Brugler: Good to be here.
Swalwell: Always nice to have you and we have lots to talk about both in the grain and livestock sectors. And, of course, weather always an influence, especially this time of year. So, let's begin with what is happening with wheat. We had mentioned that prices were looking up a bit there.
Brugler: Yeah, the wheat market was pretty strong this week particularly in the Minneapolis exchange, the spring wheat is the story. USDA came out on Monday night and said that the crop condition ratings have declined quite a bit from the previous week in that good to excellent category. That suggests a problem with the yield. The forecasts are calling for warmer temps next week up in the northern plains where the bulk of the spring wheat is grown. So, we had a pretty good run in the spring wheat this week. The Kansas City version, the hard red winter wheat is continuing to be combined. There's not much that the weather will do to the hard red wheat other than delay harvesting and we did get some wet weather in Kansas. Chicago wheat which is, of course, the heaviest traded is also the favored short leg for spread traders. So, they are buying the Kansas City and Minneapolis, selling the Chicago. We have plenty of soft red wheat, more than the market currently wants and can absorb. So, that one has tended to lag the other two exchanges.
Swalwell: So, while wheat is looking up right now anyway a little bit of a down trend with the other grains, corn and beans. Let's talk about corn for a minute.
Brugler: Corn took a hit this week. Basically the biggest problem in corn is that we've got a number of speculators that are long in the market. At one point a couple of weeks ago it was 270,000 contracts. Many of those people need to get out of the market ahead of July deliveries. We've got first notice day is a week from now. The speculators typically don't want to own 5000 bushels of actual corn so they want to liquidate that position ahead of deliveries. We've also got a couple of big USDA reports coming out next Friday, the planted acreage report and the grain stocks report. We probably will see a little bit of a bounce here as we get closer to that report. But right now the focus is on liquidation and of course the weather in the Corn Belt has been fairly benign. We've got some dry pockets, no question about it but some of the dry areas have tended to get rain just about the time they were starting to get critical. And unless we have a more widespread pattern of drought I think the market is going to take some of that weather premium out.
Swalwell: And again with beans then shifting there, weather always a concern especially earlier on in the process. But we also have the situation of beans, beans everywhere globally. So, can you talk about those dynamics?
Brugler: We still have a very comfortable world stock situation in soybeans. The Brazilian crop estimate has been reduced downward a couple of times but we're still setting a record projected ending stocks for September 1. We've got large acreage planned for the U.S. for this year. We'll find out how much on Friday. But the market's real focus in terms of weather for soybeans is going to be late July and early August. It's a little early for any weather concerns to play out in the soybeans. The risk is that if the weather is good then the prices are probably 50 to 75 cents a bushel too high right now.
Swalwell: So, what is your advice, Alan, for producers in terms of holding, selling?
Brugler: Basically we're trying to clean up our old crop sales on any little rally that comes along. We've got put protection, mostly November $6.20 puts on our new crop. We've sold some calls up around $6.60 or $6.80 above the market as kind of a light hedge strategy there as well. So, that tells you we're not really expecting the November beans to get up past that $6.80 level. The cash sales are a little more difficult to make forward contracts because the basis is still pretty weak in most parts of the country.
Swalwell: We mentioned rain earlier, it's happening in some areas of Texas, traditional cotton country down there and that is influencing the price of that commodity. Can you talk about that for a moment?
Brugler: Yeah, cotton had a major decline this week mostly on Thursday and Friday. The part of the story was that the dry area of Texas, Texas is a major production area, was getting some rain and was expected to get some more rain, up to two inches over a five day period. That took a lot of the weather premium out of the Texas part of the cotton crop. There were also some concerns about the cotton export business. China has been slow to issue their new import quotas and so that has kind of put a hold on additional sales to China. And we've got deliveries starting on Monday with huge certified stocks ready to go against delivery. So, the speculators were getting out of the cotton as well.
Swalwell: Okay, great recap on that area. Let's switch now to livestock and some bullish reports that we were talking about before the program on cattle. How about some more detail on that?
Brugler: Cattle on feed report was bullish in that all three categories were to the bull side of trade expectations. That total number on feed was smaller than expected. The placements during May were smaller than expected, the marketings were a little higher than the average trade guess. That said, I think some of the bullishness is already in the market. We saw pretty good price advance this week and we've got to also look at where those numbers are coming from. Most of the short fall in the placements was in the seven weights and the heavier cattle. It looks like we just moved them ahead when we were having the pasture problems early in the year, they're already in the pipeline.
Swalwell: And how about feeders? What is your insight there?
Brugler: Feeders were pretty strong this week. Again, when you have higher cattle prices and lower corn prices and soybean meal prices that's a pretty attractive equation and we just got a little more demand for what appeared to be at the moment fairly tight supplies for feeders.
Swalwell: And what impact is the dry weather, the drought conditions in some part of the country having on this segment of the industry?
Brugler: Basically pasture conditions are worse than they were a year ago, there's no question about that. That forced a lot of early movement and as the feature item showed earlier there has also been some cow liquidation that created a little more lower grade beef supply, that showed up in the cold storage report on Thursday. That's more of an issue in the hamburger end of the market but we're basically the cattle market stalled out a little bit on Friday in terms of cash trade and box beef trade. It's watching the pork market and pork is struggling a little bit too.
Swalwell: Well, that's a perfect segway to talk about hogs. You mentioned it's struggling, give us some more detail there. Why is that happening?
Brugler: We had a huge run up, basically the pork products, the lean cut out which is a summation of all the different pork cuts, had gained every day from June 1 until the middle of this week and then basically we started running into some retail or resistance on pork product prices and as that pork cut out declined the packers backed off on their hog bids as well. Futures had three really bad days this week. We started to see some liquidation, some of the speculative element in the market that had bought it a couple of weeks ago started to cash out their positions. Pork bellies were down because the cold storage report showed a little larger pork belly supplies. I think the hog market has probably put in a top for the short-term here.
Swalwell: Is that an unusual situation to have several good days and some bad days mixed in and end up with a net negative?
Brugler: The market is very volatile right now. When you have a market that is going almost straight up as it had been over the last couple of weeks it's typically going to end badly and we had a nasty break, then the bulls tried to reassert their control. It didn't work and then we sold off again. But, again, the bottom line is with that pork product starting to come back a little bit that is probably going to put more impetus on the futures retreating. They are at a little bit of a discount to the cash market so it may be a slower retreat from here on down. But I think the technical signs are starting to point more towards a sell off here.
Swalwell: Okay, with a little extra time here let's jump back if we can to cow/calf producers and what advice would you have for them as you look at the current conditions in the market?
Brugler: Well, cow/calf producers have got much better selling prices for those feeders than what they've been seeing. I think most of them aren't hedgers in the classic sense but there are some opportunities to put a price floor under feeder cattle using options, for example, $90 puts, that type of thing. We do have to be aware though that the cattle market itself trades in about a 45 week cycle. We just put in that bottom six or eight weeks ago. There is some potential that by late fall, early winter we could be even higher than we are now. So, I wouldn't make any long-term commitments there but in the short run a little defensive posture is probably appropriate after the nice move up we've had.
Swalwell: Well, that leads us to your advice on covering feed needs then.
Brugler: Feed needs, corn right now is under some pressure. You've got a weak basis and at the moment a weak board. I have had my own clients buy out through the end of July in the cash market but we've still got plenty of needs to cover for the rest of the fall. I guess we're waiting to see how the market behaves around this critical 4th of July period. If we start to get a little bit of more concern about drought we'll probably increase our coverage sooner. But I am thinking that over time we've got more than 2 billion bushels of old crop corn that is going to be left over on September 1, what we call the carry out. That has got to come to market to make room for the crop that is growing out in the field. That is going to put some more pressure on the basis and probably give us better buying opportunities for that cash corn.
Swalwell: Alan, at this time of year with the surpluses you've mentioned and the weather being such a big influence, as you look back over all these commodities that we just talked about where do you see the opportunities for producers?
Brugler: Well, I think in terms of price appreciation wheat is probably got the best opportunity in the short run just because of the fact that we're still in a growing season and we've got some problems with that soft, excuse me, that hard red spring wheat. The corn market is also a little oversold and could have a bounce here in the next week to ten days.
Swalwell: So, on the flip side of that, Alan, what are areas of concern for you and what advice do you have for producers who might share those concerns as they look at the markets too?
Brugler: I think the market that is in the most danger at the moment is corn if we start to get into that early July period, if the pollination forecast looks good, the weather looks good, we've got that huge amount of speculative open interest that may want to leave the market and go somewhere else. I think the, again, the hog market has had a pretty good run and seasonally this is the time of year when hogs would start to slow down, sometime in July we'd start to roll over and decline into a fall low. So, those would be my two main risk areas right now.
Swalwell: Alright, thanks Alan. That wraps up this edition of Market to Market. But if you'd like more information from Alan on just where these markets are headed visit the Market Plus page at our Market to Market Website. And be sure to join us again next week when we'll meet one of America's most advanced precision farmers. Until then, thanks for watching. I'm Rick Swalwell, Have a great week.