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Market Analysis: Dec 07, 2007: Alan Brugler

posted on December 7, 2007

Talk of increasing renewable fuel standards stimulated corn prices this week, but the real action once again was in the wheat market. For the week, December wheat gained more than 35 cents, while the nearby corn contract moved 15 cents higher.

Soybeans followed suit with coarse grains and managed to break through the 11-dollar barrier. For the week, January beans gained nearly 40 cents, while soybean meal was up $22.00 per ton.

In the softs, cotton put together a winning week, with the March contract posting a gain of $1.09.

In livestock, the December cattle gained 17 cents. Nearby feeders were down $1.75. And the December lean hog contract gained 57 cents.

In other markets of interest, the Euro lost 99 basis points against the dollar. Nearby crude oil prices lost $1.62 per barrel. Comex gold declined 90 cents per ounce. And the CRB Index lost more than half-a-point to close at 342.92.

Market Analysis: Dec 07, 2007: Alan Brugler Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Alan Brugler. Alan, welcome back.

Brugler: Good to be here, Mark.

Pearson: Well, it just seems like we're continuing to look at this very bullish market in wheat and very tight supplies going forward. Wheat producers out there, spring wheat which you know is going to get planted in the spring, those acres numbers have to jump, don't they, with these kind of prices?

Brugler: Yeah, basically I think the market is getting a little nervous about the winter wheat supply and more particularly the residual supply, what is left over from last year's crop, concern we're going to run out before we get to the new crop production so we're running up old crop prices in order to ration demand to slow down usage and at the same time send those spring wheat producers a signal that as they are making their plans this winter they shouldn't abandon spring wheat for corn and soybeans and other crops but plan on planting some spring wheat.

Pearson: So, the acreage battle really is going to start with that market?

Brugler: Yeah, we're in the thick of the acreage battle right now.

Pearson: Alright, and we shouldn't leave out hay because hay prices also, we talk about the acreage battle, we've been talking about wheat, corn and beans but the hay market has been extremely strong as well so that's another factor and the straw market. So, all those things are all going to come together. It's going to be a real interesting year.

Brugler: Yeah, we're looking at roughly 320, 321 million acres in the U.S. for the major crops excluding things like potatoes and some of the smaller vegetables and all of them, except for corn, are pretty much asking for more acreage because we shorted them last year or because the prices of those commodities have gone up. So, it's definitely a real tight rope act for the market to sort out the acreage for next year.

Pearson: Seen with the pull back, the side pull back in crude oil prices that people are thinking maybe the bloom was off this commodity bullishness that we've had worldwide and then the wheat market comes back this week, beans up above $11. Just generally, Alan, as you look at this whole market what are your impressions of what is ahead generally for commodities?

Brugler: Well, I think we've got a little bit of an inflation component to it as the feds loosened up the money supply in order to work on the housing problem and the debt problem. We're creating some surplus funds that are going in the commodities. The weak dollar is helping our exports, we're looking at the highest corn exports since 1980. And, of course, wheat exports have been just phenomenal. So, that tends to prop up the price as well. We've got a little bit of an up surge, if you will, in commodity prices in general.

Pearson: Alright, now let's talk about the corn market. Again, corn prices stronger this week. The acreage battle there is maybe the most severe between corn and soybeans. What do you see ahead? What do you think the corn market is going to have to do in 2008 to attract acres?

Brugler: Well, you have to make some assumptions about how the demand holds up. But if you look at our S&D tables we think corn has got to have about 87 million acres next year to have a decent supply at the end of the following year. We've still got expansion in ethanol consumption, we've got strong exports this year. We can give up about six to seven million acres to soybeans or other crops without likely running out of corn. That is all subject to the weather next summer and what kind of a yield we get. But the key issue is if soybeans suddenly decide they need ten million acres and corn can't really afford to give them up what happens to the price? We have to ratchet the price up and let the market sort that out.

Pearson: Alright, in your trading, with your clients right now going into 2008 have you started making some sales out there? Or are these prices still too cheap?

Brugler: Well, we've made a few sales in the old crop, in the 2007 crop and we've been very reluctant to make 2008 sales not just because of the uncertainty but also because of the uncertainty on the input costs. If we're truly in an inflationary type environment you're going to see your land cost, your labor cost, your fuel, your fertilizer all go higher and what looks like a profitable price today to lock in may not be by the end of 2008.

Pearson: That's right, so are you doing what you can to lock in some of those input costs too?

Brugler: To the degree we can, yeah, we've done some fertilizer bookings where we knew for sure what crops we were going to plant in the spring. But in many cases producers are still kind of holding back, at least in the last 20% of their acreage, and saying let the market dictate what I plant.

Pearson: Alright, where that's going to go. So, as we look out at these new crop months you're still kind of uncertain but you think we obviously could go higher, you'd be making some sales?

Brugler: Right, the long-term charts, the weekly charts, the monthly charts are still in up trends right now and so we're trying to buy our time and watching for warning signs and we haven't really had any yet.

Pearson: Alright, I hear about the macro weather forecasters out there talking about this winter being a La Nina winter, who knows what we're going to see next spring. Are you paying much attention to those, those long-term weather patterns?

Brugler: Well, I think you have to be aware that La Nina is out there and the fact that we're acting like a La Nina, some of the correlated areas are, for example, northern Texas would normally be dry this time of the year in a La Nina and that has been the case. That pattern shifts as you go into spring, we'll be watching to see if we're following that pattern because it can impact the yield. Again, the acreage relationships are so tight that you have to make assumptions of a fairly high average yield for the U.S. for corn and soybeans to make everything balance. And that is where the La Nina plays because if you can't get that high yield because of poor weather then prices really are too low.

Pearson: That's right, let's talk about soybeans. We're talking some pretty fancy prices on soybeans now. Do you still want to sell any of these?

Brugler: Well, we did sell a little bit two weeks ago. We hit our initial price target which was $11.04 for the January futures. Our March futures model says we should be able to see $11.60 as long as the up trend continues. It's not that far away after tonight. We won't necessarily sell when we get there, assuming we get there, but we're going to look at it pretty hard.

Pearson: In my lifetime $11.04 was a pretty darn good price.

Brugler: Well, one of the things you have to remember, Mark, historically speaking these aren't that high. If you took the 1974 high, the all-time high, which is really the only high we haven't hit on the charts, that was $12.90 and put that in 2007 dollars it's $60 a bushel.

Pearson: $6 a bushel.

Brugler: $60.

Pearson: $60 a bushel, oh, $60 is the price it should be today.

Brugler: So, in terms of the relative scarcity they're not there yet.

Pearson: Alright, good point. Of course, the flip side is you can say the crude oil prices in 2000 were about 38. Well, let's move on then, I like the way you're thinking but you're not making any sales in a big way yet at all?

Brugler: We're nibbling at it, we have to, these are profitable levels, you have to sell a little bit. When you've got a rally, you reward the market we call that. You've got an 80 cent or $1 move you sell something just in case the thing suddenly turns on you. The danger I think in soybeans is we've had a huge increase in the speculative interest in the market, we've got what they call the reportable non-commercials have a record large position in soybeans. When they leave that tends to be a very nasty price break.

Pearson: Real quick, Alan, what do you see down in South America? Condition wise everything I'm hearing is pretty good?

Brugler: Yeah, there's some dry pockets down there but in general they're getting the water, they've got most of the beans planted in Brazil now, there's still a little bit left to go. Argentina is not quite as far along. But overall pretty good shape. A little more dryness in Argentina is what we're hearing right now.

Pearson: Alright, let's talk about cotton, what you see happening in that market which has kind of run contra to everything else that we've had.

Brugler: Yeah, the cotton market showed a little life this week but the problem there has been the USDA raised the production estimate in the last report and we've been having trouble getting enough export sales on the books to meet USDA's projections. We're running ahead of a year ago on total commitments but USDA has got a much higher target this year. And so the market has kind of drifted lower trying to track some more export business. We're very export dependent in cotton these days, the domestic use is less than five million bales.

Pearson: Alright, so the overseas market has to be strong and the thing with the weak dollar and continued demand from China, you wouldn't make sales here?

Brugler: Right, well, we've been hedged since 68 cents all the way down and we're looking at places to lift that. If it shows us a little more signs of life we'll get there eventually.

Pearson: Alright, let's talk livestock, fed cattle market. Last month of 2007 what do you think is going to happen?

Brugler: Well, we've seen some selling pressure. Today was options exploration, we think that was part of it, the market was trying to pin that $94 level and came very close to it. From the cash cattle trade we're a little lower this week. Box beef has dropped a little bit. Don't get the impression that there's huge numbers of cattle to be marketed out there but just a little softness on that wholesale and retail side around this Christmas period. This is not a strong beef demand period until after we get a lot closer to Christmas to where the retailer is looking past Christmas.

Pearson: Alright, and walk into that time period, what do you think first quarter of '08 we could be seeing for fed cattle?

Brugler: Well, I think you're going to see a little bit of an increase in numbers, somewhere in the mid 80's or upper 80's on cash is probably realistic. Again, that is subject to weather conditions. You throw a major winter storm in there where you have some problems with cattle performance you can get higher prices pretty quickly.

Pearson: The calf market fell off this week as corn prices, wheat prices rallied, pretty much the usual inverse relationship or is there something else going on?

Brugler: It's a three-legged relationship. You've got the cattle price which was down this week and then you've got the corn price which was up. Both of those hurt the feeder market so feeders didn't have a whole lot of choice here. The feedlots have got to pay what amounts a break even price or better for the feeders. And in this case they didn't have any choice but to pay less.

Pearson: Alright, what is your outlook for calf prices?

Brugler: Well, I think we're trying to assess what the numbers are going to do. We know the cow herd was not all that large this year so the calf crop isn't going to be a huge one certainly. We're kind of looking for a little further decline here in the short-term and then probably it'll turn back up in 2008.

Pearson: Alright, let's talk about the hog market. Big numbers still.

Brugler: Big slaughter numbers, we're asking the consumer in the export market to absorb a lot of pork, pork production year to date is up 3.7% which is a huge increase. That's not all the U.S. farmer is doing. We've had a lot of hogs coming down out of Canada because of poor profitability up there with this strong Canadian dollar, etc. The thing that impresses me, though, is that we've managed to keep the lean pork cutout, the wholesale price at relatively high levels given the amount of pork we're trying to run through the system. It's been trading between $58 and $60 here for the last several weeks despite these record large slaughter numbers. So, if we can continue to do that I think we'll see a nice bottom here in the fourth quarter in the hogs.

Pearson: Let's talk about the flip side for the livestock guy and that's the feed cost. If you're not near an ethanol plant and you're a cattle feeder and you're buying corn what are you telling people?

Brugler: Well, we've been trying to extend our coverage. On soybean meal we've got six months coverage with long futures, we've had it for quite a while. On the corn we're covered out through March 1 on cash, we've got some call options to protect us against up side movement in the corn. Basically we would expect cash corn to go up over time just as it earns its carry in the market. Might see a little basis weakness after the first of the year as more cash corn moves.

Pearson: As that corn starts to move to town would you start, would you be a cash corn buyer at that point?

Brugler: As a feed user, yeah, you want to be picking it up when that basis is the weakest if you can.

Pearson: Alright, what about soybeans, same thing, soybean meal?

Brugler: Same thing.

Pearson: Alright, as usual some outstanding insights. Alan Brugler, we appreciate you being with us and being with us on the show tonight. And that is going to wrap up this edition of Market to Market. But if you'd like more information from Alan on just where these markets may be headed visit the market plus page at our Web site where you'll find streaming video of our program and, of course, you can also download audio podcasts of our market analysis and our market plus segments absolutely free at our Web site. And, of course, be sure to join us again next week when we'll examine the impact of the largest immigration raid in U.S. history one year later. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices corn markets news wheat