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Market Analysis: Nov 21, 2008: Alan Brugler

posted on November 21, 2008

Global economic uncertainty continues to influence the markets. And once again this week, grain prices followed the equity trade lower.

For the week, December wheat lost 55 cents while the nearby corn contract moved more than 40 cents lower.

Soybeans prices also were under pressure. For the week, the January contract lost 56 cents, while the nearby meal contract was down $15.60 per ton.

In the softs, cotton's tested the 40-dollar mark as the December contract posted a loss of 4 cents.

In livestock, December cattle lost more than $5.00. Nearby feeders fell nearly $6.00 and the December lean hog contract gained $1.30.

In other markets of interest, the Euro lost 282 basis points against the dollar. Crude lost nearly $7 and closed below $50 per barrel. Comex Gold gained almost $50.00 per ounce. And the Goldman Sachs Commodity Index lost nearly 30 points to close at 368-even.

Market Analysis: Nov 21, 2008: 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: Tumultuous week in the equity markets, again, in the commodity markets huge pressure on corn and soybeans and the meat sector globally we're hearing a slow down, this global economic meltdown that's been occurring. A lot of farmers are looking out there going what's ahead? What do you see ahead for commodities? Obviously lower crude oil prices are a big factor.

Brugler: Yeah, you've still got this deleveraging going on, you had a huge bubble of money that turns out to not have been backed by much and my view of things is that as that is being retracted towards reality it's causing prices of a lot of things to go down and certainly commodities aren't immune to that. Crude oil is a good example but it's in the same index fund portfolios as corn and soybeans and cattle so when someone is selling those indexes you're selling all of them.

Pearson: Where are the big fund managers now? They're still deleveraging at this point? They're still getting out of commodities?

Brugler: Still deleveraging, it's very difficult to track some of these positions because you've got hedge funds and index funds and so forth. But you've got a few of them that are actually net short, things like soybeans, but for the most part the indexes are still holding 100,000 to 200,000 contracts in corn and soybeans. As long as they want to keep liquidating we're getting net selling pressure in the market and you saw that on Friday.

Pearson: A big factor in driving up a lot of our commodity prices, stronger land prices and so forth has been the support for biofuels from the government. Now we're hearing some questions about that. It's 3 billion bushels of corn. What is your take on biofuels as we go into 2009?

Brugler: Well, I think we've got some margin issues but the bigger problems are financial and they are somewhat self-inflicted. It's tied to the management of some of these plants. We had a lot of new players in the business and some of them were better at it than others. That is probably the biggest issue is down time on plants, margins, the spread between gasoline and ethanol is kind of tight right now and that doesn't help us operate the plants at maximum efficiency. So, we're probably seeing a little bit of a cutback in corn consumption due to the ethanol, certainly corn prices have dropped off sharply and you haven't seen that same cut at the food store.

Pearson: Another key thing for both grains and meats has been the strong dollar. This week obviously the Euro was down sharply against the dollar. The dollar continues to rally. You said that's a long-term trend I think last time you were on once the dollar turned so we could just be in the early innings of the strengthening dollar.

Brugler: It's definitely a very trending instrument and it's still going up. It's quality, it's repatriation of earnings, the money has moved back here because it likes being here. We don't know how long that is going to continue. There is some thinking that eventually we have to weaken the dollar in order to get our export part of our economy going again but for right now, yeah, the trend is your friend in the currencies and right now the dollar has had the higher and that is hurting our exports, we're seeing a little bit of cutback in meat exports because of it, you're seeing a little more difficulty selling cotton and other things as well.

Pearson: Of course, that explains some of the weakness that we've seen on the board this week and you mentioned cotton and we'll talk about that one specifically. Let's talk about wheat first and what you see ahead for that market. Obviously we've had some very strong prices due to some very poor production worldwide in 2006 and 2007, 2008 pretty decent year. What is your advice to producers of wheat?

Brugler: Well, basically we're staring at record world wheat production in 2008 and we'll see, we think, a reduction in the next year, we're going to see a little less acreage, credit issues is part of it, high fertilizer costs is another part. But the problem we're having right now is that some of the FSU countries, the Former Soviet Union countries have got a large supply of feed wheat that they want to sell at very discounted prices. That eats into the low end of the U.S. export market. It hurts probably corn more than wheat but we have basically been very aggressive sellers of old crop wheat, the '08 wheat and some of the 2009 crop wheat. There should be some kind of a turn around rally this winter and spring but it's not here yet.

Pearson: So, again, you've been out there. Would you hold off on those sales for the time being with the pullback we've had?

Brugler: It's difficult to chase the market at this point. If I weren't covered I'd probably buy some puts just to put in a floor. There is an old saying about never challenge worse and we are still at historically high prices if you throw out the last two or three years. So, could it get worse as it reverts to the mean? Yes.

Pearson: Let's talk about what you see -- the corn market has been one that's been throttled here lately and all the things that we talked about earlier are all factors for corn. But a 12 billion bushel corn crop, carryout is not huge, what do you see ahead for corn prices now for 2009?

Brugler: Again, the biggest problem we're having is establishing how much demand destruction took place with the high prices that we had last summer. We're seeing the ethanol use issues, as we discussed earlier, feed use has been cut back because the broiler industry in particular is cutting back their numbers and we've seen a real collapse in the corn export sales, more than 500 million bushels we think because of all of the above, loss of demand overseas, increased feed wheat competition. So, the market is trying to establish on paper that stocks to usage ratio is fairly tight but if that consumption isn't where we thought it was we may have surplus corn. Long-term though I think the bigger issue is cost of production for next year. It appears to be above what the current market price is so producers are going to be very reluctant to plant the acreage that we think we need for next year if the market doesn't give them a little encouragement here somewhere.

Pearson: That's right, and then that level would be mid $4, mid to high $4?

Brugler: It depends on how you account for your costs, whether you own your land, etc. but somewhere between $3.80 and $4.80 a bushel is where most of the farms we have worked with play out on that.

Pearson: Who knows what could drive that. Obviously the biofuels issue is going to be one that's going to be critical, feed usage is critical but as a producer sitting there right now before we closed on Friday night it doesn't look too attractive to plant corn at all.

Brugler: No, I think there are some that are already committed because of crop rotation concerns or because they already bought some of their fertilizer last fall and hopefully locked in the price on that. But yeah, your tendency is going to be to want to plant a few extra soybeans this year. Most guys don't want to get too far away from the crop rotation because of the benefits of the nitrogen fixation onto the beans into the next corn crop. But we're playing with three or four million acres that could go either way right now.

Pearson: Let's talk about as far as making sales and what about '09 sales. At this stage of the game you're holding off on corn totally?

Brugler: Well, we're actually fairly heavily hedged on sales.

Pearson: If you haven't done anything at this point what would you do?

Brugler: Well, again, I think the answer is buy a little bit of put option protection, have a floor or a minimum price agreement with an elevator, something to prevent it -- your tendency is to think it's down so far it can't go any lower but as we saw on Friday it still can go lower. I think you have to protect against your own psychology there and hope you lose money on those puts or that guarantee and then see the price go higher.

Pearson: Soybeans, South America is a big factor, we haven't talked about that one yet. What do you see happening down there? What kind of an impact is it going to have?

Brugler: Well, basically we saw KonAb and also USDA cut the Brazilian crop production estimate a little bit. There is a dry area in the south central part of the country, a part of Rio Grande de Sol that is not getting the moisture they'd like to get right now. But on the other hand you saw an increase in Argentine acreage because basically the failure in their wheat crop and some financial incentives they have got for soybeans. So, overall we're still looking at a larger crop this year in South America than we had last year.

Pearson: Talk me through the marketing year for 2008 for soybeans. You mentioned they look a little more attractive than corn from a bottom line standpoint but what do we see ahead for soybean prices? When could we see this thing start to rally?

Brugler: Well, I think it goes back to our financial situation, it goes back to those index funds, those hedge funds, the commercials are not buying here. If you look at commitment of traders on the commercial sector the crushers are not extending their coverage because prices are still going down. It's kind of a chicken and egg situation. If they don't feel motivated to buy and the speculator isn't motivated to buy but you do have some folks trying to sell and get out you're not done adjusting the price level. Supply and demand wise we're fairly tight but, again, we're repricing, we're adjusting the price expectation for any given supply and demand setup and that's not quite over yet I don't think.

Pearson: So, going forward for producers, again, for those that have not done much who maybe have been reluctant to make sales for whatever reason to date with soybeans in the bin what would you tell them to do at this point?

Brugler: Well, I think at this point you probably have got to look at basis as one of your decision makers. If you get an unusually strong basis bid it might be an opportunity to move some cash and replace it with paper later or you just say hey, it's $9 beans minus basis, I'm going to go ahead and sell it and worry about next year's crop. We know that seasonally there is some kind of a low here but we're not finding it yet.

Pearson: Low in cotton. What is your take there?

Brugler: The government is the market in cotton right now, the loan program. Again, the LDP is getting larger, over 17 cents for this current week. The world market is very concerned about the commercial demand, textiles, Chinese plants are laying off workers because the U.S. isn't buying as much textile goods. We're probably going to see less cotton acres next year.

Pearson: That's going to be when we'll start tracking for next year an acreage play there really. What about on livestock? Fed cattle market big pressure this week.

Brugler: Yeah, cattle kind of got in an unusual situation. The cash trade or rather the wholesale value of beef was not going down significantly. We basically had a good fit supply and demand wise but what happened was that we got a situation where the basis, the difference between the futures and the cash market was very attractive for a hedger, a farmer who has been using good risk management to even take a little lower cash price if necessary in order to cash out and close out those positions. Packers were able to take advantage of that. We also, again, saw some index fund liquidation pressure as the stock market got worse and we did get, on Friday night we got a cattle on feed report which is fairly friendly, placements were lower than expected, the marketings were a little higher than the trade average guess so I think you put that together with the stock market reality at the end of the week and you probably are looking at a little firmer tone on the beginning of next week.

Pearson: What about the calf market because a lot of these cow calf people are saying, wow, we've had corn down 55%, 60%, we haven't seen this feeder market respond.

Brugler: Again, you've got two variables there. You've got the cattle market and the corn market and corn has been going the direction that should help the calf market but the cattle market with this big selloff has kind of worked against you and that tends to be the bigger influence. So, again, if we get the cattle turned around a little bit here then you probably see a bounce in those feeders as well.

Pearson: Are you friendlier next year for fed cattle?

Brugler: Fed cattle I think yeah because we've got lower numbers basically and feed costs are a little more in line at the moment so some cattle crush spreads are offering very attractive opportunities for a couple of the months out there.

Pearson: A great time to be covering some feed needs.

Brugler: Certainly much better than it was two or three months ago.

Pearson: Let's talk about the hog market and what you see happening there as far as hogs are concerned. They were higher this week on the board.

Brugler: Yeah, the hogs had a nice little bounce here. Again, we've got kind of an unusual situation where the futures prices doesn't match up with the cash price. In this case the futures are about $4 above the cash price. Pork products value has kind of stabilized here. We've lost the big high prices that we had when the Chinese were in here buying large tonnages, that's kind of gone away. But one good thing is that the slaughter rates have been lower than they were projected based on the September hogs and pigs report. So, bottom line is we've got a little less pork production and that is allowing these prices to stabilize here.

Pearson: And hopefully that will also help the whole protein meat complex in there.

Brugler: That's right.

Pearson: So, that looks like what's ahead, Alan. It's been interesting and, again, get those feed needs covered if you're in the livestock sector. As usual some great insights, we appreciate it. Alan Brugler, we appreciate it. That's going to wrap up this edition of Market to Market. But if you have more information from Alan on where these markets just may be headed why not visit our Market Plus page right there at our Web site. You'll find streaming video of our program and you can download audio podcasts of our Market Analysis and our Market Plus segments absolutely free. It's all right there at our Web site. Of course, be sure to join us again next week when we'll examine one entrepreneur's efforts to supply local food banks with her backyard harvest. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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