Brugler: Good to be back.
Pearson: Alright, let's talk a little bit about the USDA report that was released Friday morning. And, again, for the -- let's talk about wheat first. And, of course, we knew we were going to be expecting some production in the U.S. crop because of the problem we've had in the, particularly in the hard red wheat growing regions, Oklahoma panhandle and so forth, we've known about that for a while. But what was your reaction to that report?
Brugler: Well, basically USDA was expected to cut the spring wheat number further than they did. They only made a minor adjustment, about 2 million bushels, from what they had said in July. As we got into the fields and actually started harvesting we found some better yields in the eastern part of South Dakota and North Dakota particularly and Minnesota and so that was a bit of a surprise. Trade had been looking for that smaller spring wheat number to result in a smaller overall number and so we ended up with a 1.8 billion bushel production figure for the year and the market too it negatively.
Pearson: It sure did. What is your take on wheat prices now as we go forward?
Brugler: Well, I think we're, we've got a little more work to do here because we've got a lot of speculators that were long the market for the last three, four, even five months and we've choked off the exports, our export sales are actually running at a lower pace than what USDA projects for the year as a whole which suggests the prices were plenty high. So, I think we've got to kind of chew through this a little bit, get some of those speculators out of there and then going forward we've got to buy some acreage and that is not a given because it's very dry yet in the southern plains. The Texas and Oklahoma producers are concerned about whether they can get it to sprout if they put it in the ground right now.
Pearson: Alright, and so at this stage of the game for producers out there who have harvested old crop or have their current new crop that they've just harvested in the bin what do you tell them to do?
Brugler: Well, if they've still got it in the bin I think they need to have some kind of a price floor under it whether it is a minimum price agreement with the elevator or a put option or something of that type, try to wait out this little liquidation sell-off here and then probably we'll see a post-harvest rally again to give them another chance to sell it.
Pearson: Alright, let's talk about the corn number. 10.97 billion bushel corn crop. And, again, the market took that on the down swing as well.
Brugler: Yeah, we were kind of set up in negatively from a technical standpoint. The market had a nice rally last week and it looked like we were going to head into the report with that. It broke back on the first part of this week instead suggesting there were some concerns about the numbers. And, again, that was about 180 million bushels more than the trade was looking for. So, it raised the ending stocks estimate back above 1.2 billion bushels for next year and gave us a little more comfortable scenario. So, we got a fair amount of liquidation on Friday, people just saying okay the weather market is over now we're heading into harvest we want out.
Pearson: What about these big speculators, these big long positions we've been hearing about? What are they doing now in this environment?
Brugler: Well, they were, a very small number of them were liquidating earlier in the week. We won't know until Monday the exact volume in open interest figures for Friday. But those were definitely acting like it was speculative liquidation. They've got a lot of contracts left, though. It's probably, from a long-term perspective it's probably better to get them out of the system now than wait until November when they are forced out by the prospect of December futures deliveries.
Pearson: Alright, again, we go out to '07, '08, we had people tell us on the show last week that this market could be ten cents lower to two dollars higher on corn. There still seems to be this bullishness out there, what is a producer supposed to be doing?
Brugler: Well, I think the supply and demand numbers for 2007, 2008 are very bullish yet and I think the analogy I've been using out in the speaking circuit is it's like driving west out of Omaha towards the Rockies, towards Colorado. Your elevation is going up all the time but you still go through a fair number of valleys and there's a little fog here and there and it's not a straight line deal. So, I think longer term we've got to continue to be bullish because the domestic demand is growing so quickly with ethanol and the world stocks are very tight for coarse grains and for corn. So, the export market is going to be wanting to compete for that grain.
Pearson: Alright, so to get through this crop year it could be a little tough, we could see some, maybe even a deer in our headlights but longer term with the biofuels demand it looks pretty good.
Brugler: Yeah, I think the market's job after we get past the harvest lows is going to be trying to buy acreage for next year to make sure that we plant 84, 85 million acres instead of 81.
Pearson: Alright, let's talk about soybeans. Again, a little bit smaller number discounted by the trade just because we have had some rains in some key parts of the bean belt.
Brugler: I think that's a very important part of it. The market broke when we had the heavy rains over the weekend in the western Corn Belt, those rains came just at the right time to stimulate the soybean plants to put on some extra growth and some extra clusters. And so the market is looking at that soybean number the USDA gave us this morning and saying that's probably the smaller number that we're going to see, that we'll add on bushels as we go through the fall.
Pearson: Alright, so in light of all that what are you recommending on soybean sales?
Brugler: Basically we've got about half of our cash beans sold or a little past that in planting and delivering those at harvest. We've been long November $6.20 put options, we just rolled those down ahead of the report, took a little profit off the table. As it turned out we didn't need to do that but I think you've got to, again, wait for the market to stabilize here. It's very oversold technically. It should bounce. What we need is someone to be in there and buy a couple thousand contracts and give the rest of the bull some courage.
Pearson: Alright, well aren't they out there, aren't these big investment houses, aren't they still taking these long positions?
Brugler: We're still seeing the index fund buying but even there this week we had the September futures contracts were being liquidated, what is called the Goldman Role. So, they were selling September, buying November, that put some pressure on that front month.
Pearson: Alright, so one of the other factors producers need to be aware of. Let's talk about this cotton market. It's been interesting really all summer. We've seen the valley and then we saw the market climb back. What is ahead now for cotton?
Brugler: I think cotton has kind of seen the end of this current move, that we've had a very nice rally in cotton over the last few weeks. The market had gotten very close to trend line resistance from a technical standpoint and then USDA gave us a larger than expected crop number this week, still over 20 million bales despite all the problems in Texas and in the deep south. It looks like Tennessee and Arkansas are going to have excellent cotton crops and the market has got to recalibrate to allow for those extra bales of cotton.
Pearson: Alright, so we make any sales here for cotton producers?
Brugler: I think if you've got long positions to protect your CCP or any kind of speculative position you probably reduce those. I would bump up the sales a little bit. Of course, clean up any old crop sales that you've got left over.
Pearson: Get on top of that trend line number. Hey, let's talk also about the livestock market, fed cattle market. Strong cash market, strong futures market, what's going on?
Brugler: The market has been on fire. Basically what has happened is the box beef market has rallied. We've got Labor Day buying at the wholesale level, all the retailers are stocking up. At the same time the Japanese market has been opened back up. The initial shipment that we sent out at the beginning of the week to Costco in Japan only was on the shelves for half a day, the Japanese consumers just soaked it right up. So, I think you're going to see more export business going that way. And with that kind of a cycle on the wholesale side you're going to see the packers pay up for the beef because they've got to have the cattle coming into the plant.
Pearson: Alright, and the calf market, again, has really held on pretty darn good through all of this. And as we look ahead to cheaper corn that calf trade is looking still stronger.
Brugler: The cheap corn looks good, the higher cattle prices look good so the feeders have been fairly pricey. The difficulty, of course, is if you buy them at this price level it's tough to make them pencil out, to make a profit on them. So, feedlots are going to have to be very careful about what they pay for the inputs in order to be able to hedge them at a profit.
Pearson: Be aware of irrational exuberance if you're a cattle buyer right now.
Brugler: Great phrase.
Pearson: Alright, what about the hog market? As we look out and what has been happening with hogs and we have been selling a bunch of pork to Japan and now, as you mentioned, we finally got this load, which was an emotional gain in a way for the beef industry. What does that do to pork?
Brugler: Well, so far it hasn't hurt us too much. The pork prices had a little wash out about three or four weeks ago and then they came back. We were not as dependent on Japan as we were two or three years ago. We've had excellent export business to Mexico, to Canada, to some other locations. We probably will see a little bit of a reduction in pork exports to Japan as the beef market opens back up. But exports have been excellent for the last four years and I think that is continuing to underlie the market. The biggest problem we've got is rising numbers of hogs as we go into the fall.
Pearson: Alright, let's go flip side now. We're talking '07 and '08, maybe some explosive prices for feed grains. Looking down the road if you're a livestock producer do you start covering some of that? Do you start to cover some of those needs?
Brugler: I think you have to get some hedge coverage of some type or long-term forward contracts. And many of the ethanol plants are doing that, the lenders are requiring them even before they start construction to hedge the futures. The December '09 corn futures are trading already and most of the buying side of that has been commercial demand. So, a livestock producer has got to put himself in that same situation.
Pearson: Excellent, Alan Brugler, thank you so much. That will wrap up this edition of Market to Market. But if you'd like more information on where these markets may be headed visit the Market Plus page at our Market to Market Website. Oh and hey, don't forget, you can download audio podcasts of our market analysis and Market Plus segments free at our Website. So, check that out and be sure to join us again next week when we'll take you inside America's only nationally recognized Avian Flu testing facility. Until then, thanks for watching. I'm Mark Pearson. Have a great week.