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Market Analysis: Jul 04, 2008: Alan Brugler

posted on July 4, 2008

The markets wrapped up a holiday-shortened week Thursday. And as mentioned, the acreage report ran the bulls out of the grain market.

For the week, July wheat lost nearly 23 cents, and the nearby corn contract was down about 9 cents.

The real action was in the soybean pits, where despite an increase in projected acreage, prices moved higher. For the week, July soybeans gained more than 76 cents while the nearby meal contract was up $22.60 per ton.

In the softs, cotton had one of its worst weeks in recent memory, with the December contract posting a loss of more than $6.00.

In livestock, the August cattle contract lost $1.30. Nearby feeders were down 15 cents, and the July lean hog contract declined nearly $1.00.

In other markets of interest, the Euro lost 173 basis points against the dollar. Crude oil gained more than $5.00 per barrel. Comex Gold gained $2.30 per ounce. And the Goldman Sachs Commodity Index gained more than 20 points to close at 886.80.

Market Analysis: Jul 04, 2008: Alan Brugler Yeager: Here now to lend us his insight on these and other trends is one of our regular market analysts, Alan Brugler. Alan, welcome back to the program.

Brugler: Good to be here.

Yeager: Let's talk about these record oil prices. We see them at the pumps but we're also seeing them and their major impact on commodities. What is that impact? Has anything changed as we continue to see this price go up?

Brugler: Well, we've got a lot of things going on there. There's a direct impact to the farm producers. You've got transportation costs rising rather dramatically. These are bulk goods we're growing here. The corn in particular is a high volume item. There's a lot of trucking involved, a lot of rail freight, etc. and so the higher fuel costs are raising the cost to move that stuff around which means you either have to have a higher selling price for it or the originator gets less. The second part of that, of course, is the inflation angle of it and you've got higher input costs. You've got fertilizer which is primarily a petroleum based product, you've also go many of your herbicides and insecticides are petroleum based so as the price of that energy or that crude oil goes up it is raising the input costs. Frankly we're getting in a situation where $6 or $7 corn might not even break even in another year or two.

Yeager: Whoever would have thought we would have heard something like that. Let's talk a little bit about wheat. That was a market that we're starting to see some of the winter harvest come in but we're really looking forward to what we're going to see this summer, continues to decline a little bit. What did we see the impact on maybe whether it was crude oil or what are the impacts on the wheat market this week?

Brugler: Well, the wheat market is mainly focused on harvest right now. The winter wheat crop, as you mentioned, is already being harvested. Harvest is a little behind schedule. We've got a little bit of a rally in wheat because of that and because of concerns about the Australian crop next fall, they were a little on the dry side, a few other factors. Now, within the last week or so we've seen much better test weights, much higher rated crop and a lot more progress in Kansas which is the major hard red winter wheat state. So, we saw some fairly big selling pressure on wheat this week.

Yeager: Let's talk about corn -- that was something that a lot of people keep looking forward to. The acreage report comes out from the USDA this week and says, well, you still planted about as much corn as what we thought we were going to have. What is your reaction to the acreage number? Is that an accurate number?

Brugler: Well, I put out a fairly lengthy article saying that I thought it was pretty close to the right number. Now, there's a lot of disagreement in the trade on that. There are people saying there's two or three million acres less either not planted, under water since being planted or unlikely to be harvested. And that's one of the reasons you saw some upward activity. We sold off the market hard on the report itself because that was two million acres more than the trade had been looking for. Now we're debating whether those acres are all going to produce grain in the end. And our research basically suggests that we still could have trend line or above trend line yields and probably still harvest the expected acreage. We just need the right weather to happen over the summer. We need it to be a little bit cooler than normal, a little damp in areas other than the flood areas and then we need a fairly late frost in the fall to give the crop the chance to go to full maturity.

Yeager: We did drop a little bit but it did kind of rebound. Is it still time to make sales?

Brugler: Well, we just sold 5% of the old crop corn this week just kind of rewarding the market for the rally we'd seen over the last couple of weeks. And so we're still sitting on some old crop corn and we sold absolutely zero of the 2009 crop unlike most of our competitors.

Yeager: Let's move over to soybeans a little bit. This is the one where the real action was this week. $16.58, that's up 76 cents, that's impressive. What is driving that market?

Brugler: Again, there's several things involved. We started the week, July soybeans are in delivery process and there were no deliveries. That made the market nervous. If you're a seller and you're counting on getting those beans in order to re-sell them, to re-deliver them now you're hanging out, you don't have the inventory you thought you were going to get so you have to buy your way out of the contract. We had a lack of progress on the Argentine farmer's strike. There's a danger those farmers will go back on strike and, again, limit their exports. That's not the case right now but it could be because they're not getting it accomplished. If they go back on strike we end up selling more old crop soybeans to China and we don't have those beans really, a very tight supply. So, the market reacted to that. We also saw some investment fund buying as the calendar turned to July. There was the beginning of the third quarter, we saw that buying in corn, beans and wheat.

Yeager: So, you've got farmers who are going to maybe get together at a parade this weekend, what should you tell those producers after they've had conversations of themselves? Buy? Sell?

Brugler: Again, we're scaling up, we're selling a little bit on the rallies. We've still got about 15% of our old crop beans left and, again, have sold no 2009 because in this kind of an inflationary environment we're not sure what our input costs are and we know there's going to be some fairly dramatic acreage swings for next year depending on how that corn crop turns out.

Yeager: Let's talk about one of the big losers of the week and that was cotton off $6, that's a pretty big drop for that crop. What's pushing those numbers down?

Brugler: Well, cotton had a lot of things go wrong in terms of price action assuming you like high prices in cotton, not everybody does. We had acreage report on Monday that basically said that we planted almost all the intended acres from the March report when the market had been looking for a drop of 300,000 or 400,000 acres. So, more potential supply there. Export sales have been terrible at 42,000 bales this week that was actually up from last week but it's down 84% from the four week average. That's not good. Basically the poor economic situation in the U.S. and in some of our other markets consumers are being squeezed and textiles, clothing is one of the things they can cut back on or defer for several months and won't have too much impact. So, it's hurting the demand side. We've got a tremendous amount of cotton left over from last year that's still going to be in inventory August 1 which is the beginning of the new crop year in cotton.

Yeager: Can you look a little bit beyond August, a little further down the line what we see with this market?

Brugler: I think we still need to see the crop being harvested. There's indications that some of the Texas acreage is not doing well, the cover crops didn't survive, it's being sandblasted and hail damage and everything else that you can get. If those acres go down that reduces the supply and we can eat into some of that surplus.

Yeager: Let's talk a little bit about cattle right now and we continue having to feed cattle grain, very expensive grain and that seems to have reflected a little bit on the market, again down $1.30. What are we seeing -- is it a response to the higher corn?

Brugler: Well, cattlemen are getting squeezed but they're in two different camps. If they're hedgers the market has been giving them an opportunity to hedge those cattle for profit. The cattle crush spreads have been offering $20 to $30 a head guaranteed margins for several months now. However, a lot of cattlemen don't use that technique, they don't use that risk management. If you're doing an on the spot market you just buy the feeders, feed them the corn and sell them, you may be losing $100 per head, per animal and you're not going to continue to feed cattle for very long with those high corn prices and that kind of a negative return. So, what we're seeing is the deferred contracts, December and February of 2009, are record high prices trying to encourage those cattlemen to continue to feed cattle because we need the meat. The other thing that's going on is the wholesale market, the box beef market has gone up tremendously in the last two weeks. We're seeing good export sales and decent consumer demand, not great, but decent demand here in the U.S. So, with the higher selling price for the wholesale product the packers are able to pay the farmers a little more for cash. The cash cattle were up this week despite the board being down.

Yeager: Alright, and just under two minutes here, what are we talking about when we go to hogs? Same type of deal as with the beef?

Brugler: Similar situation. The hog market broke pretty badly this week because last Friday we had a hogs and pigs report. USDA found more hogs out there than anybody thought were there and less of an inclination to reduce the size of the herd. The breeding herd was down but not by the two or three percent that had been expected. So, we spent the first couple of days beating on the hog market. The cash market went down, the wholesale market went down, everything went down. Towards the end of the week we started to see a little pick up in those pork cutouts, the retailers were doing a little more featuring or trying to accumulate a little more inventory. The export market has been excellent for hogs. Pork production year to date is up 9.7% which is a tremendous increase in pork for the American consumer to eat but the export market has been absorbing a lot of that. China had problems with the earthquake and so forth and they have been taking more of the product and basically helping hog producers to kind of hold things together. Again, margins are not good.

Yeager: Talk about in the final minute here the cow-calf folks. What are you going to tell them if they call on Monday?

Brugler: Well, the cow-calf guys, feeder cattle prices are still very good. They're being held back a little bit by the expensive corn. There is a tendency to pay less for the feeders if your margins are not good. But I think there's still tremendous potential there that if you've got good grass you ought to be raising some more feeders.

Yeager: Trying to raise some more -- it always seems like you're looking forward a little bit. What about the feed needs that they're going to have? How are they addressing -- you talk about feeding them grass -- they might run out of grass, what are you telling them?

Brugler: The cow-calf guys, they'll use a lot of grass and a little bit of supplement. The feedlots, they've got to protect themselves, basically we've been long call options. That is a way of participating if the price goes up but if it goes down you're able to take advantage of the cash price going down.

Yeager: Alright, very good. I appreciate your time and your insight as well. Alan Brugler, thank you very much. And 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 you can also download audio podcasts of our Market Analysis and the Market Plus segments absolutely free at our Web site. And be sure to join us again next week when Mark Pearson will return and he'll examine the impact of the latest supply and demand estimates on an already volatile commodity market. Until then, thanks for watching. I'm Paul Yeager. Have a good week.

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