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Market Analysis: Mar 24, 2006

posted on March 24, 2006

Wet weather has dampened the fundamentals in the wheat market, while corn moved sideways this week. For the week, nearby wheat futures were down 15 cents. May corn lost almost three cents.

Old crop carryover and the specter of bird flu are scaring traders in the soybean pits. For the week, May beans dropped nearly three cents. But the May meal contract advanced by $1.50 per ton.

Reports of increased acreage in China did little to support cotton prices this week, with the May futures contract down by $1.56.

In livestock, the April live cattle contract lost 55 cents. Nearby feeders fell $1.02. And the April lean hog contract declined by 30 cents.

In the financials, Comex gold climbed $5.90 an ounce. Nearby crude oil prices were up another $1.49 a barrel. The Euro fell 167 basis points against the dollar. And the CRB Index dropped more than a point to close at 327-even.

Here now to lend us his insight on these and other trends is one of our regular market analysts, Alan Brugler. Welcome back.

Market Analysis: Mar 24, 2006

Alan Brugler: Good to be here, Dean.

Borg: Well, you've seen what I just said about the markets this week. Is it still a weather market?

Brugler: Brugler: It's still a weather market. I think the weather has turned more favorable to crop production and that is what we're seeing in the prices. We had a tremendous concern about the winter wheat crop, the hard red winter wheat crop in the southern plains in particular. We got two inches of rain in Amarillo and some rain in Oklahoma, snow further north...

Borg: And that probably had the biggest influence of any grain, didn't it, the weather on grain?

Brugler: Yeah, I think that was a rally killer, if you will. We had a fairly extended rally, we backed off, we've caused a lot of the speculative longs to leave the market. We're certainly not out of the woods yet. We've got ample statistical evidence that the crops made in April and early May, particularly in Kansas which is the biggest production state. Soft red crop, which is grown further east, is in pretty good shape. But the markets, the bulls have been dealt a pretty severe blow. We're going to need some additional problems with weather, a late freeze or something like that, to get back to those price levels that we've already seen.

Borg: So, is weather still the big factor in wheat?

Brugler: It's still a big factor, it's about the only factor. We've got a little bit of interest in the export market. Iraq bought another 100,000 tons this week. So, we'll have some interest in how well we're moving the old crop inventory. But weather is the big focus.

Borg: Is ethanol use and demand supporting the corn market?

Brugler: Definitely, we're expanding the consumption and it is a very inelastic use, that is, once you've built a plant and it is running they've got to have corn and they'll go wherever they have to get it. That said, we've got plenty of corn around, old crop stocks are ample, we're going to have somewhere just under 7 billion bushels, probably reported by USDA next week in their grain stocks report. We're looking ahead, of course, to the planting intentions for this year as well. Our number is about 80.9 million acres for planting intentions. At normal yields that would get you somewhere around a 10.8 or 10.9 billion bushel crop and would reduce the supply because of the demand side. But, again, the USDA is going to give us more thorough survey numbers next Friday.

Borg: How much of an influence is weather going to have on the corn market?

Brugler: Well, I think we've removed a little bit of weather premium. We were concerned about the dryness in Illinois and Iowa a week or two ago but since then we've had a couple big rain storms and a very large scale snowstorm in the western Corn Belt and that has basically made it look like we've got at least moisture to get the crop in the ground and get it up. We'll still have to see what the La Nina, the other weather patterns do over the summer.

Borg: Are there other variables in that corn market, exports or anything else?

Brugler: Exports are an issue. Where it would really get interesting is if we tightened up the supply and then the export market is competing more directly with the ethanol business. Right now there is enough corn to go around.

Borg: Soybeans?

Brugler: Soybean market is dealing with huge supplies of soybean oil, eventually the biodiesel industry will get ramped up and we'll eat into that. But palm oil is a major competitor for soybean oil. It's been down for nearly every day for the last three weeks...

Borg: Isn't the big threat in soybeans bird flu?

Brugler: That is the wild card, that could be here in a month, could be here in six months, kind of a question mark. Clearly it would affect soybean meal consumption -- that would be the impact. If you back up the meal, now the crusher can pay less for the beans because he's got less coming out of the products.

Borg: Is that the one grain that would be the most affected?

Brugler: Of course, we're interrelated to a degree. If you're also feeding corn to those same birds and you've got a ripple effect in the cattle and hog industries from that poultry business as well.

Borg: I talked about the cotton market. What is your take on that?

Brugler: Cotton market has got, actually been hurt by the weather as well because of the improved moisture in the southern plains, now the high plains cotton growers, the Texas growers are beginning to think they might have a little bit better crop, the market is removing that weather risk. Export sales are excellent in cotton but our main chart support, technical support is about fifty cents and that is below the current price.

Borg: Foreign competition there, is that a factor? p>Brugler: Always a factor, lots of competition. World stocks are still fairly large. As you mentioned earlier, the Chinese look like they're going to grow some more. That does not help us with the exports. We need to continue to ship at a very high rate of over 400,000 bales a week.

Borg: What do you have to say about the cattle market?

Brugler: The cattle market has been taking a tremendous beating. We've got too much beef, too much pork, too much poultry here in the United States. The cattle on feed report just reinforces that. I think perhaps the cattle markets overemphasize that the June contract is basically trading ten dollars below the current cash price, may have gone a little too far that way. But having said that, I think the handwriting is on the wall that we've still got a little bit of work to do to gin up the demand.

Borg: But isn't the feeder price holding up fairly well? In fact, better than you would expect?

Brugler: Feeders have held up fairly well. We're still over a hundred dollars. WE have dropped from $119 at the peak but, again, part of that reason that we've held up is because with the increased moisture pastures are better. And you can see that in the placement data, the numbers were lighter this time for the 600 and 700 pound cattle, not quite as many of the lightweights going into the lot. So, we're seeing a little bit of support just from diverting them back out of the feedlot.

Borg: And the hog market?

Brugler: Hogs, again, we've got the surplus meat situation to work through. Typically seasonally we'd see a little increase in hog prices. The board is already anticipating that for futures. We need to see the cash market turn around from that $57 range and kind of bounce back up.

Borg: Let's analyze the influence of bird flu on all cattle and the hog market, and of course, chicken. If chicken, if bird flu comes into this country isn't that going to affect the other two meats?

Brugler: It definitely will have an impact. There is some division in the industry as to what that impact would be. It kind of depends on the consumer reaction. If it is an isolated incident and the consumer only has a minor concern about the safety of poultry you may not see much. If there is a big shift in consumption patterns away from poultry towards beef and pork that could really help turn the cattle and hog markets around. The minority opinion, if you will, is that reduction in poultry consumption would result in the lower chicken price and compete with the meat, with the other two meats at the counter.

Borg: What are you advising to people who come to you for advice on the markets?

Brugler: Basically on the cattle market we've been fully hedged since the low 90's and we're staying there. We basically don't have a technical reason to buy the market. We're aware that avian flu could cause a fairly rapid switch, same thing in the hogs. We've advised put coverage or put spreads of some type out through July. The deferred markets are still holding up pretty well in the hogs and we haven't done any pricing out that far.

Borg: What are you advising livestock producers in the way of buying grain at these prices for future needs?

Brugler: Basically on soybean meal we're playing it very close to the vest, no more than a 30 day ownership. We see the Brazilian supplies coming out into the world market. We see the risk of the avian flu. We don't want to buy a lot of meal here. The ethanol expansion we discussed earlier creates a lot of DDG's, that competes with soybean meal as well. On the corn side, however, we're a little further extended because as exports pick up ethanol picks up, that corn gets a little harder to buy.

Borg: Were you at all surprised by the cattle on feed report?

Brugler: I think it was the actual number on feed was a little higher than I thought, twenty or thirty thousand head. That is the second largest number on feed since '96. The placement data, I thought, was pretty reasonable from what we know. Again, a little more on the heavy placements, the eight weights than I thought we would probably have. But I think the market has got a lot of that already going into the price. We may get a minor reaction on Monday but most of it should already be there.

Borg: I know we've got just a few seconds left here. But planting intentions, is that already built into the market?

Brugler: The market has got in an assumption of what the intentions are. We're trading something around an 80.5 million acre or 80.7 million acre figure in corn, somewhere between 73 and 74 million in soybeans. Those wire service summaries of the analyst's estimates will be out the first part of the week and that will probably allow the market to fine tune it.

Borg: Thank you so much, Alan.

Brugler: Pleasure to be here.

Borg: Well, 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 be sure to visit the Market Plus page at our Market to Market Web site. And be sure to join us again next week when we'll be examining USDA's first estimate, as we said, of the 2006 acreage. Until then, thanks for watching. For Mark Pearson, I'm Dean Borg, have a great week.

Tags: agriculture commodity prices corn markets news wheat