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Market Analysis: Feb 22, 2008: Market Analyst Alan Brugler

posted on February 22, 2008

At its annual Agricultural Outlook Forum this week, the Agriculture Department predicted U.S. farmers would plant 88 million acres in corn... down 6 percent from last year. Wheat acreage is expected to climb to 64 million acres and the average price is pegged at $4.60 per bushel.

For the week, March wheat gained 22 cents per bushel, while the nearby corn contract gained more than 7 cents.

USDA estimates domestic soybean acreage at 71 million acres and predicts the average price at a lofty $11.50. This week, March soybeans moved more than 45 cents higher, while the nearby meal contract gained $2.40 per ton.

In the softs, cotton had its best week in recent memory with the December contract posting a sizable gain of $5.27.

In livestock, the February cattle contract gained 80 cents. Nearby feeders were off 70 cents. And the April lean hog contract declined 70 cents.

In other markets of interest, the Euro gained 160 basis points against the dollar. Crude oil closed above $100 Tuesday for the first time, but trended lower by week's end. Comex gold gained $45.00 per ounce. And the Goldman Sachs Commodity Index gained nearly 25 points to close at 660.30.

Market Analysis: Feb 22, 2008: Market Analyst Alan Brugler Pearson: Here now to lend us his insight is one of our regular market analysts, Alan Brugler. Alan, good to have you with us. What a week it's been, $14 beans, $5 plus corn, a wheat market up in Minneapolis that's been absolutely amazing. Let's talk about spring wheat for just a minute. We don't usually talk about it on the show. Up in Minneapolis that stuff has become a tremendously valuable commodity, what $19 a bushel?

Brugler: Yeah, we got up to almost $20 a bushel this week. That's a function of a little bit of a squeeze we've got going on in that market, the deliverable stocks in the exchange positions are not sufficient to meet the open futures commitments and unusual for this time of year the prices out in the country are high enough that it doesn't pay to rail any additional supplies into Minneapolis. That's how you would usually diffuse this kind of a situation. So, you've got a real arm wrestling match going there between the buyers who profess to seriously want the physical wheat and the sellers who are caught short.

Pearson: I'm hearing Durham wheat is just like gold.

Brugler: We've heard $26 to $27 a bushel. We are going to see a big increase in Durham acreage this year both in the U.S. and Canada. Obviously that price signal has been bullied by the growers.

Pearson: Couldn't miss that one. Let's talk about soft red wheat in Chicago which it's been holding its own too. What is ahead? And it's hard to tell a wheat grower not to sell at these prices isn't it?

Brugler: Well, these are very attractive prices, particularly in the areas of the country where you can double crop that wheat with soybeans afterwards. But at the same token with what's going on in Minneapolis and with the up trend lines that we still have on the Chicago wheat charts it's very difficult to say that you need to just sell everything here.

Pearson: And what about the deferred contracts? Should we be starting to make those sales?

Brugler: Well, we've been kind of inching up our sales of the new crop July in Chicago, done very little in Minneapolis yet with the September spring wheat contract. But, again, these are very attractive levels and if the flow of speculative money starts to dry up it's time to get those sales on the books.

Pearson: When are we going to see that happen, Alan? What is going to trigger that?

Brugler: Well, we really don't know. We know that there is an asset allocation in place that's been sending more money towards the commodities and certainly with the commodity indexes like the Goldman Sachs or the Dow Jones AIG posting good performance we would anticipate some more money coming in yet, perhaps another $7 or $8 billion in March. Until that dries up it's very difficult to break the market.

Pearson: Alright, a lot of liquidity. We talked about the wheat acreage they announced at the USDA. Were you kind of surprised by that 64 million acre number? Or did you think that would be higher?

Brugler: Actually we thought it would be a little lower than that. We know that we under shot on the hard red winter wheat, that was in the January crop report. We know that spring wheat acres are probably going to go up from a year ago. USDA has got a little more ambitious increase than what we've been able to confirm so far. But the problem is, of course, the soybean price is very attractive, we've got known disease problems in the Red River Valley and some of those areas that were traditional spring wheat areas and you've got to convince growers that they really want to switch back from soybeans or corn back into spring wheat.

Pearson: And, of course, last fall we had the issue of seed availability too which hampered a little bit of our hard red wheat plantings.

Brugler: That's correct and actually wheat seed is not all that readily available for spring wheat because of the price level. I've been told that there were a number of spring wheat seed purchases a week ago but that the producers made sure that there was no treatment of any kind on that wheat and if they change their mind it can easily go to a fire mill.

Pearson: Alright, so lots of things are happening in this stage of the game. Let's move over to the corn market, again, the acreage battle continues over there, $14 soybeans would look like it would swing more acres over. Do you go along with the 6% decline in corn acreage here in the U.S. or could that be larger?

Brugler: I think we're still resolving that. It would appear after this week that maybe the beans are gaining the upper hand, that ratio, that soybean to corn price ratio is tipping a little further towards the beans. Certainly there is some resistance out in the country to the high fertilizer prices that we're seeing for the corn. But by the same token USDA is finding that a lot of producers are still wanting to grow corn because they had pretty good financial performance with it last year.

Pearson: Absolutely. And, of course, at these prices, again, even with the higher input costs that we're dealing with we're still looking at some record net farm income.

Brugler: Yeah, in current dollar terms it would be the second highest net farm income ever.

Pearson: And speaking of current dollars, as we go forward in this corn market what is your strategy there? Are you using options? What are you recommending? What is a producer to do right now looking at these high input costs going into '08's crop and into '09?

Brugler: Well, we're not doing anything with 2009 or 2010 yet. We think that with the inflationary environment that we've got at the moment with the weak dollar your cost structure is going to continue to go up and we still have an up trend on the price charts at this point. So, we're not doing anything that far out. With 2008 if we've got our costs pretty well locked in for fertilizer and fuel and so forth we are doing some scale up selling. We've got some December $5.30 puts or $5.40 puts in place to kind of give us a little headline news protection. But, again, still not being very aggressive on sales until we see how this battle between soybeans and corn and wheat plays out on the acreage front.

Pearson: Alright, and as we go forward now on the corn market and we see the impact that these prices are having, like you said, when you throw in the inputs, beans up at $14, almost it swings, like you say, a little bit more over to their favor. We're not really going to know until that March USDA report comes back and then the follow-up report we're into June. So, if that is correct we could be looking at four months before we really know what we've got in terms of acreage.

Brugler: That's correct and then you've still got summer weather. In order to make the balance sheets work in many cases you're having to assume, I think USDA used 41.5 bushels per acre on soybeans, I've seen others that said you needed to use 43 bushels which would tie the all-time record to keep the ending stocks at an acceptable level. Obviously the final outcome of South American harvest affects that because it affects how much we export. But yeah, it's going to be a long time until we know. Now, that doesn't mean the price has to go up the entire time but it's not going to be able to relax dramatically probably until at least the middle of the corn planting and perhaps even in the middle of the summer.

Pearson: And, of course, spring weather is going to be another issue as well in planting. Talk about soybeans, though. Obviously up over $14, this is all new territory for us. As we look at the soybean market going forward, again, as you look at those new crop contracts do you want to make sales here?

Brugler: We basically have only sold 20% of our 2008 soybeans and we frankly have long call options against them. We've re-bought them, re-purchased them because the market is acting well. Soybean oil set new record highs this week. The Chinese have been very aggressive at buying soybean oil and soybean meal has been following the corn market higher. As long as the products are higher the crushers will continue to pay up for the beans as well.

Pearson: Alright, so you haven't seen anything really near term that's going to impact this soybean market that negatively?

Brugler: No, we do have some technical issues in balance between the buy interest and the sell interest, we're overbought is the technical term. We had an objective of $14.22 on the nearby contract, the March contract. We're right around that neighborhood now. So, there is always the potential for a little bit of a break. I think people are very aware that last year's high in corn was the last week of February but the market rarely repeats the same pattern two years in a row.

Pearson: '09 and '10, do you want to do anything yet on soybeans?

Brugler: Again, not doing anything yet, probably more inclined to do multiple year selling in soybeans because we're expecting more acreage. But, again, USDA said 169 million bushel carryout with their preliminary numbers. That is not ample by any stretch of the imagination and would lead you to believe maybe the prices for the following year would have to be fairly high.

Pearson: Let's talk about the cotton market, a big week this week, big move. What's happening in cotton?

Brugler: Well, there's a lot of things happening. Part of it is speculative, the market is still struggling with the demand side a little bit. If we're having a recession we would expect textile demand to go down a little bit. But on the other side of that the USDA says 9.5 million acres reduction from the previous year, they're projecting the ending stocks to drop below 4 million bales which is starting to get a little snug. And I think the market is trying to buy a few more acres here for comfort.

Pearson: Alright, so that's driving things. Obviously China is a big factor in cotton too and what goes on over there and what that demand looks like. But we're trying to buy some cotton acres.

Brugler: Trying to make sure we've got a few more here. Those would be for export, we only need 5 million bales or so for domestic use these days. But we do need more export.

Pearson: Everywhere I go I get the question if they're in the livestock business what they're paying for hay. You're an old dairyman, this high quality hay is awfully high priced. We're buying acres there aren't we?

Brugler: Hay is trying to keep its acres. I don't know that we're going to get an increase in hay acres even with the higher prices but I think we're trying to keep it from being plowed up and put into corn and soybeans.

Pearson: Alright, well there's some wild stories out there on demand. Let's talk about the livestock markets. Let's talk about the fed cattle. What do you see in the beef demand? You mentioned the R word, recession, beef demand from what we've seen looks pretty good.

Brugler: Yeah, we're getting a little bit of softness in the choice in prime cuts which would be your restaurant trade primarily, you're seeing that choice, select spread collapse a little bit. The other interpretation for that, of course, would be that we're putting too much weight on the cattle and we don't want that much finish on them. But a little pressure there but demand overall is pretty good yet.

Pearson: You're looking ahead, what would you recommend for someone who is buying these calves right now with this feeder market where it is and this corn market the way it is?

Brugler: Well, if you're buying right now and you have not hedged the feeders earlier you've got a real difficult task to be able to lock in a profit on them. I think you have to look for some kind of a spring rally, perhaps in the April contract, led by the April contract, maybe a little later to try and put some profit margin in there and then lock it in. It's going to be a difficult year because your input costs are so high.

Pearson: Absolutely, some pretty creative rations anyway. Talk about the hogs, Alan, and what you see ahead for the hog market. I heard about this sow liquidation, people giving sows away. What is happening out there? What do you see down the road?

Brugler: Well, we're getting a little bit of sow liquidation. I think the publicity may have overrun what is actually happening. We had a big firm this week indicate that they were looking at a 5% reduction. One of the problems is, of course, many of the liquidated sows end up in the sausage business and in the middle of the winter that's not a big market. So, that has put a lot of pressure on the price and it leads to the stories of the giveaways. But I think the U.S. and Canadian sow herd is being reduced somewhat because the margins are poor. But if you look at the finished hog side of this, the market hog side of the business we had a 35 months in a row profitability. Now we're seeing a couple of months of negative returns and I think the producers will take steps to address that.

Pearson: Alright, well as usual some excellent insights, Alan Brugler we appreciate it. Thank you so much for being with us tonight. That will wrap up this edition of Market to Market. But if you'd like more information from Alan on where these markets just might be headed why not visit our market plus page right there at our Web site. You'll find streaming video of our program. By the way, you can download audio podcasts of our market analysis and our market plus segments absolutely free right at our Web site. And, of course, we want you to join us again next week when we'll examine the fundamentals behind today's high flying commodity markets. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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