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Market Analysis: Jan 09, 2009: Alan Brugler

posted on January 9, 2009

Despite bearish export numbers this week for wheat and corn, grain prices continued to rally.

For the week, March wheat gained nearly 20 cents while the nearby corn contract moved more than 3 cents higher.

Soybeans also rallied, as the January contract gained more than 65 cents, and the nearby meal contract was up more than $15 per ton.

In the softs, cotton continued to test the $50-mark this week with the March contract posting a gain of 30 cents

In livestock, February cattle lost nearly $3.00. Nearby feeders were off a nickel. And the February lean hog contract gained $1.58.

In other markets of interest, the Euro lost more than 500 basis points against the dollar. Crude oil lost $3.77 per barrel. Comex Gold was down nearly $30 per ounce. And the Goldman Sachs Commodity Index lost one point to close at 344.20.

Market Analysis: Jan 09, 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, welcome back.

Brugler: Good to be here, Mark.

Pearson: I have to note here before we get into our farm commodities that oil prices were down again this week despite some unrest in Israel and Gaza. Typically those would be the kinds of markets that would drive oil prices higher and oil has been the touchstone of the commodity market rally we had in 2008. What does that tell us?

Brugler: Well, it tells you you're not in a bull market in crude oil and the market is ignoring the bullish news, it is focusing on the bearish news, the inventory buildups, the tankers that are floating offshore holding oil, the market structure is basically telling someone who has got excess inventory not to sell at these prices. But relative to the ag commodities it's hurting us because we've become more dependent on biodiesel and on ethanol and with crude oil down at this level it's much more difficult to produce those products at a profit.

Pearson: Historically it doesn't stay down at these levels for too long, Alan. What is your outlook for crude oil going forward?

Brugler: Well, we're basically thinking we've seen the bottom with the expirations of the contracts a month ago but we can go down and test that from a technical standpoint, that means we ought to stay above $30, $35, somewhere in that range. But, again, demand is soft right now for energy products in general, that's a price rationing function out of the high prices we saw last summer. We do anticipate eventually it will go back into the $50 to $60 range and potentially higher depending on how much inflation we get into the economy.

Pearson: Producers are thinking about input costs and, of course, so much of that is driven by crude oil, diesel, fertilizer, you name it, pesticides. What would you recommend for a producer in terms of locking in these lower prices? How would you recommend they do that?

Brugler: We basically within the last week recommended that you lock in at least 50% of your spring fuel needs, diesel primarily, because we started to see a little uptake in that activity, some of the index funds should be buying diesel, excuse me, crude oil is part of their allocations, fertilizer prices are still coming down at the present time but, again, there's kind of a problem where some of the dealers got caught with some high priced inventory and they're needing to blend that price down. So, we're taking a go slow approach on the fertilizer at this point.

Pearson: But maybe go out and use futures to lock in some of your oil needs?

Brugler: There are some decent hedging opportunities either in futures or using options.

Pearson: Let's talk about what happened as far as the grain markets were concerned. We had this big start of the year rally going and, of course, come Monday we're going to get a look at what the USDA says we came out for a final crop for 2008, what the final carryout looks like and also wheat acreage. What is your prognostication now before this report comes out? I know it's a tough position to be in.

Brugler: There's a raft of data, if you will. You've got your ending stocks for grain are probably the main number but the other numbers all feed into it. Your December 1 stocks tell us how much corn was fed in the first quarter, for example, it also measures the ethanol consumption of corn. You've got, of course, final production numbers for corn and soybeans from USDA that feeds into that equation as well. So, one kind of builds on the other. It's a tricky set of reports to analyze ahead of time.

Pearson: Well, let's talk about the wheat market first. Wheat acreage, what is your take on that? Where do you think we're headed?

Brugler: I think we're going to see a smaller wheat acreage number this time compared to a year ago. That is pretty much baked into the cake, the market is already anticipating that. The question is, is it a 44 million acre figure, a 43 million acre figure for winter wheat? We were fairly certain soft red winter wheat acreage is down, more questions about the hard red winter which is grown on the Great Plains. So, we've got a cushion there. Ending stocks are expected to still be above 600 million bushels next spring so we can afford to lose some acreage and still meet domestic and export needs for the next year. But the smaller that number becomes the more vulnerable the market is to a bullish surprise from winter kill or poor emergence next spring.

Pearson: As you look at the wheat market right now with the rally that we've had are you making sales on wheat if you haven't done so yet?

Brugler: We haven't made any sales other than catch up sales, if someone was behind our recommended percentages we thought it was time to reward the rally. But we're still hanging onto that last five or ten percent of the old crop. We've got some light hedges on in July futures but no major commitment yet.

Pearson: So, you're expecting higher prices?

Brugler: At least we're looking for evidence that they're not going higher.

Pearson: Let's move over to the corn market. You mentioned the carryout number, what's leftover and what our total production was will be a big number on Monday's report from USDA. What do you anticipate? What do you see ahead for corn in that report?

Brugler: Well, the trade average guesses for ending stocks is somewhere around 1.49 billion bushels. Our number is slightly above 1.5. So, we're looking for a little less on the consumption side or a little bigger production number from the USDA. But in any event that is expected to be a larger number than we had in previous reports. We continue to see very sluggish corn export sales, we continue to see ethanol plants shut down. There were another three this week for various reasons that have stopped for a month or two at least so that means less corn production. Again, that gets tricky because if those plants are taking downtime that means they're also not producing DDGs which have been fed to livestock. So, we're potentially getting a little more feed use of corn directly rather than through the ethanol plant. But overall demand has been hurt. The big question which won't be addressed by this report is acreage for 2009. USDA is not going to go there until probably May. We'll get some indications in February with their preliminary number. But the point is the corn market needs to have 85 to 87 million acres at least for next year and production from this past year is pretty well set within 20 to 30 million bushels.

Pearson: With that in mind -- I'm not sure just how much time we have -- but as we look forward to these reports and the corn market as we look after Monday and if we hit pretty much dead even what is your thinking on the corn market going forward for 2009? Obviously we do have those higher input costs and producers do want to see some kind of return before they go to the expense of putting this crop in the ground.

Brugler: Yeah, we're starting to see prices you can at least believe are above break even. Now, that will slow the plans to reduce plantings. I think crop rotations and so forth will support corn acres in that 85 million acre range at least. But market wise the futures' resistance to technicals is at $4.70 to $5.00 and if we have any reasons to believe we need more acreage we can still advance to those levels.

Pearson: Hopefully that will be the case. Let's talk about soybeans and what you see ahead there. This has been a nice rally in the bean market. Are you making additional catch up sales here?

Brugler: Yeah, we made our first 2009 forward contract sales recommendation this week when November got above $10. We've had some hedges on for some time that we have lifted but we had not actually made any cash sales. So, we're wanting to reward the rally and we're still holding onto a little bit of old crop but, again, this is a very good rally and it's going to be very difficult to have a bullish number on Monday. The market has had such a tremendous move up into the report that the saying is, buy the rumor, sell the fact. It's going to be difficult to come up with a bullish reaction to the report other than perhaps fresh index fund, hedge fund money coming in as they make their allocations.

Pearson: You mentioned exports for corn were soft. Is the opposite true for soybeans?

Brugler: Exports for soybeans are running ahead of last year, the actual shipments. Export sales are about even to last year. China has been very active. They usually are active this time of the year. Their total commitments since September 1 are just a little bit above a year ago. But it's got everybody's attention and we've got these issues with South America with the dry pockets in southern Brazil, northern Argentina. It looks like CONAB this week said that the Brazilian crop may only be 57.2 million tons rather than 60 million last year. That drives a little more business here or at least forces the market to go up high enough to get the grain out of their stockpile.

Pearson: So, you've made some sales, made some initial '09 sales for beans.

Brugler: Yeah, just kind of sticking our toe in the water a little bit.

Pearson: So, let's talk about the livestock front. You mentioned the DDGs and whether the feed value is going to offset some of that ethanol demand out there. But as you look forward this fed cattle market, again, a very soft week on the board. What is your outlook for fed cattle for '09?

Brugler: We're getting into some higher finish numbers right now, just the way the placements went over the last three or four months we've had a lot of heavy 800, 900 pounders coming into the lots and so our supply is up a little bit. With the unemployment data and other things going on we assume that consumer demand is on the weak side. You're seeing that in the wholesale level, box beef prices for choice are in the $143, $142 range and you saw it this week in the cash cattle. The cash cattle were down $2 to $3 throughout most of the central U.S. So, the board is basically reflecting the reality that we're having a little trouble moving the product.

Pearson: Long return calf market as you look at that for '09. I keep hearing this small herd size and yet the cash market has been pretty good, we've had a nice little bump there.

Brugler: Yeah, we've had a pretty good run there. We had some technical buy signals on the charts but then those are longer term signals, the short-term stuff is saying, wait a minute, what's going on with corn because feeders are a composite of what's going on in the live cattle market which we discussed is not particularly strong right now in the corn.

Pearson: Let's talk about the hog market, another factor out there. As you look at hogs this last hogs and pigs report kind of showed that maybe we're starting to contract some.

Brugler: Yeah, we definitely saw some contraction, we saw some increased sow slaughter two or three months ago back starting in the summer when corn prices were very high. That has kind of slowed down. We've kind of stabilized the farrowing intentions for later on in '09 a little bigger so we're kind of in the sweet spot here where production has slowed down and we're trying to get those wholesale prices up. It would be helpful if the dollar would kind of stop going up so we could get some juice into the export market but normally that's going to pick up after the first of February, first of March.

Pearson: So, that export market is critical for hogs. What about sales for hogs, hedging opportunities for hogs? Do you see those right now?

Brugler: We've basically had put options in place for quite a while to put a floor under them. We don't see any major rally right here although February has got a big lead to cash.

Pearson: An interesting month will be coming up. Alan Brugler, it will be an interesting day on Monday. Thank you so much. That will wrap up this edition of Market to Market 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. And, of course, you can download audio podcasts of our Market Analysis and Market Plus segments free right there at our Web site. And be sure to join us again next week when we'll examine the Bush administration's legacy in rural America. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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