Brugler: Good to be here, Mark.
Pearson: Volatile week, I mean, we're in the first week of June and no one knows what kind of a crop we're going to grow. We have a pretty good idea what the wheat crop looks like. And that market was under some pressure this week. What are you telling wheat growers?
Brugler: Basically we've been trying to scale up our sales as the market has gone up, selling another 10% of production every ten or fifteen cents higher. Now we're looking at trying to put some kind of a floor under the remaining crop with options, primarily put options or short calls above the market. Basically the USDA will be coming out next Friday with another crop estimate. There are some indications they may reduce the crop a little further because of weather since the last report. But our opinion is that that is already in the market.
Pearson: Okay, so the market is figuring that. And the early reports we're getting, the early harvest reports we're getting in the hard red wheat belt have been fairly encouraging in terms of yield.
Brugler: That is always a tricky thing to measure because the expectations were extremely poor. Because of the low crop ratings everybody is assuming a very low average yield, actually our models say that the hard red winter wheat yield is probably below 20 bushels to the acre. So, when you get a guy who says he's got 50 or 45 everybody says wow, better than normal. But we need to get a lot further into the harvest and particularly further north into harvest out of the original drought area to get a handle on what the final yield is going to be.
Pearson: Alright, so you're scale upping at this stage of the game when you get ten to fifteen cents?
Brugler: Yeah, we basically think we need to reward the market for prices that are at the highest level in several years but at the same time in this type of an inflationary environment we don't know where the top is.
Pearson: That's right. Speaking of inflation, let's talk about the corn market and what you see happening there. They're saying it's a fuel now, corn market is just like crude oil or anything else and it's tracking more with that than it is with typical demand and conventional economics. Do you go along with that? Is that what continues to drive this corn market?
Brugler: Well, I think you've got a known increase in demand which is the ethanol, the industrial use. We know that over time the expansion in the ethanol industry is going to draw down the supplies that we are currently sitting on. At the same time we've suddenly developed a little more export demand. We've got the USDA telling us this week another 1.1 million tons were exported overseas and the foreign buyers don't appear to be too concerned about $2.60 or $2.70 futures and the equivalent cash prices. So, with that rising competition between ethanol and the export sector there is some potential for higher prices here. Obviously, if we have an 11.5 or 12 billion bushel crop that is going to dampen that enthusiasm and we'll have some kind of a seasonal sell off. But at this point in the growing season with high temperatures forecast for the western Corn Belt we don't know just what that yield is going to be.
Pearson: So, at this stage of the game you're probably not in too big of a hurry to be selling December corn?
Brugler: Basically we've been, again, doing a little bit of scale up, selling absolutely no 2007 or 2008 crop because the long-term supply and demand tables are suggesting we could even be negative if we don't get enough acreage. So, again, scaling up a little bit on the '06 but not wanting to run out at this point.
Pearson: Alright, on the '07, '08's, which have been $3 plus on some of those deferred contracts.
Brugler: Right, we've got -- those are historically very good prices. But, again, we don't know where the thing is going, the inflation aspect, the demand aspect and frankly, we don't know what our production costs are going to be next year.
Pearson: Absolutely, also energy factors. Talk about soybeans. Again, an up week for soybeans and what really was fairly ideal growing conditions this week.
Brugler: Yeah, the crop looks pretty good. Monday night we'll probably get the first crop condition ratings from the USDA for the year. They normally don't do that until we have at least 50% emerged. But I think we got kind of a perfect storm, if you will, this week on the soybean market. We had the weaker dollar, we had the potential for some warmer, maybe even hot temperatures in some areas. We had a stronger than expected weekly export sales figure for soybeans and also for soybean meal. We had Brazil indicating that their soybean meal sales during May were 43% smaller than a year ago. That got the meal market going in a fairly bullish fashion as you mentioned earlier. And when that product value goes up you get the bean price up.
Pearson: Alright, now help me out here. We produce all this ethanol now and we have this DDG by product, distiller dried grains product, which is a good high protein product. We're crushing additional soybeans to take on the soy oil demand which mixes with soy biodiesel. It seems like we're getting an awful lot of by product generated out there. And yet oil prices have really not done all that much. Meal, we've said, like I say, up a little bit this week. How is this all going to shake out, Alan?
Brugler: I think over time you've got kind of a downward spiral. The DDG's and the soybean meal will kind of counteract each other and you'll have a tendency to push prices down over time until they reach the point where the export market will absorb them and that is kind of what we saw this week with the bigger export sales in the meal. The world market at the moment is saying it would like to have some of that excess supply of those feed ingredients. I don't see that a ten or twelve dollar rally in soybean meal is sustainable just because of all the competition with DDG's and, of course, more plants coming on line all the time.
Pearson: Alright, so that's one thing to look at. So, from a trading standpoint and sales standpoint and marketing standpoint what are you telling producers?
Brugler: Well, I think we have to respect the ability of the market to go up here, the fairly dramatic flow of money out of the fund sector into the market this week. We're not oversold technically, excuse me, we're not overbought technically. That means there could be a little more upside yet on the beans. We do want to reward rallies but at the same time we don't want to be too soon and jump in front of that freight train.
Pearson: Alright, too soon to the party. Okay, let's talk about the cotton market which had a nice turnaround this week after three weeks in a row of being under some pressure. We've seen that market start to recover a little bit on the December contract. What is your feeling on cotton? China is still the huge player there.
Brugler: China is still the big player, they're still the number one destination for export sales. Our export sales this week were pretty good. Shipments were a little lower than we would have liked to see them. But from a technical standpoint we've got a nice up trend line on the long-term charts, on the monthly charts, the funds and some of the regular traders like to buy against that trend line and we've got some dryness in the Texas production area that has kind of got people excited about this year's crop production too.
Pearson: Alright, so we've got a supply issue as well. Let's talk about livestock. Fed cattle market, last weekend the big weekend for grilling and it was a good one. What is ahead now for fed cattle prices?
Brugler: Well, I think we're scratching our head and saying how did we get the cash price up this far with the numbers that we've got available to kill and, again, retail demand has been pretty good. The packers are seeing excellent margins at the moment. That has allowed them to pay up for cash cattle, we had $83 trade this week. The board is only trading $80 or $81 so we've got kind of a push/pull scenario there and as long as the cash market can hold up, which of course is affected by the wholesale market to the grocery stores, we could see a little bit higher futures prices. I am concerned that the rally has been fairly steep and at some point the retailer is going to say, gee, we've got lots of cheap chicken that we could feature, why do we need to pay this kind of money for beef.
Pearson: Are we starting to ratchet down some of those excess poultry supplies finally?
Brugler: We are cleaning up a little bit of the meat supply. I think the thing that will work the quickest is the re-opening of the Korean trade which is supposed to happen this coming week. If we solve the Japanese problem, get a few more tons out the door that way that's probably a quicker solution. But, yes, we are starting to clean up the chicken situation because the producers are able to reduce the excess.
Pearson: Let's talk a little bit about this calf market as we go forward, a lot of cow/calf people that watch this show. They've enjoyed some awfully good prices and, again, the rally has been there in this feeder market too.
Brugler: Got a nice buy signal in the feeders, about the same time the live cattle market started to turn around. It should be good a little bit longer. We're not seeing the break evens that we'd like to see on those fall cattle. The price that we're paying for feeders isn't matched by what you can actually hedge in for the finished animals. But that is often the case in the cattle market and the cattlemen will gamble.
Pearson: They'll gamble that one and hopefully win. Let's talk a little bit about the hog market which, again, I mean we're not selling beef to Japan. We have been selling pork. We talked about it earlier in the show the Japanese are getting a little touchier about what comes in as far as pork product and what products we can and can't use. What do you see ahead now for hog prices? Aren't we seasonally at a pretty decent time for prices in hogs?
Brugler: Seasonally we typically see a $10 to $12 rally from spring into early summer. That is related to the flow of hogs out of the facilities. But we're killing 400,000 head this week, or today and a fairly big total for the week. So, that is not really the factor here. We actually have seen the pork product prices go down a little bit over the last few days. It's more the speculative demand. It is this realization that the beef market is going up and pork should be worth more at the meat counter in competition with the beef.
Pearson: Alright, we talked about corn and beans, bean meal, DDG's, this biofuels thing, $3 plus corn on some of those deferred contracts. You're saying, hey, we could see a spike here where we might not want to make those sales. In fact, you're saying don't sell '07, '08 yet. We've got a long way to get to that crop. What about covering feed needs for a livestock producer? Do you want to do some of that?
Brugler: I think you have to do some of that. We've been very slow to make any sales, or any purchases on the soybean meal because it's basically been a surplus all year. On the corn side, though, we've tried to escalate our bookings a little bit knowing that we're competing with the ethanol plants and the other end users.
Pearson: That's right, and that may be an issue we just may learn to have to deal with over time now.
Brugler: That's exactly right.
Pearson: Alright, Alan, thank you so much. 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, of course, be sure to join us again next week when we'll examine USDA's latest crop production estimates. Until then, thanks for watching. I'm Mark Pearson. Have a great week.