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Market Analysis: Jun 29, 2007: Alan Brugler

posted on June 29, 2007

As previously reported, the USDA acreage report came out at the end of the week containing figures that took much of the trade by surprise.

For the week, July wheat fell 10 cents, while the nearby corn plunged nearly 40 cents. Over the past two weeks the July contract has given up nearly 90 cents.

The swing of 2.5 million acres to corn pushed soybean prices sharply higher. For the week, the nearby bean contract rose more than 50 cents gaining back all of last week's losses. The July meal contract was on a parallel track gaining almost $12.

In the fiber market, cotton had yet another positive week with the December contract gaining nearly $2.40.

In livestock, the June live cattle contract was down for the second time this month by more than $2. Nearby feeders trended $3 higher. And the July lean hog contract lost another $2.80.

In the financials, Comex gold declined $2.60 per ounce. Nearby crude oil prices pierced the 70 dollar mark. The Euro gained almost 7 basis points against the dollar. And the CRB Index declined a point and a-half to close at 314 even.

Here now to lend us his insight on these and other trends is one of our regular market analysts, Alan Brugler. Alan, welcome back.

Market Analysis: Jun 29, 2007: 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.

Brugler: Good to be here again.

Pearson: Well, good to have you with us, goodness gracious, 92.9, you can almost call it 93 million acres of corn. That's a big shift from the March number and the trade is trying to assimilate that. Big changes in the soybean market but also the wheat market took a big hit on this report. What is your take right now, let's talk about the wheat market first, what you see in light of the report that came out on Friday.

Brugler: Well, the numbers in the report on Friday were basically friendly to wheat, they basically said we have fewer spring wheat acres and just a slight increase in the total wheat acreage. But the story in wheat for the last couple of weeks has been the lousy weather. We've had excessive rainfall in Kansas and Oklahoma, that has been damaging to the crop, we've had entire farms that have been declared losses for insurance purposes. But you can only push that story so far, there's only so many bushels of wheat that will fall down and we are hearing some tremendous yields further west in the areas that avoided the rain. So, I think the market was primed for a sell off with the competing feed grain, the corn being under pressure, it was a good time for the wheat to kind of back off a little bit.

Pearson: Alright, as you look ahead now let's move on and talk about the corn market and what's going on there. Obviously 93 million acres, a big shift, another shift is going to be needed next year based on the ethanol story we just heard. But as we look at what's happening with corn prices today obviously that's been quite a sell off here for the nearby corn contracts.

Brugler: Yeah, it's been a rather dramatic sell off, there's been some fund liquidation in there, we've had commercials, of course, end users saying okay it's dropping, we'll take our time here. That shift from March to June in acreage was the largest percentage change we've had since early 1900's.

Pearson: It was a big shift and now producers out there are wondering if they should have sold more, are they going to get an opportunity. Obviously we still have to get through pollination, we still have to get through some difficult growing conditions. Obviously this year's crop is not in the bag.

Brugler: It's not in the bin by any stretch. We've got basically only ten or fifteen cent is pollinating so far. The weather is fairly benign at the moment but it's a little hot and dry in the western Corn Belt, we're looking at 100 degree temperatures this weekend in some areas. And we've also got to remember that a larger percentage of the crop is in non-traditional producing areas like North Dakota that will be subject to freeze threats and things of that nature clear up into September. So, the market has got a long ways to go. We have the acreage base, certainly we could end up with a 1.5 or even a 2 billion bushel carry out if everything falls right but it's a long way from here to there.

Pearson: Alright, now as the corn market, you know, obviously starts to do its thing producers are sitting out here saying, you know, what's going to happen to this cash market. There's going to be a lot of corn, more corn than we've ever seen before coming in this fall.

Brugler: Yeah, once the market is convinced that the crop is actually going to be 13 billion bushels or 12.8 or something of that nature we probably will have a bit of a drop into harvest because we've got to find a parking place for all of this corn. There is just literally not enough storage for that large of a crop. So, yeah, producers need to be making plans now and many of them have to build extra storage or find storage at a local elevator for that crop. Some guys have had to call four or five places to find some open space. But clearly that is an issue this fall. By next year we need all of the corn and, you know, the elevators and the ethanol plants, the export market and the livestock industry will use it.

Pearson: Absolutely. In terms of prices what do you see happening? In light of this report what would be your bracket and what do you see corn prices doing on the board?

Brugler: Well, I think this has dropped the upper and lower bounds a little bit. We clearly could get down into the 2.90's at a harvest low or a pre-harvest low this year given this new parameter on acreage. The upper end is still probably in the 4.20's or the 4.30's but it's going to require some weather problems to get that high. A more likely high would be a rebound into the 3.90's on the December contract.

Pearson: Looking at the cash market, though, going forward would you be more interested in maybe doing a basis contract or what do you want to do at this stage of the game if you're a producer?

Brugler: Well, the basis is excellent right now but I don't think you do a basis contract until you've got some kind of technical indication that the market has bottomed out and is beginning this recovery or rebound process because if you have a basis contract on a market that is still going down you don't gain anything.

Pearson: That's exactly right. Alright, so as we look now at what's going to happen what about for next year? What about 2008? We're still going to need to get the signal out to producers, we need more corn correct?

Brugler: Yeah, we're still going to have an acreage battle and you can see that in the way cotton is behaving and some of the other commodities that they're all jockeying for position for next year. We saw tremendous movement in the price spread between December 2007 and December 2008 contracts. December '07 dropped, '08 dropped very little this past week because the market is aware that it needs all of this production and even more for next year.

Pearson: Alright, let's talk about soybeans where, again, 64 million acres, smallest since 1995 as we talked about earlier in the show. And obviously prices have, you know, obviously took a jump on Friday. The market was kind of building towards this wasn't it for the last week or two?

Brugler: Well, we had originally thought that there was little change in the soybean acreage, then you got a little revisionist thinking out there that maybe it was a million more acres, double crop acreage because of the price being up and, in fact, USDA confirmed there is eight percent double crop this year versus five percent last year. So, we are getting a response to the higher price levels. But the drop to just over 64 million acres was a surprise and we were limit up for a while on Friday before the end of month profit taking kicked in.

Pearson: And now as we look ahead for soybean futures, I mean, can't even bar the door if we run into a dry August this could become explosive.

Brugler: Yeah, we're already looking at the potential for a 250 million bushel or less ending stocks for next year just because of the acreage reduction. Yeah, if something happens La Nina weather related, and by the way the forecast is now calling for a La Nina by the middle of August, and if that starts to occur and occurs in a drought fashion then yes, we could be looking at $9.50 or $10 beans.

Pearson: Alright, so what is your strategy for making soybean sales for 2007?

Brugler: Well, if you're a cash only seller, if you don't use the futures I think you just have to use a scale up approach, every 25 or 50 cents higher you sell a little bit more and hope that you get to continue to do it for a while. If you're a hedger our strategy is still floors but no ceilings, we'd put on some put options and then we, or short futures with long calls against them and we'd just wait to see how high the market wants to go.

Pearson: Alright, several of our analysts have said that we're going to have to have $9 plus beans to get the Brazilians back in the soybean expansion game. Are we going to get that done?

Brugler: That is definitely part of this equation, that is one of the reasons for the violence in prices. If it doesn't happen then it becomes even more of an issue for next year in the U.S. with the competition between the various field crops because we can not expand the acreage here in the U.S. very rapidly.

Pearson: Alright, let's talk about the cotton market, it's been on a tremendous run, cotton prices have and apparently the demand side has been good which is almost exclusively China. What is ahead over there on the cotton front?

Brugler: Well, China is starting to use up their domestic supplies. They've been shopping around and using up most of the regional supplies. Now we think they're coming back into the U.S. for some bales as we get toward the end of the growing season and get towards the next growing season. Acreage as was the report on Friday is down, it's just a little over 11 million, a little less than 11 million for upland cotton and basically what that's going to allow us to do is work off this tremendous surplus of old cotton supplies as we get into the new year.

Pearson: Absolutely, so what do you see ahead? What is our target on cotton?

Brugler: Well, I think you've got some fairly substantial resistance, around 68 cents on the December contract. If you get past that we could be looking at the highs from 2003 eventually but I'm not really ready to go there right now.

Pearson: Alright, let's move over and talk about what's happening in the livestock area. And we talked about ethanol on the show and we've also talked about, of course, the importance of the livestock sector and what's been happening on that front. Let's talk about fed cattle. We've been under some pressure here for a while in this fed cattle market. What -- are we current as you look at this market right now?

Brugler: We're fairly current. The problem is that the box beef market has been struggling. We've had eight month lows in the choice boxed beef and that, of course, gets passed on in terms of packer bids for cattle. We did have a nice run up on Thursday in the futures and perhaps have reached a short-term bottom here.

Pearson: Alright, if you're a cattle feeder what do you want to be doing right now?

Brugler: I think as a feeder if you've been riding the hedges down maybe you can lighten up a little bit but, again, the main thing is keeping an eye on your inputs, on your feeders and on your corn to make sure that you are getting decent close outs. If you're a cash only producer the close outs have been pretty poor, you need to be a hedger in this kind of a market.

Pearson: That's right, get some control, like you say, get some control of those inputs. Flip side, is this time to be buying feed if you're feeding cattle?

Brugler: I think it's a lot more attractive than it was ...

Pearson: Oh, yeah, a dollar ago, yeah, I agree.

Brugler: We extend our cash ownership another 30 days here just this week.

Pearson: Alright, so maybe jump onto that. Let's talk about the calf market and what you see happening there. It appears though everything we've heard just anecdotally from ranchers and so forth out there been fairly positive on this 2007 spring calf crop so it looks like there's going to be plenty of cattle out there but not much expansion.

Brugler: No, I think everybody is afraid that with the high corn prices and the other input costs that the feeders can't sustain the gains. With the lower corn prices over the last two weeks that's allowed feeder prices to come up a little bit and obviously if live cattle are bottoming out anywhere near here that might help the feeders a bit. But the key is the pasture conditions are excellent in the middle part of the country and that is allowing them to get some decent gains on a decent number of cattle I think.

Pearson: I've been out talking to a lot of producers and veterinarians and other people in the hog business who were saying that these vaccines against circle virus in particular have been extremely effective, they are very pleased with the results. This USDA hogs and pigs report that was released Friday afternoon confirms there has been some expansion in the hog business despite high feed prices, despite, you know, seeing pork producers in the news saying, you know, this ethanol thing needs to be re-thought. The numbers are up.

Brugler: Yeah, numbers are up in almost all the categories. We saw 102% on the total number of hogs, 101% over a year ago on breeding herd which says they are in fact intending to expand a little bit and more than 101% in all the weight categories. Now, that could be a function of the better vaccines, a better survivability rate but yeah, clearly there is some expansion going on in the hog business right now.

Pearson: Alright, now if you're a pork producer out there what kind of decisions do you need to be making in terms of marketing? You mentioned the key which is starting -- I think after September of 2006 a lot of people woke up to this idea of hedging this corn when it's cheap but what do you see ahead for a producer that needs to make some selling decisions?

Brugler: Well, again, I think the floors but no ceilings approach works pretty well, buy some put options at $72 or $74, $76 depending on the timeframe that you're trying to market the hogs. Certainly booking your soybean meal and your corn ahead is a good idea. We've got call spreads on in soybean meal right now to kind of control that end of our input costs but the margins are fairly decent right now if you'd lock them in.

Pearson: Alright, we've got about 15 seconds left, again, the idea of taking advantage of margins when we can, using both the input and the output side are extremely important as this becomes more volatile both in livestock and in grains.

Brugler: Yeah, and it's a situation where you've got to be well capitalized and talk to your banker about it too.

Pearson: Good points as usual, Alan Brugler, thank you so much. 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 Website where you'll now find streaming video of our program. And remember, you can download audio podcasts of our market analysis and market plus segments free at our Website. And be sure to join us again next week when we'll examine how an innovative farm organization gets the planting done for those sidelined by injury, illness or natural disaster. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news USDA