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Market Analysis: May 16, 2008: Alan Brugler

posted on May 16, 2008

The wheat market continued to trend lower this week, largely due to last week's bearish supply and demand numbers. In corn country, favorable weather conditions allowed farmers to pick up the pace on spring planting. And, as the threat of diminished yields began to fade, the dry conditions dampened prices.

For the week, July wheat lost 29 cents, and the nearby corn contract declined more than 38 cents.

USDA's reduction in soybean ending stocks last week continued to support prices. For the week, July soybeans gained 20 cents, while the nearby meal contract was up $11.50 per ton.

In the softs, cotton remained in positive territory with the December contract posting a gain of 42 cents.

In livestock, the June cattle contract was down 65 cents. Nearby feeders gained $1.12. And the June lean hog contract lost 52 cents.

In other markets of interest, the Euro gained 106 basis points against the dollar. Crude oil flirted with $128 briefly but settled slightly lower. Comex Gold gained $4.00 per ounce. And the Goldman Sachs Commodity Index lost two points to close at 782-even.

Market Analysis: May 16, 2008: Alan Brugler Pearson: Here now to lend us his insight on these on these and other trends one of our regular market analysts, Alan Brugler. Alan, good to have you with us.

Brugler: Good to be here, Mark.

Pearson: This continuing pressure on global commodities and we just talked about in our food versus fuel feature there certainly rice and wheat are pretty much victims of poor crops around the world and big demand. But we look at the crude oil prices, up to $128 a barrel this week. What is ahead for this whole global commodity sector? How long could we see this market, this pressure continue?

Brugler: Well, I think you've got a couple of different variables that play there. There is an inflation argument, the easing of the dollar has basically provided more liquidity in the system. You've got, as you mentioned, some crop problems. Those are gradually being worked out. We're going to see larger wheat production worldwide this year and perhaps that will be one of the first dominos to fall back into a more normal pattern. But I think that world demand issue is still a big one. We do have more mouths to feed and we've got people that have got more spending money that aren't in the United States and all you have to do is look at our export statistics to see that.

Pearson: Alright, it's going to continue. We mentioned wheat down this week and prospects better for wheat crops around the world and, of course, bigger wheat acreage worldwide too.

Brugler: Yeah, we think the world acreage is up four to five percent, certainly many of the exporting countries are up about four to five percent over what they had a year ago and a year ago this acreage was actually larger than the previous year, it's just that the weather was so bad we didn't have the production. So, you combine additional acres and apparently much better yield potential and we should see a big increase in world production this year.

Pearson: As you've seen from our slide we've had a slide in wheat prices. What are you telling producers right now, hard red wheat and soft red wheat?

Brugler: Well, basically we've pretty much priced all of our 2008 production after the initial break, either forward contracts or hedges or long put options of some kind. We think that basically the values are going to stabilize somewhere within the next dollar down from where we're at, looked like we had some pretty good buying interest earlier in the week. But, again, with the harvest coming on in the northern hemisphere, particularly in the U.S. there is a tendency for prices to go down to a level that the excess wheat is used for feed in lieu of corn or that it works better into the export market.

Pearson: Alright, it's been a crazy year, we had Durham wheat $25 a bushel, spring wheat markets were $20. Is that behind us now as you look at this acreage number? Is the market feeling more comfortable with wheat as we go forward?

Brugler: I think the market is definitely more comfortable about the prospects for this year's production. We can't totally rule out a sharp rise in prices as somebody pointed out. The spring wheat, which is where the big surge was in Minneapolis, we still don't have any more spring wheat production until September and we've got another futures contract delivery before there so there's still a potential for some sort of a squeeze there. But we'll start to see wheat coming out of Arkansas and Texas in about two weeks here and having those new crop supplies available will ease the situation.

Pearson: A little bit softer week for the corn market despite tremendous demand for both ethanol production, export demand has been good through at least the first quarter of the year. What is ahead now for corn prices? We're into the weather market now, aren't we?

Brugler: We're into the weather market. We're also into a tactical market. We've got money flows back and forth. There's some thinking that after the bulk of the crop is planted the easy money has been made, as a speculator in corn it's time to take some money off the table. Some of the seasonal trends top out mid-May. We're keeping an eye on another one, though, that shows in years like this where we've had a big run up in the spring that there tends to be additional nervousness in the summertime, again, weather related. NOA came out this week and said that they expect the spring and early summer to be a little cooler than normal. That is actually good once we get the crop in because we are planting it late. That puts less stress on the crop during pollination if that forecast turns out to be accurate.

Pearson: And we'll find out on Monday just how much the corn is planted but a lot of wheels got turned here this last week.

Brugler: A lot of wheels turning, there's still a problem area along the Mississippi River plus or minus a couple hundred miles but you saw a lot more progress in western and northern Iowa and into Minnesota here the last few days. Big acreage areas that needed to get into the ground.

Pearson: And at this stage of the game what are you doing for sales?

Brugler: Basically we're hanging on about the last 20% of our old crop just against some kind of a summer weather rally, drought rally, what have you. We've got about 40% of our new crop sold because these are historically high prices for corn and then we've got put options against the majority of what we think is conservative production.

Pearson: What about 2009? What about pricing there? I know there's a lot of concerns about just what could happen globally with this global commodity market, this tremendous bubble that seems to be building overall for commodities. Should we be pricing some '09 or have you started doing that yet?

Brugler: We haven't done any 2009 yet, again, if it's a real bubble and the speculative money starts to leave, yes, we'll need to. But with USDA showing less than an 800 million bushel carry out for the summer of 2009 that's a very tight carry over, very small stocks to usage ratio and therefore much potential for another price spike in '09. So, we're not in a hurry to do it.

Pearson: What about on soybeans?

Brugler: On the soybeans, again, we're seeing a little bit of a rally right now tied primarily to the farmer's strike in Argentina and that's forcing some old crop business to the United States. We've only priced about 35% or 40% of our new crop and we're still hanging onto some old crop as well.

Pearson: So, keeping plenty of dry powder if this soybean market should make a move, then you'd make some sales?

Brugler: Yeah, the USDA helped us out a little bit in terms of bullishness by showing a tighter than expected stocks report last week, only 180 million for new crop despite the assumed 74 million acres planted.

Pearson: That's very tight.

Brugler: That's tight for the amount of production that we think we're getting. Corn is going to want more acres the following year but this is really saying that we're not ramping up the soybean production fast enough to willingly give up those acres next year.

Pearson: Talk about 2009, then, you're not in a big hurry to make sales there either?

Brugler: No, same situation. We've still got the inflation argument at this point although I do anticipate that eventually the fed will have to start firming up the rates and the dollar. But in the short run I think you have to be patient.

Pearson: And the cheap dollar? Saw a little bit of glimmer of hope there a week or so ago but stronger dollar as far as the U.S. is concerned and looks like this week we've paid it back again.

Brugler: Yeah, I think we're tied into this loop with the crude oil acting as a currency of a sort and whenever the dollar goes down the crude tends to compensate for that. On Friday we had a really big run up in the crude oil and it took the dollar down or vice versa. Cause and effect is hard to prove there. But we have to remember that both the biodiesel and the ethanol will go up in value when crude oil goes up because they're competing for fuel. So, to a degree soybean oil is going to be supported by rising diesel costs and that helps the soybean price.

Pearson: Let's talk about the cotton market, an up week there.

Brugler: Cotton has been struggling although historically 70 cent cotton isn't that bad. It's been struggling to go back to where it was earlier because our export sales are still poor, we've got fewer acres this year which will help to firm up that supply and demand situation over the next year. But at this point USDA is still looking for 5.6 million bales of ending stocks a year from now. That doesn't suggest any tightness in cotton. The Chinese demand situation is very much tied to the general economy and whether consumers are taking those discretionary dollars to the gas tank, the grocery store or to the mall for clothes. And the suspicion is that maybe a few less clothes are being bought here.

Pearson: Let's talk about the livestock sector. I don't think a day goes by that I don't get a phone call or an e-mail from somebody who is either in the hog business or the cattle industry, cow-calf or cattle feeders who don't' want to talk about these high input costs and what the future is going to look like. What do you see ahead? Some of these deferred months we've seen some strength -- talk about fed cattle first.

Brugler: The market is trying to, in its own way, build in at least a break even proposition for those feedlots and hog feeders. We're told that some of the more efficient hog operations are actually making a small amount of money on their closeouts right now. You get argument on that from other sectors. The cattlemen, I think the problem in cattle is that whenever corn goes down as it did this week we have a tendency to bid up the feeder cattle price and that keeps that break even kind of narrow. The cattle on feed report on Friday night basically said we've got a few less head in the lots and that is supportive of the current price level which is what those feedlots need.

Pearson: Absolutely. Looking out, though, into '09 and beyond what is your thought? What are we seeing in terms of liquidation, in terms of heifer slaughter? What are you seeing on that front?

Brugler: We're not seeing a whole lot of movement in the cattle sector yet. The mix of heifers and steers is still pretty close to the normal levels. We're a little concerned about cow-calf operators and a little bit of herd liquidation there. We certainly have seen higher cow slaughter this year and that would imply that over time we reduce the number of steers available to put in the feedlot.

Pearson: You mentioned the calf market and that teeter-totter just worked slick this week. Corn came down, feeders had a nice dollar move on the board. As you look to the summer and fall months what are you going to see for calf demand?

Brugler: I think the demand is pretty good although we hear of lots that are only half full right now. The break evens aren't there. If you are a hedger, if you used the cattle crush spreads you've had some profitable opportunities to lock in cattle for November, October this far ahead. January of '09, no, no opportunities yet. The market is not begging for any cattle there.

Pearson: Let's talk about hogs. And, again, this is an industry that's gone through so much change in the past 15 years and we see these vertically integrated operations. I've talked to several still independent producers out there who are really struggling primarily because they were not able to hedge a lot of their input costs prior to September 15th of 2006 when this corn rally really exploded and this bean market exploded. And they're finding themselves in extremely tough positions. We're hearing about some sow liquidation, in some cases you're hearing some horror stories, people trying to get rid of sows. In my lifetime that's always been a good time to be buying sows. Is that going to be the case or not?

Brugler: I think there is going to be an opportunity like that. There is a certain element of the business that you look for the distressed merchandise and if you time it right you can make some money at it. We're definitely seeing a considerable amount of liquidation in the Canadian hog herd, they have been hurt several different ways with the strong Canadian dollar versus the U.S. dollar, the cost of the feed, etc. They have limited sows and they have also sent a lot of feeder pigs out here. As those supplies of feeder pigs dry up that will tend to support our prices. My biggest concern in the hog market right now is that our pork cutouts are getting up into the $83, $84 range and over the last two years that has been the point where the consumer and the retailer started to bulk. So, we may have pushed that string about as far as we can for right now.

Pearson: Real quick in terms of making sales for producers who need to going forward are there some opportunities out there to hedge?

Brugler: For the hogs there are some opportunities. You're not going to lock in a big profit right now given the unknowns in the feed side. But we think there are some opportunities here in the August contract, for example, to do some hedging here.

Pearson: Well, a couple of bright spots finally for the livestock sector here this week so we wanted to point those out. Alan, appreciate you doing just that. That's going to wrap up this edition of Market to Market. But if you'd like more information from Alan Brugler on where these markets just may be headed why not visit our Market Plus page at our Web site where you'll find streaming video of our program and you can download audio podcasts of the Market Analysis and, of course, our Market Plus segments absolutely free right there at the Web site. Be sure to join us again next week too when we'll meet a group of farmers who jump on their tractors to cut a rug. We'll do-si-do with the Farmall Promenade next week on Market to Market. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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