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Market Analysis: Sep 05, 2008: Alan Brugler, Market Analyst

posted on September 5, 2008

Grain markets continue to be pressured by wide spread precipitation, little frost threat, a stronger U.S. Dollar and weaker energy markets.

For the week, September wheat lost 50 cents and the nearby corn contract was down a little more than 35 cents.

Soybeans followed suit on the downward trend. For the week, the September contract lost $1.50, while the nearby meal contract went $26.40 lower.

In the softs, cotton slid past last week's gain, with the December contract losing nearly $4.

In livestock, October cattle lost $1.10. Nearby feeders lost 3 cents and the October lean hog contract gained an even $1.00.

In other markets of interest, the Euro lost 395 basis points against the dollar. Crude oil closed down $9.23. Comex Gold lost more than $28.40 per ounce. And the Goldman Sachs Commodity Index lost almost 51 points to close at 658.00 even.

Market Analysis: Sep 05, 2008: Alan Brugler, Market Analyst 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 with us. To say the least it's been a down week across the board and not just in our agricultural sector but in the broad commodity sector things fell off and the dollar strengthened. What are you seeing from 30,000 feet looking at commodities right now?

Brugler: Well, we're seeing hedge funds and various other types of investors who are having trouble borrowing additional funds. If they get a loss in one sector of their portfolio they're having to sell other sectors to compensate. They're getting some redemptions for some of their investors and basically we've had a speculative premium built into many of these markets over the past two years because the interest level in being in commodities that is slowly leaking out here.

Pearson: So, we're starting to see this kind of decompress, the balloon is kind of starting to lose some air. What does that tell us as we look at our agricultural commodities in futures for the next six to nine months?

Brugler: Well, if it continues to leak out, in other words, if they want to continue to pull money out it's going to have a negative impact on ag prices. I think we have a premium that is there strictly because of their buying. I'm not saying we've manipulated anything, just the money coming in caused the price to go up. If the money is leaving you'll pull it back down. A good illustration would be the corn market because we've had situations in the past with similar stocks to usage ratios where the high of the year was $3.50 a bushel. We're sitting here at $5.50 instead and part of that is inflation and the weak dollar but part of it is also I think this speculative premium and that can go away on it.

Pearson: Let's talk about the wheat market. Historically this is when we're starting to move into our higher prices for wheat. A little bit softer week this week for the wheat market. What do you see ahead in that market? Do you think it will be a seasonal norm or do you think we're into some more pressure on wheat prices?

Brugler: We've had a couple of rallies in wheat where we've tried to follow the seasonal tendencies. The problem, of course, is the world wheat production is record large this year. IGC came out this week and said 672 million tons was their estimate for world production. That would be an all-time record. So, what you're seeing it we're not able to export wheat like we were a year ago. A year ago we had the tightest stocks to usage ratio in 40 years. Now those customers have got their own domestic production or something the next country over, they're not having to buy from us so we're seeing a slowdown on our export book, we're seeing a tremendous discount in the cash market versus the futures and we're trying to use it as a feed ingredient.

Pearson: We finally got a good crop throughout the world in wheat. We had a real struggle for two years in a row. I guess the good part of the story is that we're able to feed the world better and individual countries are able to have their own. In terms of producer's sales what are you recommending right now?

Brugler: We're fairly heavily sold on 2008 production already, about 20% on 2009 so far, a little less over in the Minneapolis in the spring wheat contract. The key will be how much winter wheat is planted this fall. That gets into cross production issues, it gets into weather at harvest, we know the soybean crop is late and that tends to mean less soft red winter wheat gets planted because the beans have to come off first. But if wheat acreage is actually down a little bit then I think that would help to support the price.

Pearson: Give us a chance to make some more sales.

Brugler: Correct.

Pearson: Let's talk about the corn market. You mentioned corn earlier and the premium that has been in corn that's now starting to dissipate. As we go forward and as we look towards this harvest you've been around the Corn Belt, I've been around the Corn Belt, you've talked to a lot of people and I've talked to a lot of people and everybody tells me this crop is late, it's slow, it's been cool. It just seems there could be more of a frost worry than what we're seeing right now.

Brugler: Yeah, it's definitely behind. You look at the USDA numbers, you see the dough stage is behind, the dent is behind and the maturity is behind. Again, that's all irrelevant as long as the frost is behind. And so far the 14-day models and so forth don't go below 32 degrees other than in places like Wyoming and Colorado that normally have a freeze by this date. So, the burden of proof is on the bulls to show that we're actually going to have a premature end to the growing season. 2004 had very similar crop condition ratings for most of the summer where they were going up instead of down and in '04 we had a late fall and had record high U.S. yields. The anecdotal evidence as you suggest is that the crop is not as good, that there's more tip back on the ears, nitrogen leaching, etc. but we also know from the August crop report the USDA found record high plant populations, record high year counts so the farmers were really cramming those plants in there because of the high prices trying to get a bigger yield and that is offsetting some of the other problems that we're seeing.

Pearson: It's going to be watched, if we do see a problem we could see prices make a big move. But what is your outlook for the year? Do you think we're going to be a little bit softer in the final quarter of 2008?

Brugler: I think we're going and looking for a harvest low. Last year we had an August low and then rallied right away trying to buy acres for the next year. We're going to have to defend those acres or try and buy more because the ethanol industry is still growing. But wheat is not going to be as severe of a competitor for acreage and soybeans remains to be seen, it depends on South America. So, essentially I think we're going into a more normal kind of an October type of a seasonal low here. The market will at some point have to bid up acres and obviously if we have a freeze it will be a much more dynamic reaction. But you have to keep in mind that we're fighting this leaking balloon effect from the outside investors. So, it may be a case that we get a dollar rally but from a lower bid.

Pearson: That would be when you would sell?

Brugler: Yeah, we'd add to the sales. We've been short most of July and August but we'd be looking to move the rest of our cash sales up.

Pearson: What about 2009? Do you want to sell anything for 2009 yet?

Brugler: We are sold -- 30% priced in the 2009 short futures, you can't get any elevators to give you a bid that far out but we've been short futures for a while now.

Pearson: Let's talk about soybeans. I think even more vulnerable to frost issues and like you say the market seems to be unconcerned about that, at least this week with the pullback we had in soybean futures. What is your take on that market as we go forward here? Again, we're running late on the beans substantially.

Brugler: They're very vulnerable. Just driving across western Iowa today there's a lot of fields that are still green, a lot more of them in eastern Nebraska, they're just starting to turn color, starting to change so they're getting mature but USDA is not even showing any leaf drop percentages yet. So, that tells you we're not ahead of schedule certainly. The rains that we're getting leftover from Gustav are tending to keep those plants green a little longer. That could result in extra yield potential if we stay above 32 degrees. The market knows that stocks are very tight, we need those bushels and we also need to maintain prices at a level that will encourage the Brazilians and Argentines to plant this fall. But at the moment, again, this leaking effect of the other investments coming out is allowing prices to go down. Soybean oil is under pressure because of the energy market.

Pearson: As crude oil drops that one has been slowing too.

Brugler: It's been very dependent on being a biodiesel, on being a fuel that actually pencils pretty well to run a biodiesel plant right now. And so we're seeing improved soybean oil demand but not enough to force the price up.

Pearson: We're also seeing good opportunities to start locking up some feed needs. We see so many livestock producers now who are anxious to try to get those feed needs covered. Is now the time to do it? Or do you think that leakage will continue and we'll get better opportunities ahead?

Brugler: You're getting better opportunities I think. If you look at soybean meal for the last 20 some years a high proportion of the seasonal lows, the 12-month lows have been in September and October meal. So, we're just coming into that window where we often, not always but often, put in those lows.

Pearson: Let's talk about cotton, it turned in a terrible week this week. That one is really slowing down, really never got caught up in the big speculative movement it seemed like. Is that just the stronger dollar? Is that the biggest factor over there?

Brugler: Well, the stronger dollar is not helping cotton at all. The other issues are, as you know, the global economy slowed down somewhat. We've got concerns about consumer demand. We know the textile demand at the retail end is down. You've got with crude oil coming down synthetic fibers, the polyesters and so forth, that compete with cotton in clothing are also getting cheaper for a change. So, all that is kind of working against cotton a little bit. It's being supported to a degree by the storm damage, we had some stripped and some quality issues because of Gustav. Fay actually probably helped us a little bit by putting some water on some dry areas.

Pearson: Let's talk about livestock and what you see happening there. Let's look at the fed cattle market first. I keep hearing this over and over again, I've had you comment I know before but an extremely small cow herd we have out there. Beef demand seems to be not robust but decent from everything we've seen up until now.

Brugler: Beef demand overall is pretty good. It's very dependent on the export sector though right now. The U.S. consumer has backed off just a little bit on that per capita consumption but what we're seeing this week, for example, over 12,000 tons were sold of beef for export so still a pretty good market there, some going to South Korea and definitely improvement into Japan, for example. That is helping to support us. We've had an increase in beef production for the year because we had so many cattle placed earlier. But we've been able to move the inventory. $155 on choice or $158 is actually a pretty good price for the supply-demand situation we have on the cattle. Now, we know the place numbers, the numbers in the lots are going down over the next couple of months so that will tend to support prices unless the consumer really takes a leave of absence.

Pearson: We hope that doesn't happen. Are there opportunities out there right now to hedge fed cattle?

Brugler: We liked it better two or three weeks ago. There's certainly another dollar or two downside risk here but you better be quick on your feet if you're going to start a program at this point.

Pearson: Feeders were off this week too despite corn coming down. What is your outlook for this calf crop?

Brugler: Well, actually the feeder market has kind of hung in the middle. It's not sure where to go. $114, $112 is not that bad of a price for feeders. If you're a cow-calf guy you can live with that. Obviously it has hung between corn and cattle. If corn continues to go down that gives you a little upside potential in the feeders, the feedlots can afford to pay more. If the cattle futures kind of bottom out seasonally here in September-October that will tend to help support those feeders as well.

Pearson: Let's talk about hogs and what you see happening in the hog market. There was a lot of concern of this liquidation issue, what this fall could potentially look like for the hog business. So far it seems decent, the board was up a dollar. What do you see happening here in this end of the third quarter, start of the fourth quarter in hogs?

Brugler: Well, we had a tremendous export program in pork. There were a couple of weeks in there where it was 30% or 40% of the total production which is a phenomenal number. Now that's kind of going away. We've had issues with the Russians on pork and poultry both. Mexico has got some problems and they're a big ham buyer. So, we've seen a drop in the pork cutout values. That is not timed very well in that we're going into a seasonally larger hog production period. But the good news is the U.S.-Canada combined herd is smaller so we're not talking as much total production. But my biggest fear is that it looks like there's going to be some weeks in the fourth quarter where we're killing 2.45 to 2.5 million head of hogs a week. That's really pushing our plant capacity. The market is anticipating that with the sell off that we've seen. This week we got just a little too far too fast, the board had dropped more than $10 and got to be at a fairly big discount the cash hogs so that allowed us to rally back, do a little profit taking and kind of balance things out.

Pearson: End of the year ballpark price for hogs?

Brugler: Ballpark price for hogs I'm going to say 70.

Pearson: Alright, thank you very much Alan Brugler. That will wrap up this edition of Market to Market. If you'd like more information from Alan on where these markets just may be headed why not visit the Market Plus page at our Web site. You'll find streaming video of our program and you can also download audio podcasts of both the Market Analysis and the Market Plus segments absolutely free at our Web site. And be sure to join us again next week when we'll profile one entrepreneur's efforts to supply area food banks with their backyard harvest. So, until then, thanks for watching. I'm Mark Pearson. Have a great week.

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