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Market Analysis: Oct 12, 2007: Alan Brugler

posted on October 12, 2007


The corn trade appears to have already factored in the specter of record production, and despite sharply curtailed supplies the wheat market trended lower.

For the week, December wheat lost 32 cents, while the nearby corn contract moved 8 cents higher.

The production and stocks report sparked a rally in the Soybean pit. Prices with the November contract gained more than 36 cents per bushel, and soybean meal followed suit closing up slightly more than $13 per ton.

In the softs, cotton trended up this week with the December contract posting a gain of $3.65.

In livestock, the October cattle contract gained 78 cents. Nearby feeders were down 58 cents. And the October lean hog contract declined 58 cents.

In other markets of interest, the Euro gained 34 basis points against the dollar. Nearby crude oil prices set and intra-day record and gained $2.47 per barrel. Comex gold gained $1.50 per ounce. And the CRB Index gained nearly 5 points to close at 335.25.

Market Analysis: Oct 12, 2007: Alan Brugler Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Alan Brugler. Well, October 12th USDA's crop number and world supply-demand estimates were out and a little on the friendly side really to all crops but let's start off with the one that seems to be in the tightest supply and that's wheat.

Brugler: Yeah, USDA confirmed what the trade had already anticipated, that stocks are very tight, they are projecting a 307 million bushel ending stocks for wheat, that would be the tightest since 1948 or 1949 if it turns out to be the final number. They also reduced the world number, tight ending stocks in the lower production.

Pearson: Australia certainly is not coming through this year. Elsewhere we hear wheat for next year, acres are certainly going to be increasing dramatically, I mean, would you be selling some of that 2008 wheat at this stage?

Brugler: Well, I think we, number one, yes, we expect a large increase in acreage. Number two, yes, I think the price over time comes down. The complication is that the market has already discounted those summer 2008 futures contracts fairly substantially and, in fact, they've been rallying while the front month has been declining because of spread trading. So, yes, we're thinking you should price some of the 2008 but we think you should do it in the 2007 crop contracts.

Pearson: Okay, interesting. So, that would be more your strategy than actually going out onto the board next year?

Brugler: Right, sell a May futures or something like that instead of a new crop July because of the spread.

Pearson: Alright, so a producer should keep that in mind as well. So, what is your outlook? Is this as good as we're going to see for that new crop now? Do you think we're going to start hearing bigger acreage numbers worldwide?

Brugler: I think we're going to see the bigger acreage numbers but, of course, we had bigger acreage numbers this past year and didn't get the crop production. We seemed to have problems in just about all the major growing areas. So, we're going to start off with a comfort level that there's increased acres but, again, if we have drought, if we have flooding, if we have winter kill we may still see some more strength over the winter and next spring.

Pearson: Let's talk about the corn market. Of course, USDA's number, like you say, pretty much what the market was anticipating. What do you see going forward now? The old crop corn, for those who are still holding old crop corn, what are your thoughts?

Brugler: Well, I think in most cases we're socking it away, we're looking for basis improvement over the winter and we're actually seeing some basis improvement over the last couple of weeks. The cash market is rising against futures because not enough farmers are actually selling the grain. We've got record crop but it seems to all be stored away. We would anticipate some continued, at least a firm tone in the corn. There is some risk to go down to $3 here because of the size of the crop. But we think that because of the acreage battle for next year because of the need to keep the December 2008 futures at a high level that the nearby corn and the old crop corn really can't drop that far.

Pearson: Let's talk about corn demand, more than 3 billion bushels of corn going into ethanol, ethanol is $1.50 or so this week on the board, even though oil prices as we just mentioned an intraday record. What are your feelings? What is your call and what are you seeing for ethanol for 2008 and that demand being there?

Brugler: Well, we're clearly expanding ethanol production that we've expanded a little faster than the infrastructure can absorb it and blend it into the gasoline, that's the reason we're seeing the low ethanol prices. The market is clearly telling you if you've got a vehicle that will run E-85 which is a much higher percentage of ethanol that you're being given a price incentive to do that. I think consumers will respond to that with the vehicles that are equipped that way. We are seeing some gradual movement in terms of additional blending, that is, some of the folks who haven't put in the necessary equipment to blend ethanol are doing so because it's now very profitable for them to do it. But we probably have overestimated up to this point the ethanol corn consumption for next year because of these problems with the ethanol side of the market.

Pearson: With more plants coming online though do you think we'll still see strong demand for the ethanol sector in '08?

Brugler: I think we'll continue to see expansion in the ethanol consumption and it'll just be a matter of what price do we need to have to stimulate that. And we may, in fact, have a few plants that are in less than ideal locations freight wise or for other reasons that will have some financial problems because of it.

Pearson: One of your analyst colleagues made the comment that after this report today it's just going to confirm the intensity of this acreage battle for the 2008 marketing year.

Brugler: I think that's correct. We've got a little lower average yield for the U.S. here, 154.7 bushels, the trade had been expecting perhaps a 157 or 158. So, that means less total production and therefore a little more need for corn acres next year than what we might have anticipated.

Pearson: Are you interested in selling '08 corn at this point looking at the December contract and what it's done for '08?

Brugler: Basically we've been nibbling at it when it's over $4 a bushel, we're not really interested in selling at $3.60 or $3.70 or $3.80. At the moment we think there's plenty of time for that and, again, it's far from clear how this acreage thing is going to turn out in the spring.

Pearson: How do you want to do that? Do you want to own the board or do you want to use options or what is your strategy?

Brugler: Well, for most producers your risk is one directional, if the market drops and you haven't sold the crop you take a financial beating. If it goes up you're pretty happy to sell the grain higher. So, that suggests an option strategy whether it's a put option or a minimum price of contract at the elevator or a short futures with some kind of a call option against it, something that looks like an option is probably the best strategy.

Pearson: Alright, and you mentioned the strength in the cash market which is interesting because we've got this huge crop, biggest one ever but we are putting more of this crop away so apparently the call on producers to build their own storage apparently paid off.

Brugler: I think we've seen a tremendous increase in storage both at the commercial level with the low cost rings and that type of storage and also in farm bin construction. The other thing that helped us was we drew down our ending stocks from last year. We created in the Western Corn Belt about 700 million bushels of storage just by clearing out some of the inventory that had been stored the previous year. It made more room for this year.

Pearson: Absolutely, now let's talk about soybeans and soybean market and what you see happening on that front. Obviously what happens in South America now becomes as critical as about anything else as we gear up for this acreage battle for 2008.

Brugler: You hit that dead on, Mark. We've got essentially a two season year in soybeans. There is the U.S. season and the South American season. The U.S. season is ending, we know the crop is just a little under 2.6 billion bushels. We know the South Americans have been given a price signal of $10 a bushel in dollar terms to plant more soybeans. They appear to be responding but we don't know how much of an increase they're going to have yet, they're still in the middle of planting and we also don't know how that crop is going to turn out with all of the soybean rust and other issues they've got to deal with. So, the market is going to be on pins and needles for a while here until it gets a comfort level that the South American production is large enough. If there were to be some problems down there I think you'll see another leg up in the price here in order to make sure that U.S. producers get the message to plant more next spring.

Pearson: Talked to a fellow down in Sao Paulo today and he said they were looking for rain this weekend. That could be a big factor in the market on Monday.

Brugler: Yeah, it's been a little dry, that dryness is starting to break from west to east and so Sao Paulo is still on the dry side right now but Madagraso is starting to see some seasonal showers. It's very difficult to keep Brazil dry being that close to the Amazon.

Pearson: Yeah, usually the problem is always the other way, it's too wet. Alright, so that's a big factor. And obviously price here -- what kind of price do you think we're going to have to have for soybeans? What are you looking for to make sales?

Brugler: Well, basically I think anything over $9.50 is a pretty good sale. Yeah, could you have a home run and have a $12 type market? Yes, if South America gets in trouble and the U.S. is having trouble buying the acres. But we're a long way off from that. I think most producers I talk to are saying cash wise $9 to $10 works fine for them if they want to put something on the books.

Pearson: Alright, let's talk about what's going on in the livestock world, the flip side of what's happening with the grains and the oil seeds. The fed cattle market, as you look at that market this fall do you have a sense that we're fairly current in this cattle market? Are we starting to maybe add some weight?

Brugler: We've got some localized problems with heavy weights and, in fact, we saw some fairly substantial discounts for heavy cattle at the beginning of the week. They got some press because prices were $3 to $4 lower than last week. But overall I think our numbers are fairly tight relative to a year ago and will remain that way for another month or so. So, I think once we get past these heavy cattle we're still in pretty good shape in terms of overall beef production.

Pearson: What kind of prices do you think we can expect for fed cattle?

Brugler: Well, I think you're going to see that December contract hanging in that $95 to $102 range for quite a while here.

Pearson: Alright, so you're pretty strong. Feeder cattle market, let's talk about that. Obviously still a relatively small cow herd and you weren't anticipating much of an increase in production for beef numbers this year.

Brugler: Correct, we've got, we've downsized the cow herd and also the beef replacement umbers and that just means you can't have as many feeder steers coming out of the pasture. So, we've got those numbers down, year over year, and that's probably going to continue into the following year.

Pearson: If we have soybean meal making a run up as it potentially could at $10, $10 soybeans and see soybean meal run up would you recommend to a producer maybe to lock in some feed needs right now?

Brugler: Yeah, we started doing that at $220 a ton and now we're in the $270's and $280's on the futures. I think there is some risk of the meal going to $300 if soybeans stay at this price level and/or corn begins to go up. One thing that could change that is if wheat were to confirm the high is in for the year and back off some of the substitution.

Pearson: Let's talk about the hog market and what you see happening on that front. There have been some pretty big kills here this fall.

Brugler: Too many hogs, too many hogs, 2.3 million head plus last week, an even larger number this week. This week's estimated slaughter including Saturday was 187,000 head larger than last week which was a record, near record level. That's a lot of pork to be put into the system. Some of that is, in fact, going to China under the deal that was done with Smithfield. But there's still a lot more that has to go to either the domestic consumer or be encouraged into the export market and at this point we're having trouble getting that done. We thought we had a little rally going in the hogs on Friday that just totally collapsed, there's still too much pork.

Pearson: Alright, too much pork, pressure on prices for the rest of the fall.

Brugler: At least into Thanksgiving.

Pearson: Alright, Alan Brugler, appreciate your insights as usual. That's going to 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 the market plus page at our Market to Market Website where you'll also find streaming video of our program and you can also download audio podcasts of our market analysis and market plus segments absolutely free of charge right there at our website. And be sure to join us again next week when we'll meet a pioneer in research addressing global hunger who was credited with saving more than a billion lives. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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