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Market Analysis: Mar 28, 2008: Alan Brugler

posted on March 28, 2008

Prognostications over USDA's Planting Intentions report dominated trader rhetoric this week, while wheat traded in a sideways fashion, and corn moved sharply higher.

For the week, May wheat gained slightly more than one cent, while the nearby corn contract moved 53 cents higher.

Soybeans also broke out of their freefall to post respectable gains. For the week, May soybeans gained more than 60 cents, while the nearby meal contract gained $32.00 per ton.

In the softs, cotton bounced back from last week's sell-off with the December contract posting a gain of $2.39.

In livestock, the April cattle contract lost $3.00. Nearby feeders were down $1.78. And the April lean hog contract lost $3.60.

In other markets of interest, the Euro gained 342 basis points against the dollar. Crude oil was up $3.78. Comex gold advanced $10.60. And the Goldman Sachs Commodity Index gained more than 25 points to close at 686.10.

Market Analysis: Mar 28, 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. And it's good to have you on a pre-report eve show because Monday USDA is releasing two big ones, grain stocks report and, of course, the planting intentions report. Step out on a limb, ballpark what do you think we're going to see?

Brugler: Well, I don't think anybody has got a real good handle on these. We're basically using 87.5 million acres on corn. We're looking for 71.7 on the beans and 62.5 to 63 million on the wheat. But I've had some people in the seed business tell me there is a six million acre difference in their projections on the corn acres. So, somebody is going to be surprised on Monday morning.

Pearson: You're absolutely right. And, of course, they're all over the board as far as what the trade is expecting so this is going to be a pot boiler come Monday when the USDA releases the prospective plantings report. Are you expecting much in the way of the grain stocks report having much of an impact?

Brugler: Well, the grain stocks report is important particularly for the corn in the aspect that that's what USDA uses to figure feed use and to figure ethanol use. And we suspect there is a few problems with the numbers as they exist today so this will help to firm up the demand side, domestic demand side of the corn projections. If USDA were to find smaller soybean stocks or wheat stocks in what the trade is expecting that would just aggravate the tightness that we see in the year end inventories for both of those crops.

Pearson: So, brace yourselves for Monday. Let's talk about the wheat market which, again, as far as the week to week movement was concerned and despite the volatility really didn't do much for the past five trading sessions as far as from Monday to Friday. But in between there's been a lot of activity. What do you see ahead now for the wheat market for the balance of this year? How much concern is there about the condition of the U.S. crop?

Brugler: Well, the hard red winter wheat crop is generally pretty good. The Kansas crop rating is good overall, same thing with Oklahoma. But what you've got is you've got a strip of dry soils there in western Texas, western panhandle of Oklahoma and up into Nebraska and Colorado and so we are looking at some potential either low yields or abandonment in that particular part of the belt. Going over to the soft red country we've got some talk about flooding although historically we don't lose a lot of acres that way, it just looks bad for a while.

Pearson: Based on that and based on what you're seeing so far with this crop where do you think we're headed price wise?

Brugler: Well, I think the market would like to go down from the standpoint that we're pretty sure we've got a big crop coming on both in the U.S. and the world, particularly in the world. Every country that grows wheat is expanding wheat acreage by 3%, 4%, 5% this year. We can see that bigger supply coming but at the same time we've got to be extremely tight. Old crop stocks we've got a lot of countries either putting up barriers to exports or lowering their barriers to imports which continues to mean that we're making larger wheat export sales than we probably normally would at this time of the year.

Pearson: With that in mind, with the potential for a larger worldwide crop and, of course, as you've also mentioned on previous shows strong really worldwide demand, strong consumption demand for wheat. Do you want to make sales in here at these prices?

Brugler: I think we're kind of in a situation where we've made a lot of sales on the previous spike and we're trying to make just a couple more but we really can't go too much further on cash sales because of the production risk that we've still got to deal with this spring. We've got some put options against July Kansas City and July Chicago to give us a floor going into the report because these are excellent prices historically speaking. And the key for a producer is not to let them get away from us here.

Pearson: Let's talk about the corn market. Again, so much is going to hinge on what happens from the USDA's perspective and the trade is guessing that we're going to be losing some corn acres compared to last year.

Brugler: Yeah, I've been saying all winter it's a minimum 4 million acre swing from corn back to soybeans just because of crop rotation issues. A lot of producers don't like to grow corn on corn or they've got agronomic issues when they do. There's also a lot of complaints about the high fertilizer costs and I think that's probably the key issue here is how sensitive producers turned out to be to that part of the equation. Were they able to borrow the money to finance the fertilizer? Or were they forced to do a little bit more on the soybeans which use less fertilizer? I can show you a nice, evenly balanced table that says here is what the soybean acreage should be, here is what the corn acreage should be but when you've got 1.9 million farmers making independent decisions the randomness is going to cause one of those crops to be too high and the other one too low probably.

Pearson: So you're not in a hurry right now, of course, to make sales on the eve of this report?

Brugler: No, corn technically there's a 78% retracement of the last move. It's therefore set up to go to new highs if we get some bullish numbers on Monday.

Pearson: Let's talk the flip side, the soybeans. Bigger acreage number, decent numbers out of South America. Is that your sense of that?

Brugler: Yeah, the yields have been excellent in South America this year. The acreage turned out to not be that much bigger for soybeans. They planted more corn this year, had phenomenal yields in the corn crop down there in Brazil. But we're getting the export sales despite the big crop down there because the Argentine folks have still got a strike going on. They are limiting their export sales and that is forcing world business to come here a little later in the spring than it normally would.

Pearson: That's right and, again, as we look forward and if we hit the numbers that are close to what you're talking about and we hit trend line yields we're going to be looking at a substantial soybean crop in the United States.

Brugler: Yeah but at the same token we have more than 500 million bushel carryout last year. We're looking at 140 million this year. So, what we're doing is we're trading beans in the bin from last year to beans in the field this year and therefore much more vulnerable to weather or to other types of concerns over the growing season.

Pearson: Give us your take, price synopsis after this pullback that we've had in soybeans. Are we going to recover? Is there potential for new highs? A lot of people I've talked to this week and I know you've been out doing seminars, talking to people, I was in Wisconsin this week, they're all concerned on soybean sales that they've missed it.

Brugler: I have some of that same sentiment. I've got a head and shoulders top on my November soybean chart which a technician would say would take you down to $10.50 if we don't get a fundamental development here. The thing that really concerns me is that some of these hedge funds are having to pull the money out of commodities because of liquidity issues and leverage issues and they were the sponsors of that last two or three dollar move. If they're not there I'm not sure we can get back to the highs. I am anticipating some kind of a weather rally this summer but the level that we start from is the question.

Pearson: Cotton market bounced pretty good this week.

Brugler: We've got kind of a mixed bag in cotton. We're expecting USDA to show lower acreage, trade estimates between 9.2 and 9.5 million acres versus 10.5 last year. Export sales picked up very nicely on the price dip the previous week. They were over 400,000 bales this week. Our commitment are actually running strong enough now to make USDA's numbers for the year if we just ship about 340,000 to 350,000 bales a week.

Pearson: Let's talk about livestock. The fed cattle market was under pressure on the board this week. What is your outlook? There's all this talk -- you mentioned liquidity issues and the big money banks, there's ongoing talk we mentioned earlier in the show potential recession. What kind of an impact is it going to have on this beef market going forward?

Brugler: Well, I think what we're seeing is the cattle numbers aren't that tight -- they're not real tight but at the same time they're down from where they were in January and February. That would be supportive to prices but the problem is on the consumption side. The consumer really has pulled back on their beef consumption, we can see that in the choice select spread, we can see that in the retail sales numbers for some of the food chains and what that is doing is it's forcing the packers to lower the wholesale price to move the product and they are trying to pass that reduction onto the producer. Then the futures markets pick that up and actually went to a discount to cash earlier this week.

Pearson: Of course, that does not bode particularly well for the feeder market temporarily. Obviously in the higher corn price too.

Brugler: Yeah, combination of higher corn and lower cattle is almost always going to give you a lower feeder cattle price.

Pearson: Of course, like you say, cheap corn makes for cheap cattle and hogs as grandpa used to say and this high priced corn is supposed to have the opposite effect. When is that going to happen? First on cattle but let's talk about the hogs and pigs report too.

Brugler: Well, we had a hogs and pigs report and the hogs have a little different problem than the cattle. The demand side is holding up pretty well, exports have been excellent but we've got way too many hogs. The hogs and pigs report on Friday just confirmed that, 106% and change on all hogs. Market hogs were over 107% of a year ago. We had been anticipating it but USDA did revise their September and December estimates up by two and four percent respectively. So, a lot of hogs out there, a lot of pork to be put into the system. We're asking that consumer to eat more product and we're asking the export market to take more. The result has been we've built up a little bit in the coolers that we weren't able to sell and, again, prices are under pressure for that reason.

Pearson: Take us out further, though, Alan. We can't sustain a non-profitable hog industry for very long. Where is our turnaround? What should producers be looking at longer term?

Brugler: Well, I think historically what we have to do is we have to have a little bit of a washout. We have to force some sow liquidation, we have to force a few producers to just slow down on their expansion plans. We saw a hint of that in the hogs and pigs report, the breeding herd is 100.5% of a year ago so we're not quite zero but we're coming down. Once you can dry up that supply of hogs a little bit then the market will have to pay the full cost of production to get the expansion started again. But that process can take six months, eight months, perhaps even longer.

Pearson: And it may be a year before we see prices back to profitability, for instance, in the hogs?

Brugler: Well, I think the futures market has a couple of times here offered you profitable prices for next winter or February of '09 anticipating that we're going to need to have that incentive, need that ability to lock in higher prices than what we're seeing today. But, again, if we don't slow the slaughter down, if we continue to accumulate inventory it's going to be difficult to do that.

Pearson: About ten seconds, Alan, as you just look at this from the livestock producer's standpoint if you look at this pullback that we had is now the time to be stepping out and getting some feed needs covered?

Brugler: Well, I think you have to wait for the report on Monday, obviously, but if you've got some kind of a pullback here because of too many acres of some crop, a weakness in beans would tend to pull the bean meal down, that would be something you'd want to lock in or more corn acres, buy a little corn on the dip.

Pearson: As usual some great insights. Thank you Alan Brugler. 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. You'll find streaming video of our program. You can also download audio podcasts of our Market Analysis and, of course, our Market Plus segments and it's all free at our Web site. And be sure to join us again next week when we'll further examine efforts to preserve salmon populations in the Pacific Northwest. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices corn markets news USDA wheat