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Market Analysis: Feb 13, 2009: Alan Brugler

posted on February 13, 2009

Tuesday's friendly USDA reports were trumped later in the week by poor performance in the equity markets and rainfall in South America and China.

For the week, March wheat lost more than 20 cents, while the nearby corn contract fell nearly 15 cents.

Despite reduced production estimates in South America, soybean prices followed the grains lower. For the week, March soybeans fell nearly 50 cents, while the nearby meal contract was down $19.60 per ton.

In the softs, cotton prices retreated this week, with the March contract posting a loss of $5.83.

In livestock, February cattle gained 40 cents. Nearby feeders were up 12 cents. And the February lean hog contract gained $2.47.

In other markets of interest, the Euro lost 61 basis points against the dollar. Crude oil was down more than $2.50 per barrel. Comex Gold gained nearly $28 per ounce. And the Goldman Sachs Commodity Index lost more than 20 points to close at 334.20.

Market Analysis: Feb 13, 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, welcome back.

Brugler: Good to be here, Mark.

Pearson: Let's talk about Tuesday's USDA numbers. They were relatively friendly and they did dial down a little bit on what we have for corn carryout and there were some other positives in there but as we look at this broad commodity world out there we're still facing some challenges.

Brugler: Yes, we've definitely got to deal with demand destruction. That is typically the pattern when you have high prices anyway and we're throwing it on top of occurring in a global recession. So, the question is how fast are your consumers of your commodities downsizing their requirements relative to how fast you can adjust the production.

Pearson: As we adjust that machinery what do you see ahead? Let's talk first about wheat. There's been some challenges to the U.S. wheat crop, certainly particularly down in Texas and a region you're going to be heading down to.

Brugler: Yes, we're going to be down there next week. The wheat down there we know has been very drought affected, there's a lot of yellow wheat and you hear the stories. Some of it will probably be ripped up. Texas traditionally does rip up some of the wheat in the spring anyway. It's a high stakes game down there. But wheat is a good example of that downsizing though because winter wheat plantings were down about 4 million acres this year versus a year ago. Some of the preliminary world production estimates are as low as 650 million tons which would be down 37 million or so from last year. So, the wheat market is responding to the fact that we produced a little too much wheat last year for the global demand.

Pearson: And so as we adjust that downward if we lose 4 million wheat acres they're going to go somewhere.

Brugler: That's the negative part of it if you're a corn or soybean or cotton farmer, probably corn and soybeans get the bulk of that, probably lose about one million acres of double crop beans that would have been on that wheat last year so there's a little adjustment there. But clearly the acreage war that we had the last two years is running at a much tamer level this year.

Pearson: No question about it. Let's get back to wheat. With the problems we've had down in wheat production areas here in the country so far and like you say it is by no means a guaranteed deal in many parts of the plains but as we look at that and we look at some of the challenges worldwide and reduced acres worldwide what is your outlook for wheat prices at this point?

Brugler: In the short run we've got some problems because primarily we've built up a stockpile of old crop wheat here in the United States. The USDA did not change that number on Tuesday. It's still 655 million bushels. That is going to tend to pull down the May and the March contracts, maybe even the July contract. I think later on down the road the tighter world production and perhaps some losses here in the United States will give us another shot at higher prices. But the gravity is definitely pulling on us right now.

Pearson: So, your price outlook you're not in a position right now to sell wheat?

Brugler: We're not in a position to sell any additional cash wheat. We do have a few puts in place trying to give us a floor while we figure out where this real bottom is and it may be above the December low, we just don't know yet.

Pearson: Worldwide we've heard about production issues in China and certainly the situation in South America as it affects corn and soybeans but the China situation is a wheat situation so could we see more of a draw down? Could there be some more excitement in this wheat business?

Brugler: I think the wheat in China could be reduced up to 5% of their production. The complicating factor there is they do irrigate a large percentage of their wheat and they are organizing manual irrigation parties right now to get water out there.

Pearson: And they have the people to do it.

Brugler: And they do, particularly with all of the farmers that are unemployed from the city and are back home right now. So, a certain percentage of that wheat is going to be irrigated and, of course, it's still in many cases dormant for the winter, it just needs enough water to survive. So, you're going to see some draw down there. The big question mark is whether they'll import anything to replace any shortfall or if they'll just try and pull off of government stocks.

Pearson: So, you're using some options right now just to get a floor in this wheat market and that's about it. The corn market, we talked about those four million acres and, of course, there is some concern whether they're going to go to corn, beans, cotton, wherever they're going to head that didn't go into wheat this year and, of course, the acres that will get plowed up so there's some opportunities there too. Give us your corn scenario. What do you tell people right now about this corn market?

Brugler: The corn scenario is we're losing some acres to soybeans, at least we assume we are just because of the cross production differentials. The fertilizer costs are much higher and much more fertilizer intensive crop so you end up using more fertilizer for corn. But having said that you've got this unwinding of demand, the cattle industry, poultry, hogs, the numbers are down in all three of them. You've got a dramatic slow down in exports right now. And then you've got the questions with the ethanol industry financially. So, with the demand slowing down you don't need as much replacement corn next year as what we might have thought six months ago.

Pearson: Are you using an acreage number for corn at this point, Alan? Have you dialed on in?

Brugler: For next year I'm using 87 million right now which is one million more than last year and obviously leaving a few more million to go somewhere else.

Pearson: There's those other million acres floating around out there that came out of the conservation reserve program last year. Where do you see that headed?

Brugler: That's correct. Right now that could be spring wheat or it could be soybeans, those would be my two leading candidates.

Pearson: What kind of price targets, what are you kind of bracketing in for corn sales for 2009 at this point?

Brugler: Well, for '09 we think that certainly if you get something back in the $4.70 range, $4.80 range you've got to make some sales. We've got some probability models based on USDA cash price forecasts and that is about the top end of those. Obviously $5.00 would be great but we'll have to have some kind of spring crop problems I think to get there. The down side risk is $3.00 or less so you definitely don't want to just go unpriced on the whole thing.

Pearson: Were you nervous about this carryout number on corn, 1.7 billion? Does that scare you a little bit?

Brugler: 1.7 billion, 1.8 billion is not a huge number. It's 15% stocks to usage ratio. That is right in the middle of the curve historically. But the problem is it is a price dampening effect of having that much corn. You've essentially got a fifth or more of next year's crop already sitting there in the bin so the market has to see a real weather problem or a real acreage shortfall to get too excited.

Pearson: You mentioned more acres for soybeans. What is your outlook there?

Brugler: Well, right now I've only put 2.5 to 3 million onto my total so I've still got a little sloshing around there and I'm not sure where it's going. But the problem that I see there is that even with 78 million or 79 million acres you have a build up in ending stocks potentially to 500 million in soybeans and that is, again, a very price dampening effect. So, we don't want to see too many producers go to the soybeans.

Pearson: Of course, input costs are going to drive some of that and weather is going to drive some of it too.

Brugler: Yes, if we have a wet spring, a late spring that tends to lean towards more soybeans. If we get good planting weather early I think maybe you'll get a little more corn.

Pearson: The price action in cotton this week doesn't lend itself to buying a lot more acres in cotton.

Brugler: No, the cotton market is having trouble with both the demand side, the global slowdown, people shopping in their closets, if you will, rather than at the store and also just we're not competitive compared to some of the third world producers on price. So, cotton has had some rallies, has pulled some cotton out of loan but now that we've got that crop moving we're kind of backing off again.

Pearson: And your soybean targets? What kind of targets do you have for soybeans?

Brugler: Again, I think $10 on the board is a good selling price, not $10 cash, $10 on the board for new crop. We had a couple of shots at it already. I'm holding my breath that we'll get another shot as we get into spring.

Pearson: Let's switch over and talk about livestock for a minute. We've got some real challenges in the beef and pork sectors in particular, we don't follow poultry very close in this show but the same issues have been the higher input costs. We now are seeing lower input costs on feed costs for cattle and hogs but we're also looking at certainly a pull back in numbers, at least according to the last cattle on feed report and yet we're still seeing these cattle prices struggle.

Brugler: The biggest problem with the cattle right now is the distribution where the meat is going. We've lost a lot of our restaurant traffic on the high end, the fine dining segment and that's where a lot of your prime beef and your upper choice goes. So, what that means is you're having to discount those prices, that part of the steer or that group of steer out of the pen is pulling down the average price for everybody. Hamburger demand is great, particularly since we've had fairly limited imports this year. But, again, your average value of the steer is pulled down by the problems of marketing the choice. The numbers are actually going to fall of a little bit here in February and March so that will help to support things and we saw a little of that last week and this week on the cash side.

Pearson: Yes, we did. Mid to higher 80s are okay. Do you think we're going to finish the year higher than that? Are we going to be stronger do you think going forward?

Brugler: I think it goes down to what you think the domestic economy is going to do. If we start to get the recession kind of managed a little bit, which of course is one of the goals of the stimulus package, we get people spending some money then I think that second half price could pull back up.

Pearson: The calf market for these cow calf people out there, those are the numbers that have shrunk the most really is the cow herd, and the calf market has had a pretty good run so far this year.

Brugler: We took them down into the mid 80s on the board and now we're back in the mid 90s partly because the cattle inventory report showed we have fewer calves there. But, again, if you're expecting the feeders to go higher you've got to assume either the live cattle prices are going higher, which we just discussed, or you assume that corn is going lower. Those are the two drivers that can make those feeders go up.

Pearson: Let's talk about the hog market and what you see happening there. It's been really fairly encouraging for hogs, hasn't it?

Brugler: Just recently, yes, within the last week or ten days we've had a nice little rally in the hog futures. Basically the futures went down below the cash market ahead of expiration on the February contract and then that index that is used to sell the futures didn't go down. We got pork product prices started to pick up, the cash hogs started to go up and it looks like we've got some declining numbers of marketings for hogs here in February and March. We're tracking the December hogs and pigs report very well and that is supportive. Now, the rally may have gotten a little ahead of itself here this week but I think it's going in the right direction.

Pearson: We talked about lower input costs, it's a great time to take advantage of these lower corn and bean meal prices, big pull back in bean meal this week.

Brugler: Yes, a big retreat there. We picked up a little bit of cash meal. We've got, again, some call options to help protect our up side costs for anything that we don't want to buy physically yet.

Pearson: All right, some good ideas and some great insights as usual, Alan Brugler. We certainly 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, it's at our Web site. You'll find streaming video of our program and you can download audio podcasts of our Market Analysis and Market Plus segments absolutely free right there at our Market to Market Web site. Of course, be sure to join us again next week when we'll examine the comeback of the American bison. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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