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Market Analysis: Jan 05, 2007: Alan Brugler

posted on January 5, 2007


The blizzards that buried parts of the plains in snow provided a much needed shot in the arm for the nation's winter wheat crop. Consequently, the storms depressed both residents and prices alike. For the week, March wheat futures lost more than 30 cents. The nearby corn contract followed suit falling 22 cents. Soybeans fared a bit better, largely due to sentiments that competition from palm oil may be reduced. For the week, nearby beans lost more than 15 cents. The January meal contract gave up $5.90 per ton. In the fiber market, the March cotton contract gave back more than twice the amount of last week's gains, posting a loss of $1.77. In livestock, the February live cattle contract was down 18 cents. Nearby feeders lost nearly a buck. And the February lean hog contract lost $1.30. In the financials, Comex gold fell more than $33.00 per ounce. Nearby crude oil prices plummeted almost 5 bucks per barrel. The Euro lost 184 basis points against the dollar. And the CRB Index fell nearly 13 points to close at 294.50. 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: Jan 05, 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: A little pressure on the wheat market and corn. I know there are a lot of factors going on. Obviously we've got some snow cover for a big part of that hard red winter wheat belt.

Brugler: Hard red winter wheat prospects for next spring are much better than they were, it kind of cooled some of the talk about ripping up wheat that had already been planted to put corn in next spring. Farmers generally won't rip up a crop that is doing well. Wheat exports are not very good either. We only had 5 million bushels and change for Christmas week and that was expected to be a small number. It was even smaller than anticipated. So, we've got a demand problem and we've got a potential increase in supply in the hard red wheat. Now, the thing that was kind of ignored this week is that we still need to have a spring wheat crop and that's still competing with corn and soybeans for acreage.

Pearson: That's right. And, of course, we've got a little bit of time on that so we'll see what happens and just how many corn acres we wind up grabbing. What is your take on pricing this coming wheat crop?

Brugler: I haven't done much on new crop yet. I think up until the last couple of days the up trend was still in tact, we set new contract highs a week ago. I think you're at a price level that is attractive so you don't want to let it get away from you too far but I don't think you have to do a lot yet.

Pearson: We talked about the impact of the rebalancing by these funds. How big of an impact is that in wheat?

Brugler: It's fairly substantial in wheat and corn particularly. We've got not only the index funds who won't do most of their rebalancing until this coming week but we've got hedge funds and managed traders of all stripes. You saw some liquidation just because the commodities were sharply higher for the year. Corn was up 80%, for example, year over year. They're just saying let's get out of this expensive stuff and go find something cheap to buy.

Pearson: Alright, so at this stage of the game old crop wheat sales, where are you there?

Brugler: We're almost done with that, 80% cash sold and we've got some put protection on the rest.

Pearson: Alright, let's talk about the corn market. Obviously a week of pressure this week. How big of an impact was the fall in crude oil prices?

Brugler: I think crude oil had a little bit of an impact because it hurt the ethanol, at least perceptually here at the ethanol. Ethanol prices are still fairly strong compared to where they were in the fall. But the fact that the energy sector is dropping had a psychological impact, export sales slowed down a little bit over the holidays and, of course, we've got the major USDA reports coming up next Friday.

Pearson: That's right. Of course, a lot of people are kind of holding their breath to see what that's going to look like. What is your take, what do you think we're going to see on the corn?

Brugler: I think we'll probably see USDA cut the production slightly, a little lower final yield. The big question in my mind is whether they raise the exports 50 million bushels and if they are forced to drop the feed use to reflect the DDG production.

Pearson: So, that may be the more important number than total production for last year?

Brugler: Right, it's the ending stocks and how much of that we carry over into next year. Next year we still think is going to be a very tight supply year relative to demand. So, that cushion of carry over becomes very significant.

Pearson: We're into the New Year and that usually means some selling. Cash wise are we seeing that?

Brugler: We're seeing real basis weakness the last couple of weeks. I'm not so much sure that the farmer sold a lot more but the elevators that had already purchased a lot of grain were moving it and we ended up with a situation at the Gulf where we had more grain available than what the export market was able to absorb. That hurt the basis. Board wise of course we were at contract highs last week so it's hard to say that we've done much damage to the board yet.

Pearson: Alright, let's talk about it, old crop corn sales, where are you?

Brugler: Basically we're around 65% on the forward sales, the cash sales. We've got some put protection, we bought puts at $3.90 on Wednesday morning in the March and added a little bit more later in the week. So, we're basically sticking with our strategy of floors but no ceilings.

Pearson: Okay and that could become important. What about -- are we going to buy enough corn acres? Do you think the market has done its thing?

Brugler: I don't think the market is comfortable with the acreage scenarios yet. There is a long time until planting. You've got weather issues during planting. We're basically saying there's three innings to go and the third one being pollination. And so the market is going to want to err in terms of excess acres I think to allow for drought or other issues later down the road.

Pearson: Okay, new crop corn sales, I'm sorry, where were you on that?

Brugler: We haven't done any.

Pearson: So, you're just going to hang on here. Obviously the three innings are coming and we don't want to have, we don't want to strike out early.

Brugler: It's the sixth inning, we don't want to put our closer in yet.

Pearson: Alright, so producers for the time being hold on, you think we'll get some opportunities. Obviously we're going to be looking at a lot of things happening at planting season. I mean, how this thing -- if it's wet that could be a factor?

Brugler: Yeah, there's just so many variables. There's no denying this is an excellent price level, revenues per acre close to $500 already available to you. We're seeing, unfortunately, some of that being passed off in higher cash rents and operating costs. But we're close to making some sales just because it's so attractive. But, again, our supply and demand models and our price and probability forecasts all suggest that we haven't seen the top yet.

Pearson: Horns are still on for the corn?

Brugler: A little bit.

Pearson: Alright, let's talk about soybeans. What is your take on the soybean market as we look again at this rebalancing issue. How much of an impact are these funds and their rebalancing, keeping their portfolios in order, how much of an impact is that going to have on soybeans?

Brugler: I don't think it's going to affect soybeans as much. One of the major funds doesn't even have a soybean component so you're not going to see as big of a switch over there. I think beans are kind of subject to South America right now. If Brazil has a large crop, if Argentina has a large crop then the bean market can kind of relax a little, let corn have a few more acres here and the world stocks will still be record large. If we start to see some late season problems in Brazil and Argentina then I think the beans will have to bid a little more aggressively for acres.

Pearson: Alright, what is your outlook for production down there this year?

Brugler: Well, we're at 58 million tons for Brazil and 44 for Argentina. There was another major firm in Memphis that went a little higher on beans, they went with 60 million this morning. We're a little skeptical of that because it's such a big increase.

Pearson: So, at this stage of the game it's South America's game right now. Obviously any crop problems down there would you want to make soybean sales?

Brugler: I think if we start to see problems down there, no, you don't want to make sales. If we get into late January, February and it's still looking very good down there then I think yes, we're going to want to put some floors in again.

Pearson: So, if we have some problems down there we could see this soybean market continue to move. And obviously they're going to be a part of that report next week too.

Brugler: Yeah, we'll get grain stocks report, we'll get a U.S. final production which will probably be slightly larger and then we'll also see some adjustments to world ending stocks.

Pearson: If we look at the soybeans on the current USDA numbers there's an awful lot of soybeans out there, Alan, to justify these prices.

Brugler: Again, it's not about the current supply, it's looking ahead. If you cut acreage by four or five million because those acres go to corn now you've got to have a good yield on the remaining acreage or you start to have a shortage here or somewhere else in the world. So, there's an interplay between those commodities. We call it the acreage war of 2007 and nobody can give up completely, nobody can surrender but you can give up some ground strategically.

Pearson: Alright, what about cotton?

Brugler: Cotton is part of that acreage war too. We've got a little bit of a rally going in cotton because it looked like we were going to lose a million to two million acres of cotton this spring. Now the problem is more related to exports. Exports are not doing all that well in cotton, the Chinese have been very slow to come to the U.S. for supplies and we ran into some technical resistance. I think cotton is probably going to back off for a little bit here.

Pearson: Let's move over to livestock. Of course, the flip side is this feed usage issue. The cattlemen and the cattle feeders as we look at this market going forward there have been some pretty big hits for guys who were out there feeding cattle. What is your outlook now for the first quarter of 2007 for fed cattle prices?

Brugler: Well, we've got the storm issue, that is delaying performance. We've had some death loss but the bigger story is just lack of efficiency and delaying cattle into a period where normally we're already looking at fairly large numbers. The price has come up over the last couple of weeks because of reduced holiday slaughter schedules and because of the delays from the storms. I think $92 to $93 is probably the most we could see in this time period. Actually the market looked a little softer than that going home on Friday.

Pearson: What is your take on the feeder cattle market going forward?

Brugler: Feeders are stuck, they're stuck between the corn price and the live cattle price. That is the one variable the feedlot owner can change fairly rapidly, he can adjust what he's willing to pay for those cattle in order to keep this bottom line in some semblance of order. Obviously feeder production is going to be impacted by the storms if we lost some cows. That is more of a long-term factor rather than a short-term factor. We are seeing excellent crush margins, cattle crush margins offered for next fall, for September, October placement. The market is basically saying to producers who are willing to hedge hey, we're going to make it worth your while, go ahead and make those plans to do so.

Pearson: Okay, so a bright spot out there in the cattle world, the beef world and it's been a tough week, like I say, with all the storms through big parts of the range. What about, talk about the hog market and what you see happening in pork.

Brugler: Hogs have been a little different story. We've had some pressure in the pork products, ham prices were soft even before the holidays, loins have come down a little bit lately. We've got very robust slaughter I think for this time of the year. Now, the cash hog prices were hurt by several things, packing plant disruptions and so forth. We're starting to reach a value level I think that's a little more attractive and we're getting oversold technically. So, somewhere in the next dollar or two down I think we'll find some buyers on hogs.

Pearson: Alright, longer term what is your outlook?

Brugler: Longer term I think we've got to, we'd like to see some strength in the beef, we'd like to see some continued reductions in poultry production. I think those would help the hogs. The thing that has kind of saved us on hogs over the last couple of years has been the rising export market. That would be a little tougher as beef starts to make some in roads but, again, I think it's a positive contributor to the hog profit level.

Pearson: About 30 seconds left, Alan. Covering feed needs, what are you telling producers out there?

Brugler: Basically we've got coverage through call spreads for the rest of this year in corn. We've also got coverage in soybean meal, did that a little while ago. We are looking now at 2007-2008 needs after harvest basically for next fall. I like three way option spreads, you can do them fairly cheaply.

Pearson: Very good way to get some coverage there too. Great ideas, great insights, Alan. Thank you so much. That's going to wrap up this edition of Market to Market. Now if you'd like to hear more information from Alan on just where these markets may be headed and what you should be doing visit the Market Plus page at our Market to Market Website. And remember you can download audio podcasts of our market analysis and Market Plus segments free at our Website. Now, be sure to join us again next week when we'll examine a national farm to fork program that helps restaurants purchase more locally grown foods. Until then, thanks for watching. I'm Mark Pearson. Have a great week.


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