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Market Analysis: Mar 23, 2007: Alan Brugler

posted on March 23, 2007


The coarse grain markets moved in a sideways fashion this week as the trade waits for next week's much-anticipated Planting Intentions Report from USDA.

For the week, May wheat moved fractionally higher, while the nearby corn contract gained nearly 4 cents.

Concerns that next week's report will overestimate corn acreage appear to be offsetting increased soybean estimates coming out of Brazil. For the week, nearby beans gained 16 cents. The May meal contract lost $13.30 per ton.

In the fiber market, December cotton trended slightly lower, posting a gain of 4 cents.

In livestock, the April live cattle contract was up $1.00. Nearby feeders lost 47 cents. And the April lean hog contract lost 83 cents.

In the financials, Comex gold gained $3.40 per ounce. Nearby crude oil prices gained more than 5 dollars per barrrel... The Euro gained 25 basis points against the dollar. And the CRB Index gained more than 6 points to close at 310.75

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: Mar 23, 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: Great to be here, Mark.

Pearson Alright, well, of course everybody is going to be talking about this big acreage report that's coming out next week and trade has been trading on it really for a couple of months now. And, of course, we really know the acreage intentions report is just that, it's just intentions. As you look at this for wheat and corn and soybeans and their impact what are you telling producers?

Brugler: Basically we're telling folks that we've got fairly high prices going into the report, we need to have a little bit of down side protection whether it's put options or minimum price agreements. We have to give the market a chance to work and as you point out it is just an intentions report. The whole idea is to look around and see what everybody else is doing and see if you need to adjust your plans before you actually put all that stuff in the field.

Pearson And, of course, who knows what the weather is going to do which is the other factor. Let's talk about the wheat market first, Alan. And, of course, we've had a great run on wheat, wheat production is increasing worldwide we've been hearing. And, of course, we're seeing wheat feeding occur. But what's the outlook now for wheat prices? What do you see ahead?

Brugler: Well, wheat has been under a little bit of pressure because the U.S. winter wheat crop looks pretty good. The crop condition ratings in the state reports have been much better than a year ago, in some cases at five year or ten year highs. It doesn't matter much yet. We're just getting into the critical part of the crop year for wheat. But wheat has been on the defensive. The things that's been propping it up has been that it's the cheapest against corn that it's been since 1996. So, it is attractive as a feed ingredient. We think world production is going to be up 40-50 million tons this year but at least 10 million tons of that will probably go into feed rations.

Pearson Alright, so if I'm a wheat producer out there and obviously the winter crop, as usual, we've tried to kill it five times already. We look at conditions it looks like hard red wheat looks pretty good, soft red wheat what's your take there?

Brugler: Soft red is not in quite as good a shape. We've had some flooding, we've had some heaving, we didn't get very good stands in the eastern Corn Belt. I think you'll see a little bit of abandonment or tearing up of wheat out there but for the most part the key focus in wheat right now is actually spring wheat. It's how much the spring wheat acreage is going to be reduced, if there is a big enough reduction because of expanded corn and oil seeds then we'll probably have to push the wheat price back up a little bit.

Pearson Okay, sales targets? Making sales right now? Again, would you like to maybe off set a little bit in case that doesn't happen in that report?

Brugler: Yeah, we've got some, in some of the classes we've got some put options. We haven't done any new crop wheat on spring wheat yet, any new crop pricing. We're starting to think that we need to, the market is still respecting the up trend it's had since last fall, though, so not in a hurry but if we go steady to higher into the report I think we probably want to do some pricing before the report.

Pearson Alright, let's talk about the corn market and what you see happening with corn futures. It's been a wild winter really since the September 15th of 2006 this market has been on an upward roll, we saw it peak out the first part of March or end of February and then this fade here in March. What is your thinking, obviously the report next week -- we always put you on the week before one of these big reports come out -- but as you look ahead for this report from the USDA, Alan, what is your thinking? And for producers out there maybe who are sitting on some old crop would you make some sales?

Brugler: Well, I think you have to remember that the intentions data was collected right around the first of March which was the peak in the market so far. So, we could see a little bit of a lean in terms of acreage that isn't there now. By the way, the sell off that we saw in March is fairly typical ahead of this March intentions report. I think what you've got to do is look at your exposure, how much of your old crop do you still have left. These are definitely good prices, the revenue per acre numbers are excellent for both old crop and new crop but, again, our approach has been floors but no ceilings. We've bought some May $4 puts to protect our down side relatively inexpensively going into the report. We've got $4.10 puts on the December contracts for the same reason. We've sold some down side puts to help pay for all that but we're basically taking a wait and see attitude realizing that we've got planting weather to follow and then, of course, pollination period after that.

Pearson On the demand side, obviously with ethanol and the new plants coming on do you think demand is going to be there regardless of what happens price wise? If we do take the other side of this thing -- and you've got climatologists out there talking about El Nino evaporating, La Nina reappearing, typically not good news for corn production and typically means a wet spring and a warmer summer -- with those things in mind, Alan, I mean, that up side could be phenomenal.

Brugler: Yeah, the demand is there, in fact, we've seen two more ethanol plant announcements this past week ground breaking and so forth. So, the gasoline rally that we've seen over the last couple of weeks has made ethanol more attractive. We're not doing anything to slow down that industrial demand. We are seeing a little bit of a cut back in the export market over the last few weeks. But I think the situation is going to be tight and the market is going to be very sensitive to those weather forecasts. It will probably trade the weather, as you alluded to in wheat, we'll try and kill it three times. Our data says that La Nina's not all that predictable in terms of drought which seems to be the bag everyone wants to hang on it. But I think there will be ample opportunities to trade weather this summer.

Pearson With the kind of demand that's coming forth in this corn market and you mentioned oil prices up dramatically this week and certainly the price at the pump on the rise again fueling more demand for ethanol. I was out in Washington, D.C. this week and if you talk to the policymakers out there in the halls of the Congress they're saying we are four square behind this and we're going to see renewable fuels, we're going to continue to nurture this and continue to see it grow.

Brugler: I think we need that. From a geopolitical standpoint in terms of having some leverage in the energy industry it makes sense and it will help us in agriculture if we're getting away from 20 year lows in prices on a real dollar basis. Yes, we could be a little tight in the short run but the market has a tendency to adjust, it tends to increase the production and tends to adjust the demand to fit the supply.

Pearson Let's talk about soybeans, also in the renewable fuels game, but less so. And, of course, soybean acreage could be the one that's hurt in 2007 based on where we're going right now, the soybean prices have hung in there pretty well.

Brugler: Soybeans have held in real well, that has to do with 31 cent soybean oil and we're basically staring at all-time record large supplies of soybean oil, anticipating the biodiesel use, soybean meal, though, is very cheap against corn on a pound per pound basis it's the cheapest it's been since 1996. So, basically any time corn goes up meal goes with it, this week we got a little bit of an exception to that rule with the break in meal. But I don't see meal breaking dramatically unless corn goes down. So, that's supporting beans and the market is basically saying it'll tolerate a four or five million acre swing away from beans but anything more than that it starts to get nervous about world supplies. So, that's allowed the bean price to continue to go up along with this value in the products.

Pearson You mentioned the fact that we've got plenty of product out there. We still have plenty of old crop out there to sell don't we?

Brugler: Yeah, looks like we're in that 595 million bushels of old crop leftover next year. That's a third to a fourth of the total demand. So, we've got a lot of the crop already in the bin if you will. But, again, the market is looking ahead. In both corn and beans it's pricing the old crop based on what it perceives to be the new crop supply and demand balance. So, if new crop is tight then old crop is worth something. The bird in the hand is worth two in the bush.

Pearson Let's talk about cotton and what you see happening there which also, of course, could be impacted by this report on Friday, or on Thursday from the USDA.

Brugler: Yeah, cotton is basically married to corn right now. We've discounted probably two million acres of plantings from last year. That will eliminate much of the 8.8 million bale ending stocks carry over that we're dragging from this year into next year but if it looks like corn or soybeans is going to attract more acreage than that I think cotton wants to rally. So, basically we're stuck in a trading range with cotton right now but, again, if the field crops, the other field crops start to go up cotton will probably fall now.

Pearson Alright, let's move over and talk about livestock obviously impacted by these higher feed costs, we've seen adjustments, calf markets held them there, fed cattle market going forward it looks pretty attractive these days.

Brugler: It's been a lot better. We had a nasty break in the last week and a half because the box beef prices got basically the highest they've ever been in March and we weren't able to support that at the wholesale and retail level. So, we've had a little bit of a pull back that may not be done yet but certainly cutting the average carcass weight by 10-15 pounds to save corn has helped support the market, it's tightened up the beef supplies a little bit. So, any weakness here is probably not long-term weakness, it's just dropping back towards the main up trends.

Pearson Strategy wise what do you want to be doing if you're feeding cattle these days?

Brugler: Well, we think you've got to use risk management, you've got to use the futures or the options. We prefer the options because you're less likely to be on the wrong side of a big fund that wants to trade. But we think you have to -- when you get these rallies like we had to $102 you've got to put in some protection to lock those in. We're big fans of the cattle crush spread for next fall because it's offering profitable opportunities that may not be there by the time we get to next fall.

Pearson Alright, good point. We've got about a minute or so. Let's move right over to the hog market and talk about what's going on on that front in terms of numbers and supply and what you're seeing for pork prices heading down the road.

Brugler: Basically we're slaughtering a few too many hogs for what the retail market will absorb in terms of pork so we're seeing some pressure on the pork cut out and that's caused packers to pull back on their bids.

Pearson We're seeing this market under some pressure. Longer term is this going to strengthen?

Brugler: I think you've got to look at the feed cost again. I think you're not going to see huge expansion given that everyone knows there is a potential problem with the feed use. But that tends to be supportive for the hog prices long-term.

Pearson About fifteen seconds left, cover any feed costs with this break before this report?

Brugler: Yeah, I think you've got to. We stepped up our cash ownership this past week and we've also got call options against soybean meal and corn.

Pearson Alright, some excellent points as usual. Alan Brugler, thank you so much. 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 may be headed visit the Market Plus page at our Market to Market Website. And, of course, remember you can download audio podcasts of our market analysis and Market Plus segments absolutely free at our Website. So, be sure to join us again next week when we'll analyze the government's planting intentions report and examine the impact of wild hogs in Texas. Until then, thanks for watching. I'm Mark Pearson. Have a great week.


Tags: agriculture commodity prices markets news USDA