telling them?

Brugler: Well, I think you have to be a little careful about how much forward pricing you're doing for your '09 crop here because of this uncertainty about the size of the crop. We've got 30% or so cash sold for our producers but we're kind of dragging our feet now to wait and see how the spring planting in the spring wheat areas particularly goes.

Pearson: Worldwide wheat acres about the same as last year?

Brugler: No, we're pulled down, world production last year was over 680 million tons, estimates now running 645 to 650 million tons, you're seeing some cutbacks in the United States, we know we've planted about 4 million less winter wheat acres. You're also seeing some other countries that are saying it's not $13 futures any more, it's $6 futures, we don't want to plant quite as much wheat, we need to go back to some other crops.

Pearson: What are your targets? You're 30% sold new crop. What number do you want to see before you make some more sales?

Brugler: Well, we're pretty flexible on that. We look at the charts and let the charts tell us where we can mechanically get to. Right now we're seeing an increase in open interest, we're seeing new money coming into the market since the first of April or the beginning of the second fiscal quarter and we want to let it run a little bit and see where it can go.

Pearson: Half a buck?

Brugler: Certainly, daily limit in wheat is 60 cents nowadays so that is a good one day move.

Pearson: If we got that you'd start making some sales?

Brugler: It would be my intention, we'll put it that way.

Pearson: Let's talk about the corn market. Now, these corn acres, 85 million, pretty close to what everybody was kind of anticipating for corn and a nice rally this week. Obviously we're going to run into planting issues and planting concerns and we're going to have farmers on tractors pulling planters and not hauling corn to town here in the next 70 to 80 days. So, as we look at that we're going to see some opportunity maybe to sell some corn at some better money here?

Brugler: Well, you've got a couple of things going on. The grain stocks report showed that we had a larger percentage of the crop than normal still on farm, still held by the farmer. In the last two weeks we've seen a big rush to get some of that moved and if that continues for a couple more weeks we may have enough to coast by. It has weakened the basis, the spread between cash and futures because it's suddenly available to the market. But traditionally there is a window there somewhere in early May usually where the market is either nervous about the crop or having trouble attracting cash bushels from the farmer.

Pearson: Would that be a chance maybe to make some additional sales?

Brugler: Yes, we've got three different buckets here. We've got one that we do before planting, we've got one that we do May and June and then once you're really sure you've got the crop you might do a little bit more before harvest.

Pearson: And are you running about a third sold on new crop corn or where are you on that?

Brugler: Yes, we're basically a third sold on the forward contract side. Now, we've got some additional protection via some put options and we're locking those higher as the market is allowing us to do that.

Pearson: It seemed like that $4 level was such a resistance point for corn. As we move through that in the nearby contracts is that going to stimulate some more upward moves? Are we seeing the speculators come back in now?

Brugler: Yes, we're seeing an influx of money since the first of April, another trader report on Friday night showed some of that, you'll see more next week I think based on the open interest. The limiting factor there is they need someone to sell against and usually that is the commercial hedger who has to have bought to cash corn from the farmer first. So, that's the lynch pin of the whole move.

Pearson: So, at this stage of the game you'd tell a corn producer to hold off and you'll probably get a good opportunity to make some sales?

Brugler: Yes, we've got targets 20 to 30 cents higher for some old crop sales but certainly we won't clean the bin out at that point.

Pearson: 85 million acres, trend line yields, we're talking pretty good production for 2009. Can we find a home for it all?

Brugler: It would be over 12 billion bushels but if you look at the estimated total supply including carryover and so forth it would not be a record so there should be bin storage out there for it.

Pearson: Let's move over to soybeans. Kind of update us on what's happening in South America. Last time we were talking about that issue and we're seeing that crop wrap up. What are you seeing for South American production?

Brugler: Well, it looks like Brazil is probably going to stay above 57 million tons, you can argue about the decimal point. Argentina is somewhere under 43 million. The Argentine ag secretary put a very low number out this week and then pulled the number back and said there were errors in it. So, we're guessing 41 is probably closer to what they've got there. We did get some decent moisture on the late planted beans, harvest is still ongoing in both of those countries but there's adequate beans going to the ports that the political situation in Argentina is very unstable, producers were on strike for a week and now they're actually actively hauling soybeans to market because of the rally but certainly they could interrupt the supplies again in the future.

Pearson: Soybean sales, old crop first, clean those up now?

Brugler: We're fairly heavily sold from last summer, last fall and we did make a few catch up sales here on this rally.

Pearson: New crop, have you made sales there yet?

Brugler: Again, we're about 20% to 30% forward sold. We did have some short futures but we got out of them because of the rally this week and we're looking for a pricing opportunity there.

Pearson: I don't want to put you on the spot but could we see another half a buck in this soybean market?

Brugler: Well, what we're looking at is the potential for tight stocks. If you take the 76 million acres at face value and assume we don't get more you're looking at a 200 million bushel carryout and needing fairly strong yields to get it. So, the market is going to try and buy some extra acres. But that is a function of planting and progress in corn and some other things. Yes, we could get $10.07 on the nearby futures with a little bit of help from the fundamentals.

Pearson: And you'd recommend those make some sales?

Brugler: Yes, that would definitely be one of our targets.

Pearson: Real quick, the cotton market, nice bounce this week, a lot fewer acres there.

Brugler: And the surprising thing is the acreage number was actually larger than the trade guesses and we still got the bounce. Export sales are starting to pick up and encouraging there that it's not just China, it's Mexico and some other people buying it. With the stock market improving there's some perception maybe that consumer demand will turn around, certainly nothing in the retail sales yet to suggest that but you put all those together and cotton is trying to move up here a little bit.

Pearson: You mentioned the financials, strong markets, strong recovery here from the lows of the first part of March, in the Dow we're seeing a little bit better news, a little bit of strengthening in the financial sector which historically would lead us back out since they led us into this equity decline. As we look at all this I'm thinking about the cattle market right now, I'm thinking about fed cattle. You were getting fairly friendly on cattle for the second half of the year. You've got to feel pretty good about that.

Brugler: Yes, again, if we get a little more consumer income to play with there -- the key there is that the restaurant trade has been hurting, particularly in the higher end restaurants that use a lot of our choice and our prime beef. That has lowered the average value of a steer because of the pricing. In fact, we went to negative what we call the choice-select spread this week, that's very uncommon. But, again, if you get a little turn up in incomes and people choose to part with that instead of saving it that could help us. We've got a lower number of cattle on feed, the lowest since 2005 right now for the month of March and actually fairly tight numbers coming to slaughter the next 60 days. So, that could support the market.

Pearson: Low 90s you think on fed cattle maybe second half of the year?

Brugler: Well, the first target is 87 and then we'll see.

Pearson: Let's talk about the hog market in the little bit of time that we have left and what you see happening there. There's been a lot of talk about some fairly friendly numbers from mid-summer hog trades. Are you in that camp? Do you think we're going to see some pretty good numbers?

Brugler: Well, we normally have a rally of $10 or $11 in the cash market from the spring low to the summer high. What makes it difficult is from a producer/hedger standpoint is the summer futures are already anticipating that, they're already trading $12 higher than the nearby. So, the cash market can go up. It will be much more difficult to get the futures to rally.

Pearson: Alright, well it's going to be interesting to see what happens. Hopefully second half of the year better one for livestock producers and, of course, for our good friends in the dairy business as well. Alan Brugler, thank you very much, we appreciate it. 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 where you'll find streaming video of our program. You can also download audio podcasts of our Market Analysis and our exclusive Market Plus segments free at our Web site. And be sure to join us again next week when we'll learn how National Guardsmen are beating swords into plowshares to win the hearts and minds of farmers in Afghanistan. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices corn markets news wheat