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Market Analysis: Aug 31, 2007: Alan Brugler

posted on August 31, 2007

Record wheat prices continued to dominate the commodity markets this week, but reports of large yields failed to lift corn.

For the week, September wheat gained more than 40 cents, while the nearby corn contract moved 17 cents lower.

Early yield reports on soybeans are mixed but this week there were more buyers than sellers. For the week, the September contract gained another 37 cents, while soybean meal was up $17.50 per ton.

In the softs, favorable export projections sparked a rally in cotton and the December contract posted a gain of $2.62.

In livestock, the August cattle contract lost 27 cents. Nearby feeders gave up a nickel. And the October lean hog contract declined $3.83.

In other markets of interest, the Euro lost 35 basis points against the dollar. Nearby crude oil prices gained nearly $3.00 per barrel. Comex gold gained $5.00 per ounce. And the CRB Index gained nearly 5 points to close at 310.50.

Market Analysis: Aug 31, 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: Alright, well let's talk about record wheat prices. Over $8 in Chicago on the September contract, I don't think they closed there but wow. What a week for wheat and what a market right now. What is ahead for this wheat market and what should we be doing?

Brugler: Well, I think the question here is how far the import buyers or the export customers are willing to chase this thing. So far we're still seeing excellent export activity. India was in over the week, had not received the results when this was recorded. Morocco still has a tender outstanding. We've got CCC activity. The point being as long as this export activity is there at this price level we're not really accomplishing the price rationing that the market is trying to get done here. I think you have to be patient, let the market run as far as it wants to run. If you're a producer clearly we're going to get some more acreage this fall out of this rally and that's one of the other things we're trying to measure is will we, in fact, overproduce as we appear to have done in corn this year.

Pearson: Yeah, and it's going to be interesting to see. In terms of near-term wheat to harvest that might do us some good not a lot of good news out there.

Brugler: No, a lot of problems around the world. We basically had about the same production here as we did a year ago despite having 3 million more acres. Canada is down from what we thought they were going to get. Europe is down. Argentina, Australia still a developing story there, a little on the dry side in both cases but it's still early.

Pearson: Those people can move cash wheat to town right now have got a real lottery win going for them. But what about pricing some wheat into 2008 and on out? Are you looking at that, Alan? Do you recommend that at this point?

Brugler: Well, we've just done one small increment so far. We're basically waiting to see if we can identify some type of a top in the old crop. There's such a big discount in the new crop values versus old crop right now that we'd prefer to hedge it in the old crop and capture some of that as the market goes to a more normal carry. We don't have that opportunity until we know where the top is.

Pearson: Cash wheat prices strong?

Brugler: Pretty good but there's a huge basis weakness here, a big spread there because the cash market hasn't kept up with the speculative buying on the futures.

Pearson: Let's talk about another key market, of course, on this program and that's the corn market. As we look at that, again, this week a little bit of pressure but early yield information, I was over in Decatur, Illinois, the Farm Progress Show, very short yield, short season hybrids over there were yielding very well. What are you hearing out there? And what is ahead for corn?

Brugler: Yeah, it's pretty unusual that most of the yield reports we're getting are large. Typically the farm population wants to kind of keep the big ones quiet and emphasize the problems because that's better for prices. But no, we're hearing a lot of big yields, a lot of kudos to the technology of the corn, the ability to tolerate drought and bad weather. The real question is whether USDA has already captured these yields. We're hearing positive stories but much of that would have been picked up by the USDA survey data. So, we've still got another week and a half until the next USDA report but it looks like we're probably going to be in that 13 billion bushel range yet.

Pearson: Alright, so, take me out here, as we go forward this fall there is a sense of confidence that we've reached our 2007 goal and now the march is on to the 2008 harvest and, of course, a whole new set of variables.

Brugler: Yeah, we've got to look at sharp increases in production costs for corn, fertilizer prices are up, seed corn is going to be up, land prices are going up, cash rents are going up astronomically in some areas. That kind of tips the balance sheet back towards the wheat producer and the soybean and the cotton. And corn could probably lose 2 or 3 million acres here because of the excess production we're going to have this year. But if it looks like producers are switching more acres back then I think you're going to have to see a rally later in the winter to get the corn back up.

Pearson: Alright, and what kind of a rally would you expect with the demand anticipated that we see already?

Brugler: Well, again, based on what we know today getting back to $3.80 or $4.00 is a push but if you start to see a stronger export program because of what's going on in wheat, corn maybe goes up to 2.3 or 2.4 billion bushels, then I think you could see a stronger market maybe get back to $4.25 again.

Pearson: Alright, same story in the cash market, a lot of discrepancy there between Chicago and what's happening in these cash markets on corn too.

Brugler: Yeah, you've got a weak basis there as well. Basically what's happened is there's very little storage in the south, there's a lot of barge order facilities where the corn comes straight out of the field to the river. That has caused this huge increase in the barge freight because basically they have no other choice. It's hurting the prices upstream though and will be that way for a while until we get that cleared out.

Pearson: Alright, so again, if you've still got old crop what would you recommend? You don't have storage what do you recommend?

Brugler: Well, basically we've already cleared our old crop out, I think you basically have to at some point unless you know you've got a shortage in this year's production. Obviously you don't want to make a lot of cash sales at harvest with a weak basis, you want to find a place to store it. Storage is the key story here. The market is giving 95% of full carry to keep it until December or January if you can find a place to put it.

Pearson: Alright, as we put on our hats and we look forward we've got to look at all the variables and, of course, I'm not sure how much time we have to visit on this topic but I want to talk a little bit about soybeans and the soybean market and what you see happening on that front. Obviously soybean prices have to remain strong to meet their production goals for 2008 but they may get some help from South America on that production.

Brugler: Yeah, I think a lot of this strength we're seeing right now is demand based for the soybean meal and then it's trying to send a signal South America to ramp up the production this fall as they plant. And, of course, the main planting season Brazil begins in October, extends into November so high prices in this time period send that signal to the South American producers.

Pearson: Alright, so, again, U.S. producers, what are you recommending in terms of sales and in terms of as we look forward to 2008?

Brugler: We're going very slow, less than 35% priced on new crop beans right now and basically have some long positions against those. I think you have to recognize that $9 is a pretty good price and we're getting close to that in some areas on the board at least.

Pearson: Alright, and the cash market, a lot of problems there.

Brugler: Again, weak basis, the cash market is not keeping up, your processors need beans because everybody is focusing on harvest already. But that's going to be a localized situation. Reward the pushes.

Pearson: Alright, let's talk about the cotton market which had quite an up week this week. What do you think is going on there? Are they trying to track some acres?

Brugler: Oh, I think we got a little too cheap there, we got a big export sales response two weeks in a row now. China is part of it but a lot of the other countries are starting to step up and buy some cotton here. And as we got in the month end that caused some of the shorts to take profits, take the money off the table.

Pearson: Let's talk livestock and what you see ahead in this fed cattle market. Near-term as we go through the fall are we going to historically softer time for the fed cattle prices? What do you see ahead next 90 days?

Brugler: Well, I think you've got declining placed against numbers. That is, looking back at when the cattle were placed on feedlots, when they're likely to be finished we actually got weaker numbers. So, that is supportive to prices, I think you saw that this week. The cash cattle prices got up to $94 and $95 in some cases. You've got to keep an eye on the box beef. We'll have a better handle on that one after we come back from Labor Day and see what the weekend clearances were.

Pearson: With this weak basis that we've been talking about I assume you're recommending to feeders out there, those in the cattle feeding industry cover some feed needs?

Brugler: Yeah, you want to take advantage of the lower prices, obviously next 30 days is when you typically would see the weakest basis but you've got to make sure that you get that grain before the ethanol plant or the other competing users do. So, again, we're starting to pick up some coverage but we're not very heavily loaded up yet.

Pearson: Alright, and let's also talk about, as you look at this fed cattle market going forward do you see some opportunities out there to lock in some prices?

Brugler: Well, I think when you're looking at December cattle futures in the $99 to $100 range and some of your 2008 futures in that level also as long as your ____ are in line, yes, that's an excellent opportunity already.

Pearson: Alright, we just showed our feeder slide and as we look at what the feeder cattle market we've got record prices going there. Cow-calf guys, should they start stepping up and loading up on some of these futures?

Brugler: Well, I think we've got to look at, again, not letting this get away from them. If corn is going to go down a little further in the harvest you might see a little additional strength in the feeder cattle but $118, $120 futures is excellent and we know that the numbers are down slightly because of the cow liquidation. That could help us sustain the rally but if cattle start to come down or corn starts to go up the feeders are going to get squeezed so, again, lock it in while you can get it.

Pearson: Herd expansion a non factor at this stage?

Brugler: Not really, not really. We had some liquidation particularly in the southeast because of the drought. Grass conditions are excellent on the plains but we're not really seeing the expansion. We're seeing fewer beef heifers being retained. It may happen eventually but not right now.

Pearson: Alright, so still no expansion so still some opportunities in that cattle market. Let's talk about the hog market and the opportunities there have been, you know, some big export news announced a week ago, export support going into China. This is one that I know a lot of our analysts were talking about and anticipating. Was that pretty much in the market?

Brugler: Yeah, it was what we call buy the rumor, sell the fact. The market rallied, came back down, then the news finally came out, it rallied briefly. Now we're sitting here saying, okay, 60 million pounds, that's less than 1 day's kill and yes, it's incremental business, it's good business that way but we've overpriced ourselves based on that piece of news. If the Chinese come in and buy more then maybe we can get a little more excited. But at this particular juncture the problem is we're killing two or three percent more hogs and we don't have a market for that export.

Pearson: That's right and as you look at the hog market going forward, again, take us through the next 90 days barring some surprise somewhere in terms of additional export business, like you say, with China. What do you see happening in this hog market?

Brugler: I think the seasonal tendency would be for prices to go down because of the increase in slaughter. We'll be killing 2.2, 2.3 million head a week for a while now and that's going to keep some pressure on the product values. Again, if we can gin up some more export business that can bleed off the excess production and help us with prices or overall commodity inflation is a background factor here too.

Pearson: And that's right, of course, we could see more of that. Anything out there to hedge? Anything you'd do in particular in this hog market?

Brugler: Basically we've got puts on against the Octobers and some of the December marketings but we haven't done anything for 2008 yet.

Pearson: Alright, well, Alan Brugler, as usual we appreciate your insights on what's happening in the commodities markets. Thank you so much for joining us. And that will wrap up this edition of Market to Market. But if you'd like more information from Alan on where these markets just maybe headed why not visit the market plus page, it's at our website where you'll find streaming video of our program. And you can also download audio podcasts of our market analysis and our market plus segments absolutely free at our website. And, of course, be sure to join us again next week when we'll further examine the impact of wildfires that are burning on more than 1.5 million acres in the West. So, until then, thanks for watching. I'm Mark Pearson. Have a great week.

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