Pearson: Alright, let's open up, I want to talk about this wheat market. That one has certainly been an interesting one to watch this year with the horrific dry conditions down in the panhandle of Oklahoma and Texas through southwest Kansas, some moisture has moved through. How do you feel about this year's wheat crop
Brugler: The correlation on yield is primarily in that April and May period.
Pearson: Doesn't matter, right?
Brugler: Doesn't tend to matter. And we're getting the rain during that critical period. It's probably not going to help the Texas crop but the Oklahoma maybe a little bit and definitely Kansas and Nebraska which are two of the bigger production areas for hard red winter wheat. We're seeing some benefit from this extra moisture. So, my models have the wheat, winter wheat average yield somewhere between 38-40 bushels, that would be down from last year but not nearly as bad as we were looking at a month or two ago.
Pearson: Alright, how does that correlate to price as you look at things? Now, we follow Chicago soft wheat and, of course, we're talking about the hard product which is a little more valuable and has been a little more exciting to watch this winter.
Brugler: Definitely. There is a dichotomy there that the hard wheat, the hard red spring and hard red winter is scarce supply to soft wheat and the soft white wheat plenty of supply both here and in Europe. So, we do have a widening spread between the two. Right now I think the market is very vulnerable to a sell off because of the rain as long as it doesn't continue into the harvest period.
Pearson: Are you confident enough to start making some sales on the hard red wheat?
Brugler: We've got about 35-40% of the crop forward contracted and we've got some put options against much of the rest to put a floor under prices so if it does go down we're protected.
Pearson: Alright, we're hearing about a small crop here in the United States of all wheats, literally. Worldwide there seems to be plenty of wheat around. What is some upside for wheat?
Brugler: Well, I think that the upside would be if Canada, for example, which is expected to have a larger spring wheat crop runs into some problems as well. The IGC this week did increase their old crop estimate another 3 million tons so the world stocks are not excessive but they are bigger than we thought they were going to be a few months ago.
Pearson: Alright, and the demand picture?
Brugler: Demand is growing fairly steadily. We haven't stopped producing people and that food grains and a good economy in many of the larger consuming countries helps us with that demand.
Pearson: Let's talk a little bit about what's going on in corn. This has been changing times in the commodities world. You've got all this fund buying that has been occurring, people wanting exposure to commodities for institutional investing and retirement plans and so forth. A lot of that money has flowed in. You have this idea of the corn and soybeans are now tied to what is happening in crude oil. And it's made for a very interesting scenario. Talk about this corn market. And what I want you to address, Alan, is a lot of producers ask me about selling some of those, that December deferred contract for '07, maybe into '08. Those prices look fairly attractive. What is your take on all that?
Brugler: They're definitely attractive prices but you have to look at the context. If the price charts are telling you to not sell those contracts, we've had fairly steady upward movement in those prices all spring, all summer. If you look at the growth of the ethanol industry you can easily compute a scenario where we've got less than 500 million bushel ending stocks. In a year and a half, two years from now you could potentially have negative ending stocks if we are unable to expand production at the rate that the market requires. So, I'm very skeptical about selling 2007 or 2008 crop at this time. I think we've got an adequate old crop carry over. If the 2006 crop looks good going into June and July then we'll probably see some price relaxation, if you will, into harvest. But, again, unless you're just doing it as a speculative play to try to pick up 20 or 30 cents I don't think you sell the '07 or the '08 yet.
Pearson: Alright, let's talk about selling the '05. You mentioned it, old crop, there's still a lot of old crop in farm hands out there.
Brugler: Quite a bit of old crop out there. I'm afraid the basis is going to be poor again this year. There have been a couple of studies out in the last two weeks talking about a storage crunch again this fall with even a normal size crop for 2006 because we've got bigger ending stocks of both corn and soybeans from last year that we still have to find a home for. So, I don't see a very good performance on the cash side. Obviously if there is any problem with the new crop in terms of weather then I think you can see a little more of a rally in the old crop. Probably another ten to twelve cents between now and July but only if we've got a crop problem.
Pearson: You'd use that as a selling opportunity?
Brugler: I think at that point you have to reward the old crop market.
Pearson: Alright, and talk about selling the '06 crop. Are you getting in a hurry to get it sold?
Brugler: Not in a hurry, we've sold some $2.90 calls basically we regard that as a $3.07 sale which is well above the current market. If the market was down it's not much of a hedge, it's just a little bit of money in our pocket. So, I guess we're nibbling at the new crop sales. We'd like to see the market conclusively break out of that island top that we're looking at right now, either higher, in which case we don't want any sales or if it's going down then that will tell us it's time to get more serious.
Pearson: The island top occurs about where?
Brugler: Around the $2.50 area, $2.55 area.
Pearson: Alright, you mentioned ethanol production. And ethanol is great, we're pulling the starch on the corn and making it into alcohol. That produces a great byproduct, distiller dried grains, DDG's, that's a great feed product, competes handily with soybean meal doesn't it?
Brugler: Yes, it does compete in the ration with the soybean meal. I contend there is actually, over time there will be a kind of a death spiral there where the increasing supplies of DDG will compete with the soybean meal and the ration. It will force the price of both of those products down over time as we increase production. You talk about biodiesel and the demand for more soybean oil, that just increases soybean meal production. Again, we're probably going to reach a point in which we've got too much of both of those. But right now, yes, it's a good byproduct and because we're taking part of that bushel of corn, borrowing it at the ethanol plant and then putting it back, it doesn't have as direct of an impact on feed use or on prices as it would if that corn was just leaving the country on a vessel.
Pearson: Alright, we're adding value which is what it's all about right here at home. What about on the -- talking about soy biodiesel, let's talk about soybeans and soybean prices. Friday was an interesting day on the Chicago Board of Trade. Soybean prices jumped higher, finished relatively strong and relatively strong for the week. As you look at this soybean market right now we've got almost a record carry out, big crop down in South America. How can you justify not selling this market, Alan?
Brugler: Well, it was a pretty puzzling day actually. Why anyone wanted to pay 15 cents higher on the open for soybeans is beyond me. As the day went on we did see another round of speculative buying in the soybean oil and that justified some of the rally in beans. Again, I think we're trading energy, we're trading that concept of biodiesel, soybean oil as a substitute for diesel fuel. The limiting factor, of course, is many of the biodiesel processing plants that are needed to turn that into fuel, to take the glycerin out don't exist yet. The census bureau crush report this week did show a slightly smaller soybean oil stocks figure than the trade had anticipated. That kind of supported the rally. But this is definitely an oil led rally rather than a meal led rally. And the beans could go higher if oil continues to be a strong player. But, again, I'm a little skeptical about the staying power given our lack of processing capability.
Pearson: Do you want to sell beans now?
Brugler: I'm not selling them yet.
Pearson: I'm talking old crop beans.
Brugler: Old crop I'm wide open. I have no hedges, we lifted those as the May options were expiring. We're kind of riding it to see how far we can get with it. Obviously this is the rally to sell, you don't want to lug them into summer in most cases. New crop we've got a few light put positions on just because of the price level. But, again, I think we have to kind of take a wait and see attitude here. This could be a selling opportunity with this big bounce but we need to see what happens Monday and Tuesday.
Pearson: Same question, Alan, on those far deferred contracts, a year or two years out, are you making any sales there or would you advise...?
Brugler: I'm not touching those, again, in the high inflation environment soybeans tending to be one of the commodities that's a little more speculative I think, and not knowing what our input costs are, I think we need to be very cautious about selling those. I'd like to see a much bigger spread between the old crop and the new crop in both corn and soybeans if I was going to sell those deferred's.
Pearson: Alright, and talk about '06. I missed it, what are you recommending for price levels? Where would you like to at least start making some '06 sales?
Brugler: Basically I like the $6.40 area, that's very close to the contract high. We've got a little bit of forward sales at $6.25 and we've got some short $6.60 calls that we've had for quite a while. I didn't lift those so I guess I don't think the market is going above that at the present time. But somewhere in there is probably a good selling opportunity, maybe part of a scale up approach.
Pearson: Alright, let's talk about the cotton market. It's been on a slow decline here the last three weeks. What is your take on cotton? Planting progress has been good. What else is going on in cotton?
Brugler: Well, the big story in cotton, of course, is exports. The USDA is calling for a record export program this year, by far the most we've ever shipped out of the country. Most of it is going to China. The Chinese business has slowed down here because of several factors, the most important one right now is that they're on vacation all this coming week for the May Day holidays. And so we've seen smaller export sales, we've also seen smaller export shipments. That is probably the biggest issue right now is whether we can meet USDA's aggressive estimate for the year when we're shipping about 50,000 or 100,000 bales a week less than what we should be to meet that target.
Brugler: I think the rainfall in Texas probably was also a little bit of a negative because it improves the prospects for this coming year.
Pearson: Alright, let's move over to livestock. Fed cattle market, on the board again, pressured. We saw dressed beef move up a little bit this week. What is ahead for the fed cattle?
Brugler: I think we know there is bigger numbers coming, we've got all these light cattle placements, they'll be coming out this summer, right now we think probably the weakest cash spot is probably late July or early August. The packers are making some more money now because they've been able to get the boxes up and the cash cattle price down at the same time. At some point we hope the producers will be able to get a little leverage here and capture part of that value. But technically speaking the market is trying to put in a double bottom. It's already discounted the cash market of June trading around $73 or $74 when the cash is at $79. So, that does give us an opportunity to rally futures, perhaps, but I think the trend for the cash market is probably steady to down for a while yet.
Pearson: What do you think we could see for a bottom in fed cattle?
Brugler: The cash bottom I think is probably $75 to $76 based on what we know today. But, again, timing is very critical there. If you bunch up the marketings too much it could be much uglier than that. If we're able to spread them out a little bit...
Pearson: Or back up the weights or we don't get poultry moving...
Pearson: You know, those are all things. I want to talk about this feeder calf market real quick. I think the board looks pretty decent for some feeder cattle sales.
Brugler: Yeah, the feeder cattle are very dependent on the fat cattle deferred contracts. Basically, technically speaking yes, we've got a declining trend yet we have very little long coverage for feeder cattle for our feed lot clients. We're not interested in protecting the price much here. But, again, if you're a feeder producer...
Pearson: Cow/calf guy...
Brugler: Cow/calf guy we do have some hedge protection on for those guys.
Pearson: Alright, let's talk about the hog market which has been fascinating. Had a nice up move this week on the board. What is going on with this hog market?
Brugler: Basically, again, it's the meat. The pork cut out has been climbing, the cold storage report showed a little less pork, showed less pork bellies in storage. The pork belly market, futures market had a limit up move one day and a couple of other fairly big moves this week. So, it's meat related. The thing that impressed me the most was when the Russians said they were halting all poultry imports you would have expected that the beef and pork markets would back off and that didn't happen. We do have some plants that will be dark on Monday for labor issues and that is tightening up the wholesale supply a little bit and that may be supporting the product values. The biggest problem, of course, is that the futures are already anticipating about a seven or eight dollar increase in the cash market and if the cash market stalls out then we probably are going to see a little bit of a sell off here in the futures.
Pearson: We've got that bacon, lettuce, tomato market we have to take care of for those bellies.
Brugler: BLT season is coming up quickly. If it quits raining and warms up a little bit we'll be there.
Pearson: Get those tomato plants in the ground. Let me just ask you real quick, for the livestock producer in here. With all this volatility going on, fuel prices and everything else are you wanting to get some feed needs covered or not? You hand to mouth?
Brugler: Basically we're very hand to mouth on soybean meal. We do have some call spreads on the corn.
Pearson: Excellent. Thank you so much, Alan Brugler. That will wrap up this edition of Market to Market. But if you'd like to hear more from Alan on just where these markets are headed then be sure to visit the Market Plus page at our Market to Market Website. And be sure to join us again next week when we'll examine how one small town is fighting the methamphetamine epidemic in rural America. Until then, thanks for watching. I'm Mark Pearson. Have a great week.