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Market Analysis: Nov 03, 2006: Alan Brugler

posted on November 3, 2006


The wild ride in the commodity pits continued this week as prices reflected volatile markets. For the week, nearby wheat futures lost more than 15 cents, and the December corn contract posted another weekly gain of nearly 10 cents. Despite growing supplies, soybean markets continued their rally. For the week, nearby soybeans gained more than 13 cents. The December meal contract gained 7.80 per ton. In the fiber market, the December cotton contract gave back all of last week's gains and closed below $50.00. In livestock, the December live cattle contract was down 3.37. Nearby feeders lost 2.15. And the December lean hog contract declined 43 cents. In the financials, Comex gold gained $28.70 per ounce. Nearby crude oil prices fell below the 60-dollar mark. The Euro lost 23 basis points against the dollar. And the CRB Index declined nearly 5 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: Nov 03, 2006: 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: Well, I think there's going to be a lot more wheat out there in many parts of the Corn Belt this year, do you agree?

Brugler: I agree. We're getting reports -- particularly in the western part of the Corn Belt we're hearing a lot of stories of people borrowing grain drills because they don't have one any more or shortages of wheat seed in a few locations. Now, the eastern Corn Belt is not going to get probably what they intended because of the lateness of the soybean harvest. But overall, yes, probably five to six percent more wheat acreage.

Pearson: Let's talk about that. Obviously the situation, the shortage is now -- what do you see ahead? What is this wheat market going to do?

Brugler: Well, I think the rally that we've seen in prices is to slow down demand and we're seeing that. The export sales are other than this current week's number which was inflated by the Iraqi deal export sales are running behind. They are actually for hard red wheat and hard red spring they're actually below USDA's percentage for the year. So, I think we are accomplishing some rationing but it's a long winter and Australia is pretty much out of the market so there's still going to be some demand for U.S. wheat over the winter.

Pearson: Alright, should old crop be making sales I suppose at these points?

Brugler: Yeah, we made another cash sale this past week. Technically we think the market looks a little tired here, we've got downside break out on a couple of the charts and, of course, the crop that has been planted, the winter wheat crop has, the market can't do anything to stimulate more winter wheat acreage here. So, we think maybe the leadership on the bull markets turn over to one of the other commodities.

Pearson: Alright, so in terms of pricing next year what do you want to do?

Brugler: Basically we've been very careful about pricing next year. We made a ten percent sale in Kansas City this week. We did, we've got some short calls which are basically a light hedge in the Chicago wheat and kind of waiting for further price signals before we do anything more.

Pearson: Alright, let's talk about that next leader and that is the corn market. Obviously it's been over a dollar that this market has moved right in the heart of the harvest season. That is pretty substantial. Again, a fairly decent week this week. What is ahead now for the corn market? Are we buying enough acres? That seems to be what everyone is talking about. Are we buying enough acres at these prices or does this thing need to go higher?

Brugler: Well, I think that's a moving target. I think the market is trying to ensure that we, first of all, that we didn't lose too many acres to wheat. Now that that battle is over we're back into jockeying for corn versus soybeans and to a lesser degree versus cotton and rice as well. My reading is we're probably trading a 30 or an 84 to possibly an 85 million acre corn planting for next spring at this price level. The game has kind of turned toward buying the old crop supplies, making sure you've got the bird in the hand rather than worrying about the two in the bush.

Pearson: Alright, let's talk about that. Producers -- we went to such great efforts to put this crop away. I mean, most of the analysts were saying, you know, we'd see these moves in the corn market starting in early '07, spring of '07 into '08 and then, of course, the wheat situation erupts in Australia and now all of a sudden wheat is not going to be a coarse grain, it's not going to be a food, it's going to be a food grain not a feed grain and now the thing tightens up right now. So, producers are saying, you know, should we be feeding this current rising market?

Brugler: Well, I think you have to keep it in the context of where prices are going to go next year. We're still thinking we ought to see $3.90 to $4.00 futures for Dec. '07 or March '08 contract. In that context a nearby contract at $3.40 or $3.50 is still cheap. You've got carrying costs of course. I think you feed the market, you reward the market for the dollar rally, that is a twelve month average move in a little less than two months. So, I think you do, if you've got some surplus grain, you don't have convenient storage for it, maybe you let the market have a little of it but, again, I don't see that you need to sell the whole crop here.

Pearson: Alright, so higher prices are coming?

Brugler: We're still being patient, we haven't done anything on '07 or '08 yet.

Pearson: Alright, and as we go on let's talk about soybeans here too. Obviously they have gained from this rally because the fundamentals for soybeans as you were, the last time you were on the show they aren't that attractive.

Brugler: Yeah, the soybean supply and demand looks pretty bearish but what you have to remember is soybean meal is a feed substitute versus corn and wheat. So, as corn pulled up away from the soybean meal, meal had an opportunity to catch up. It's actually the cheapest it's been against corn since 1996. And so I attribute much of the twenty dollar plus rally in the meal to just the cheapness versus corn but that is half of the value or more than half the value of the soybean so that has pushed the bean market up as well.

Pearson: Alright, talk about soybeans around the world. Now, with this rally that we're having, I mean, most of the crop has been planted in South America correct?

Brugler: Actually they are about halfway done or a little more than halfway done. The market is still in a position to influence that acreage. This rally has played right into the hands of the Brazilian producers by making some of those more marginal situations a go instead of a no go. I think we probably have purchased some extra acreage in Brazil and probably like in Argentina as well. The market is going to want to see how the yields are turning out on that, planting will end up actually the first or second week of December and then we started getting into January we'll start to get a better handle on that crop. But obviously if South America has a larger crop than we originally had dialed in then we don't need quite as many bean acres here in the U.S. next spring and that is to the corn's benefit.

Pearson: That's right. Okay, what is your target now for soybean prices?

Brugler: Basically we think that $6.60, $6.70 area is a pretty good place to start sales. We haven't actually pulled the trigger on any new sales other than what we have done earlier. We think that there is potential for $7.00, $7.25 out there yet particularly if meal tries to catch up with corn.

Pearson: Okay, yeah we get them into closer alignment. Let's talk about the cotton market which as we mentioned on the show this week is under a little bit of pressure. What is ahead for cotton? China continues to make all our clothes, they're just a big factor out there.

Brugler: They are a big factor, they account for about 40% of world demand. That is one country. But they have a bigger crop themselves this year and they've also got a fair amount of cotton that was brought in ahead of the end of the step two subsidies out of the U.S., they're still working off that pile and their domestic harvest. I think you're going to see them become more active in the world market over the next few weeks but the cotton market here is so far behind on export sales and we need to see that business coming, actually see some on the books before we can get too excited.

Pearson: Okay, not in a hurry to make sales here at all?

Brugler: We've got everything under loan. We've got nine and a half cent LDP's. Actually we've got a few long puts, kind of Texas hedged a little bit and waiting to find that low.

Pearson: Alright, let's move over and talk about livestock. Fed cattle market going forward -- is the house pretty much in order -- we're fairly current on this beef market right now?

Brugler: I think we're fairly current but we've got bigger numbers coming. If you remember we had a lot of light calves placed last January, February, March. Our numbers start to rise the middle of November. We have year over year very large numbers in December. I think the market is starting to anticipate that a little bit, cash cattle were down a buck or so this week. Product value is hanging in there pretty well in the mid $140 on the choice but that number of cattle is going to increase and, of course, this is, we're getting the seasonal time of year where the ham and the turkey becomes a bigger factor in the consumer.

Pearson: Alright, do you want to do anything if you're feeding cattle right now?

Brugler: We're hedged up on cattle in terms of December and February particularly. There are some attractive opportunities in the cattle crush spreads. We've had some of our clients put May cattle crush spreads on here in the last few days. We've already got some on in November as well.

Pearson: Alright, what about this feeder market? Obviously the corn market, the move it has made it's put a lot of pressure on this calf market.

Brugler: Yeah, the feeders are really the victim there. If corn is going up and the cattle market is sideways or a little lower the adjustor of the thermostat there is you beat down the feeders. And that is exactly what is happening.

Pearson: What do you see going forward now with this corn market? If we stay in these ranges we get $3.90, $4.00 that really makes that calf unattractive doesn't it?

Brugler: Yeah, if corn continues to go up then I think you're going to see feeders continue to be squeezed here. Now obviously if live cattle suddenly were able to turn around that would change the equation. But right now we don't have a lot of leverage on the finished cattle side so the feedlot has got to pay less for the feeders.

Pearson: Talk about the hog market and what you see happening there. We've had some big numbers in September, huge numbers in September. The market has held in there pretty good. What's ahead?

Brugler: The market has held up real well, it's helped that we've had pretty aggressive competition in the western Corn Belt from between the packing plants. That has kept the cash price up a little bit. We, exports of course have continued to be very good. Looks like we might be getting past the peak of the numbers. Seasonally that should happen November or no later than December. And, you know, it looks like maybe that $54 figure might have been the swing low here. I'm not real inamorate of buying hogs at this price level but, again, I don't see that we're probably going back to $54 either.

Pearson: The cows are out of the gate here but as you look for a livestock producer right now and you mentioned it earlier that the cash is the big thing what would you do for covering feed needs for the next two quarters?

Brugler: Well, what we did, we did some bull call spreads in corn, March $3.40, $3.70 calls. Now, the market has been getting towards the upper end of that and you might have to look at a different set of strike prices. But that gave us some protection on the up side. Obviously if you've got a weaker basis locally you might want to go ahead and lock in the cash. I had a client that had some grain offered to him, I said go ahead and get it before the ethanol plant down the road does. You can buy a put if you think you paid too much for it but at least you'll have the physical commodity. And I think that becomes an issue as we move forward into 2007 is control of that physical grain.

Pearson: Excellent, some good points as usual. Alan Brugler, thank you so much. That should wrap up this edition of Market to Market. But if you'd like more information from Alan on where these markets may be headed 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, that's no charge at our Website. And be sure to join us again next week when we'll examine the impact of the mid-term elections on rural America. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

. I'm Mark Pearson. Have a great week.

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