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Market Analysis: May 11, 2007: Alan Brugler

posted on May 11, 2007


USDA production estimates coupled with improved planting weather this week pressured grain prices. For the week, May wheat gained one cent, but the nearby corn contract gave back last week's gains posting a loss of more than 20 cents. Tighter than previously anticipated global stocks were friendly to soybean prices this week and the nearby contract gained more 16 cents. The May meal contract was up 40 cents. In the fiber market, the December cotton contract trended lower again this week posting a loss of 21 cents. In livestock, the June live cattle contract was up $1.23. Nearby feeders gained nearly $3.00. And the May lean hog contract posted a loss of $1.70. In the financials, Comex gold lost $17.40 per ounce. Nearby crude oil prices were up 43 cents per barrel. The Euro declined 71 basis points against the dollar. And the CRB Index lost more than three points to close at 308.50. 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: May 11, 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, Mark.

Pearson Well, what a week indeed it was as we, again, struggled to get the balance of the corn crop in the ground. We also had the situation with all the weather issues affecting wheat which we just saw in that excellent report. Let's talk about the wheat market first and what you see going forward as far as wheat prices are concerned. We've seen, obviously some production issues, but the government is convinced there is a fairly good sized crop out there.

Brugler: Yeah, the government is telling us that we've got a larger crop than last year which we expect given the increase in acreage. I think the trade was a little bit surprised at the spring wheat and Durham estimate which was an implied estimate in Friday's report. But we've still got a lot of growing season weather ahead of us, the combining is just getting ready to start down in South Texas and we've got to have fairy decent growing weather to meet the USDA projections.

Pearson Alright, so if you're a wheat grower and you're convinced you've got a pretty decent crop out there and you haven't done much in terms of making sales would you be pulling the trigger right now?

Brugler: I think you've got a little bit of a rally going here Friday and you've got some potential for a little more of a technical correction. We're still carrying some long puts from earlier when prices were a little bit higher. I don't think I'd sell probably right here but on a bounce back we've got to recognize that there is a seasonal tendency to go down into a harvest level.

Pearson On the Chicago soft red winter wheat crop are you pretty confident that yield is out there too?

Brugler: The soft red production estimate from USDA was smaller than the trade had anticipated. I believe it was about 360 million bushels. I think most of that crop is there. The question is how much of the wheat was torn up, you know, is the acreage number that we're using really the actual number? We won't have that data until the end of June.

Pearson So, we're still somewhat up in the air. Let's talk a little bit about the corn market. Again, a lot of producers out there I've heard from this week, I know that you're hearing from them who are particularly in areas where they're behind on corn planting this year we're saying this market doesn't seem to be paying much attention to the issues we're having and yet, you know, it wasn't that long ago, 2004, very wet spring, we got the crop in, turned out to be one of the best years ever.

Brugler: There's a phrase that rain makes grain and I think that the market had been trading that philosophy most of this week. You have very rapid planting progress in the eastern Corn Belt, Ohio, Indiana, Illinois this week. I think maybe the traders were looking out their backyard in Chicago and thinking that the whole Corn Belt was that way. Certainly there's a lot of problems in the western Corn Belt, standing water still is recorded between Des Moines and the Nebraska border and I think that's going to play out later in the season as a yield issue.

Pearson As we get past May 15th and we get past, you know, technically optimal yield planting dates it's going to get harder to hit that trend line number.

Brugler: Right, you're basically concentrating a lot of the crop and so it will be pollinating during the peak of the summer heat. Any potential summer dry periods that fall during pollination would tend to hurt your yield. So, it's possible given the ample soil moisture reserves we've got in the western Corn Belt to see some really good dry land yields this year. But overall we're putting the crop into a situation where things have got to fall just right to hit the 150 bushel trend line yield.

Pearson Alright, of course, the flip side is a lot of producers who the crop is in the ground and has emerged and looking good who are saying it looks like a pretty god year, what about making sales? What about, you were talking about cleaning up old crop sales last time you were on where people maybe haven't done that with the improvement basis. Is now the time to be getting that done?

Brugler: Yeah, the basis is telling you that the market would like to see some of that old crop. We've seen about a 15 cent national basis improvement over the last six weeks. So, that's a pretty good improvement, still not anything to write home about but it's much better. We're down to our last 15% or so of cash and kind of holding some of that to see if there's a summer weather rally. But, again, with the basis firmer, if you've got the capacity, the capability to move it during planting certainly the basis is telling you you've got to move the cash and replace it with paper if you need to.

Pearson You mentioned that, obviously, we've got pollination to go, we've got to finish up planting the crop, we still have to harvest the crop, we have to have decent growing conditions. Are you safe to bet that way that we are going to see some kind of a weather rally? We talked about the ethanol demand earlier in the show. That has ramped up and that seems to be pretty solid. Export demand has been pretty solid. Would you be willing to be that we're going to see some kind of a blow off this summer?

Brugler: I think you still have to have the philosophy we've been using all winter which is a floor but no ceiling. Have some puts in place to give yourself some kind of down side protection in case everything occurs right and the crop is a big one. But I'm not anxious to sell real heavily this early in the season because of the potential for a problem this summer.

Pearson Let's talk about soybeans, big crop in South America, plenty of soybeans around. They've held in there too. Obviously it's a defensive situation for the soybean market. What is your take? We've had a little bit of a rally here lately. What should a soybean producer do?

Brugler: Well, I think the soybean market is looking ahead to next year. It's really saying we've got plenty of old crop but the new crop is going to be much smaller, the acreage may be only 67 or 68 million, USDA said stocks only 320 million perhaps for next year. That suggests a go slow approach on marketings for soybeans. If you've got old crop you've kind of got to do something with them and, of course, the South American folks are getting most of the export business right now. It may not pay you to lug the old crop beans if you've got to move them before harvest.

Pearson Talk about South America, big crop down there. Obviously they are a big part of this mix now as a leading soybean producer. And, again, if we move more soybean acres to corn in '08 here in the U.S. are they going to pick up the slack down there?

Brugler: Well, they're saying no, they're saying that because of the rally of the Real versus the dollar that the cost of their inputs are so high and their margins are so thin that they're not really anxious to expand their soybean production. In a backhanded way that's saying get your U.S. prices at the Chicago Board of Trade higher and then we'll be interested. So, if the market concludes that U.S. stocks are being drawn down too rapidly and the Chinese are wanting more production price is usually the signal that we need to get the Brazilians and the Argentines to plant more next fall.

Pearson Alright, and, of course, we need to get those signals here in the U.S. as well and we need some stronger bean prices for that to happen. From a sales standpoint you're holding fast on soybeans?

Brugler: Yeah, we've made a few sales ahead of the March report or just after the March report. But, again, when you're looking at eight dollar plus beans you about have to make some sales. Now we're a little lower than that right now, I think we're taking a wait and see attitude because of the small acreage and the weather forecast there's several of them calling for warm and dry period late July and August and, of course, that's a key yield development time for soybeans.

Pearson Absolutely, is there much carry in the soybean market throughout the deferred contracts?

Brugler: It's not very attractive to me right now.

Pearson Alright, let's move over and let's talk about the cotton market which, again, it's been impacted by corn, acres are certainly impacted by corn and what we've been seeing in this cotton market now for some time has really been a downward swing despite the fewer acres. Is world demand just that soft?

Brugler: Well, world demand is really not that bad, more specifically Chinese demand and it's only compared to last year's record pace. But we got geared up to be selling 16 million, 17 million bales of cotton and now the Chinese have kind of pulled in their horns a little bit, they're buying from Pakistan and India and other places with less freight. And, by the way, freight costs are astronomical right now, the highest in several years. So, what we're faced with is 9.5 million bales of old crop cotton that we're not going to need in this current marketing year. That's like having half the crop already in the warehouse, already gin and ready to go and it's very difficult to rally the market when you've got that level of a security blanket available to you.

Pearson You mentioned freight costs, that's impacting the whole agricultural sector.

Brugler: Yeah, that's any dry goods type freight. That affects corn, it basically discourages the Chinese and the Japanese from buying, it shifts freight flows. If you're going to Asia it's cheaper to ship it out of the Pacific Northwest than it is out of the Gulf. So, that hurts the markets that feed into the Gulf.

Pearson Let's talk about livestock, fed cattle market. As we look at this fed cattle market are we in pretty good shape? Are we fairly current on these cattle?

Brugler: We seem to be fairly current. Of course, with high feed costs that tends to keep your weights down a little bit. Beef production year to date is up just a little over one percent. We had been running three or four percent higher so that has actually kind of diminished the supply a little bit. Exports are a little better. You know, packers pay 97, 97.5 dollars this week because they needed some beef. We've got Memorial Day demand propping up the wholesale at the moment. Technically we've got some problems another dollar or two higher. But right now it's acting pretty well.

Pearson Alright, this market looks pretty good. Do you want to lock in anything as you look at this fed cattle market and as you go forward?

Brugler: I think you've got to look at particularly the cattle crush spreads. There's some very attractive margins being offered for next October, November placements, $150 or above on the gross margin. Those are fairly attractive from a historical standpoint.

Pearson Okay, and as far as the fed cattle market is concerned right now obviously we're in a decent cash market, like you say, with Memorial Day coming up. We've got that buying underway. And, again, you've got a scarcity of supply. Do you think we'll see much expansion in this cow herd in 2007?

Brugler: Well, I think we've got much better grass conditions, particularly in the central U.S. The pasture condition rating overall isn't any better than it was a year ago but it's more the California area that's dry. With the better pasture I think there's a tendency to want to expand that cow herd a little bit and certainly feeder cattle prices are high enough to be attractive to a cow-calf operator.

Pearson Absolutely, with this corn market coming down these feeders have really started to really look fairly attractive haven't they?

Brugler: Yeah, actually they've held up fairly well on the spikes in corn prices the feeders haven't really fallen. So, they're fairly high priced yet which is tough on the feedlots but it is fairly attractive to the cow-calf guys.

Pearson Let's talk about the hog market. Again, virtually no expansion according to the last USDA hogs and pigs report.

Brugler: That's correct and, in fact, if you look at the combined U.S. and Canadian hog herd as one entity it's less than a half percent of the expansion rate.

Pearson So, that's almost nothing.

Brugler: Almost nothing and that's helping to support the prices. We're in a seasonal time period when the hog numbers come down and that tends to mean higher hog prices. Cash hog prices have been marching up fairly steadily. Futures were already ahead of them, though, we were at one point ten dollars above cash so for the most part the futures are kind of going sideways and waiting for the cash market to catch up.

Pearson Alright, let's talk about the other issue and that's the flip side and that's covering feed needs. We've got about a minute left. As you look at this market right now we've had this pullback in corn prices, we've had a pullback overall in soybean product categories. How are you covering that or are you covering feed needs right now?

Brugler: Yeah, we've bought July futures against the soybean meal a couple of weeks ago to cover us for the remainder of this current marketing year and we've also got bull call spreads on corn extending clear out into 2008.

Pearson What about covering cash needs?

Brugler: Cash needs, I think you've had a little dip here in the corn, it's probably time to expand your coverage if you're not covered out through July or August it's probably time to add a little bit of coverage here.

Pearson Alright, product wise anything on that you want to do?

Brugler: On the soybean meal we're basically covered through the middle of June. We'd probably expand out as well.

Pearson Alright, some great thoughts as usual from Alan Brugler, want to thank him for being with us. And that's going to wrap up this edition of Market to Market. Now if you'd like more information from Alan on just where these markets might be headed why not visit the Market Plus page, it's right at our Market to Market Website. And, of course, remember you can download audio podcasts of our market analysis and our Market Plus segments free of charge at our Website. And, of course, you can join us again next week right here when we'll examine the impact of years of drought in Nebraska. Until then, thanks for watching, I'm Mark Pearson, have a great week.


Tags: agriculture commodity prices markets news USDA