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Market Analysis: Sep 29, 2006: Alan Brugler

posted on September 29, 2006

The Agriculture Department released its quarterly stocks report this week. USDA predicts that corn stocks will be down 7 percent and all wheat stocks will decline by 9 percent from last year. The news was friendly to coarse grain prices. For the week, nearby wheat futures gained nearly 25 cents, while the December corn contract was up more than 7 cents. The government's prediction that soybean supplies will be up 75 percent from last year, appears to already be factored into the markets. For the week, nearby soybeans lost about 2 cents, and the October meal contract was down $3.30 per ton. In the fiber market, the December cotton contract moved back into positive territory, posting a gain of 38 cents. In livestock, the October live cattle contract was up 55 cents. Nearby feeders lost more than $3.15. And the August lean hog contract was up $1.27. In the financials, Comex gold gained 86 cents per ounce. Nearby crude oil prices rose $2.40. The Euro lost 108 basis points against the dollar. And the CRB Index rose nearly two points to close at 305.75. 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: Sep 29, 2006: 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, let's talk about this wheat market. What a week it was for wheat and, again, what the USDA predicts and worldwide supplies must be pretty tight.

Brugler: The world supplies are still shrinking because of dryness down in Australia and Argentina. The International Grains Council dropped their world projection by 5 million tons for production this week. Now, they did cut the world consumption estimate by 4 million tons. They are suggesting that wheat is being priced out of feed rations, a lot of wheat worldwide is feed wheat. So, we do have to be aware that we're doing some damage to demand here. But, certainly got a great market reaction this week.

Pearson: The Chicago market that we follow is up about, what, 60, 70 cents in this most recent rally. What about Kansas City as far as the hard red wheat is concerned and also, of course, the soft spring up in Minneapolis?

Brugler: Well, Kansas City wheat has been not quite as enthusiastic about the rally. The speculator interest has been focused on the Chicago and, of course, we've got pretty good planting conditions this fall for hard red winter wheat, it looks like acreage is going to be up three or four percent. That is going to keep a little bit of a lid on hard red. The wild card on both hard red and Minneapolis is that the Iraqis are in the market, they are saying they're going to buy some U.S. wheat this time around and we don't know the exact quantities or the timing but it is supportive to the market because India has already been buying and we don't need to sell a lot of wheat this year to move the price.

Pearson: Talk about strategies for making sales. Obviously these are some decent wheat prices we're seeing.

Brugler: These are good prices. I think you have to take a scaleable approach, say thank you for what we've got and maybe sell a little bit but try and keep some held back also. We're looking a little bit at selling call options for 2007 July crop on the theory that we get paid for the time frame or we get paid for the price.

Pearson: One way or the other that will work. Let's talk about the corn market, Alan. And, of course, we've been watching that and kind of nervously, interestingly in the farm country as I've been out talking to groups farmers are a little bit concerned about what this reduction in oil prices could mean for the corn and soybean market since they started trading kind of like an energy.

Brugler: Yeah, we put a little pressure on ethanol prices over the last six months. They've followed the gasoline down and that is squeezing the margins on some of the ethanol producers. They're still making money and they're still processing corn at about the maximum rate right now. The story hasn't changed that much in that we've still got a number of ethanol plants coming on line. I believe there's 42 of them under construction right now. So, we're going to increase that domestic demand over the next twelve months. And the market is going to look at that and say how high does price have to go to make sure that the cattle feeders, the exporters and the ethanol guys all have some corn to work with.

Pearson: I don't think I've ever seen a year where I've heard more concern and more interest in storage. A lot of people are thinking oh, we're just going to store this crop away. Is that the best strategy or should we be going to futures and maybe using some options to get some coverage?

Brugler: Well, I think the market carries are telling you that you should store as opposed to selling at harvest. The key though is what your basis is doing. If your basis is narrowed up because of your neighbor is not selling you may be better off selling some of the cash grain and replacing it by buying futures or buying a call option. If your basis is still historically weak then it is definitely a storage situation. We're looking at some hedges but with the changes in the spreads in a tight stocks year you have to be real careful about your strategy.

Pearson: Absolutely, and what is your take now on producers going out and maybe selling some of the '07 crop for corn?

Brugler: I'm still opposed to selling the '07 crop. Our model says that if we get the domestic demand that we were anticipating then the December futures are still 20 to 40 cents at the minimum too cheap so we're saying we've got plenty of time and let's just wait and see what the market wants to give us to encourage more acreage next year.

Pearson: Alright, and at this stage of the game do you think the market is giving us enough to encourage the acreage that we're going to need?

Brugler: I think the price ratio between corn and soybeans is signaling we should plant a little more corn but I don't think it's going to buy 5 million acres which is what USDA is saying we probably need for this next year.

Pearson: Alright, now let's talk about soybeans. You know, they're getting ready down in South America, I talked to a fellow down in South America today and, you know, it's planting season down there. What do you think is going to happen down there with soybeans? Obviously according to the USDA report we've got plenty of soybeans domestically.

Brugler: We have plenty of soybeans here. But, again, those can go away in a hurry if South America doesn't have a crop. We are going to see a reduction in plantings down in South America and, of course, the price level that we're seeing here in the U.S. at their planting period is not telling them to expand acreage. In Madagroso we're going to see a cut back. We're also seeing some shifting to cotton, we're seeing some shifting to sugar down there. So, they're going to have a smaller acreage base depending on the weather, the yields could be up a little bit but it looks to me like no bigger than the crop that they had last year and very possibly smaller.

Pearson: Alright, is that helping this market out right now or is that too early? What should we be keying on as producers going forward to getting soybeans priced?

Brugler: Well, I think the key point continues to be energy, it continues to be the soybean oil. If soybean oil were being priced as vegetable oil right now it would be 17 to 18 cents a pound. But as a fuel molecule it's worth 22 to 24 cents a pound. So, as long as we're seeing at least some stability in that diesel market then oil stays where it is, soy oil stays where it is and the beans can remain at this level. If the fuel prices continue to come down then soybeans probably need to go back towards five bucks.

Pearson: Alright, at this stage of the game are you interested in selling the '07 soybean crop?

Brugler: It's getting attractive to me but, again, we haven't done anything.

Pearson: Alright, cotton market, we talked about it on the show over the last few weeks and we certainly had a little bit of a sell off going on in cotton. Are we headed down sub fifty bucks? Is that your thinking?

Brugler: The charts are still suggesting we ought to go below 50 cents. The fundamentals have firmed up a little bit because China has finally announced some import quotas. We were kind of constrained there, they couldn't buy because they just didn't have the paperwork to do it. But we've got a large crop coming out this fall, we've got huge deliverable cert stocks there sitting in the warehouses, probably a little more weakness yet.

Pearson: Alright, let's go over to livestock. Fed cattle market, it's been interesting to see, it's held on, it looks pretty good. What is your take the final quarter of the year for fed cattle?

Brugler: We've been looking for a high in the September, October period for the year, the 45-week cycle. Basically we've taken a hit here because of the box beef prices going down. The market is acting like it wants to come back and try that high again before it is all said and done. We know we've got eight percent or more cattle on feed. We've also increased cow kill so we've got some extra cutter type beef coming into the market. That is going to limit the ability of the market to rally.

Pearson: This calf market has taken it on the chin, certainly did on the board and it seems like there has been a turn out there in the cash market on feeders. They have been awfully good. I mean, let me leave it at that.

Brugler: Been good for the cow/calf guys, not so good for the feedlot guy who is trying to buy them. Again, yes, a lot of calves have moved into the feedlots early, that has created a little bit of a shortage in some areas and some weight ranges. But the big problem, of course, is with feed costs going up and corn has certainly been trying to do that over the last couple of weeks it's less attractive to buy those calves and the market has reflected that.

Pearson: USDA released the quarterly hogs and pigs report today. What is your take on that, Alan?

Brugler: The market is going to take that as a fairly neutral report. We were looking for a one percent increase in all the hog numbers. That is about what we got. The breeding herd number was slightly larger than expected. The pigs per litter is up again. The big story in hogs is the pork cutouts have continued to decline and we're killing a large number of hogs, it's seasonal but it's not done yet. And I think hogs are probably going to continue to be under some pressure here.

Pearson: Anything that you want to do as a livestock producer in terms of getting some control over those inputs? You mentioned finding corn for next year.

Brugler: Yeah, I think you've got, cash corn is king particularly in areas where there's a lot of ethanol plants. You want to make sure you've got supplies lined up that are coming to you and not going to the plant or going out on the railroad. You can adjust the price later using options but the key is to line up that cash corn I think.

Pearson: Absolutely, some excellent points as usual. Alan Brugler, we appreciate it. That will 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 absolutely free. It's at our Website. So, be sure to join us again next week when we'll examine an innovative operation that is helping consumers support their local farmer. Until then, thanks for watching, I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news