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Market Analysis: Dec 23, 2005

posted on December 23, 2005

The grain markets continued their latest rally despite fundamentals suggesting otherwise... For the week, nearby wheat futures gained nearly 15 cents. And the September corn contract was up more than 6 cents. Soybean prices also posted an impressive rally. For the week, the January contract gained more than 20 cents. The nearby meal contract was up 46 cents per ton. Cotton prices continued their upward trend. For the week, the March futures contract gained 15 cents. In livestock, the December cattle contract was up $2.88. Nearby feeders gained 30 cents. And the February lean hog contract jumped 65 cents. In the financials, Comex gold advanced 40 cents per ounce. Nearby crude oil prices rose 37 cents a barrel. The Euro lost 87 basis points against the dollar. And the CRB Index fell $1.50 to close at 327.50. Here now to lend us his insight on these and other market trends is one of our regular market analysts, Alan Brugler. Welcome back.
Market Analysis: Dec 23, 2005 Brugler: Always good to be here, Mark.

Pearson: Well, the market is a little bit stronger. I think a lot of people are getting a little itchy to pull the sell trigger. Let's talk first about the wheat market. We've seen some strength there in the last, really in the last six weeks.

Brugler: Yeah, the wheat market has put in a little bit of a bottom here. It's not so much that we're doing all that great on the export market but we had particularly in Chicago we had a huge net short position from the commodity funds, the manage funds in particular and they're getting out of those positions. There are some year end mechanics involved there that people are taking profits and exiting their positions. There is also quite a bit of thinking that the index funds, the Wall Street asset allocators are going to be buying wheat and corn after the first of the year. And if you're short wheat you want to get out of the way before that happens.

Pearson: Alright, so what is a wheat producer to do?

Brugler: I think we sit tight for the moment. We're not technically overbought at this point and the train is going your way. I think you've got to give it a little room to go.

Pearson: What is going to drive this thing up further?

Brugler: Basically we've got concern about the weather on the plains. Yes, most of the wheat is dormant but it's very dry in the southern plains and we've lost most of our snow cover so there is some potential for damage there. And stocks of the hard red wheats are fairly tight right now.

Pearson: Let's talk a little bit about what is happening in the corn market. And, again, we're at year end and producers, you know, we spend 11 months out of the year trying to make money and a guy told me that we spend the last two weeks of the year trying to lose money. What is your take on this corn market and making sales right now?

Brugler: We've had a pretty good rally, almost 30 cents a bushel in the national average cash price since the middle of harvest. So, it's not a bad time to be making sales if you've got storage deadlines coming up. I had one producer call me this morning and said he has to start paying four cents a bushel storage after the first of the year. It probably isn't feasible to just store the grain if you've got that kind of a bill coming due. The market carry or what you can hedge it for is only about three cents a month. However, I think that you've got potential probably not until late February or March to have a little bigger rally while the market tries to establish the acreage for 2006.

Pearson: Okay, so you're not going to get in a big rush?

Brugler: I think we're going to reward the market for the rally that we're currently seeing. My target is $2.15 March corn, we got very close to that on Friday. But, again, on new crop I'm still looking for $2.50 or higher. We're not quite there yet and these would be small sales thinking, just to get something on the books because of the rally but not in a big way.

Pearson: And you mentioned the national average cash price, of course, we've seen a nice basis recovery here for corn.

Brugler: Most of that recovery has been in the basis. The board is up from, what, $1.86 to over $2 here. But most of the gain has been on the cash side.

Pearson: Okay, so at this stage of the game if you're paying commercial storage you'd consider making sales here?

Brugler: I'd consider making sales. You always have the alternative of buying a call option or a call spread to replace ownership if you decide, you've made that sale at too little of a price. The key consideration is what is your basis. If your basis is relatively firm for this time of the year that is the market telling you to go ahead and move the cash grain and obviously avoiding storage costs is an issue. If you've got on farm storage you've got typically cheaper storage costs. The market is paying you an excellent carry if you just hedge in the March or the May or the July futures contract, you can earn that storage without having to do much else besides put that hedge in place.

Pearson: With these energy prices, I know I've talked to Western Corn Belt producers who are irrigators who were saying boy, the soybeans are going to look a lot better for me. Could we see a shift or is the market going to have to buy some corn acres?

Brugler: I think the market sees that farmers aren't making any money in corn with the energy costs like they are. But the problem is we're sitting there with 25% of next year's crop already in the bin via the carry over from this year. And I don't think we can get a real rally going on corn unless there is a viable threat that we're not going to plant the acreage. If it's just a one or two million acre shift from corn to soybeans I don't think the market is going to get very concerned because we've got that cushion. If the surveys start to show that producers are going to switch three or four million acres to beans and a rally in beans would help cause that thinking then I think we can get a little competition for acreage and corn can take off.

Pearson: Let's talk about soybeans. Obviously big crop potential in South America. Now, they've had a couple of droughts in a row. I mean, I don't know if we have enough production history to know what the likelihood of that is for a third year in a row but what is your take on what is happening in Brazil right now? Most people I talk to say it's ideal.

Brugler: Yeah, I think what I'm hearing is that most of the crop is in pretty good shape. It emerged nicely. The moisture particularly in the major states like Madigroso is in pretty good shape. What dryness we're seeing is down in Argentina and extreme southern Brazil. That is where you would expect to see it if there is an El Nina pattern developing in the Pacific. But as you say it's very rare to have that drought three years in a row and the market has also kind of gotten burned by drought last year here. Everybody thought we were going to have crop problems, the yields came through in the end. So, I don't think the bulls are going to be quite as excitable this year on a little bit of dryness in South America.

Pearson: So, it's going to take something else to move this market up then?

Brugler: It's going to take a little more aggressive problem down there or a sudden recovery in world demand. One of the disturbing facts I guess is that Brazil during the month of November shipped almost a million, 1.2 million tons more beans than they did a year ago for the same period. That means they have a lot of beans left over from last year. That is eating into U.S. export sales and potentially adding to our carry over.

Pearson: When we start to see this Brazilian crop more finalized there could be some serious pressure on beans couldn't there? I mean, if we have a big crop down there and with the carry out that we had here in the U.S.?

Brugler: Yeah, we're kind of in a two crop year. You've got about six months for the U.S. to make most of its export sales, then the South American crop comes out of the field and they've got the cheap grain and they're capturing the majority of the export market. Where you get in trouble is, as you're eluding to, if we have a big carry over and then they have a big crop following it, now you've got double what you need and that would tend to put a lot of pressure on prices. There are several analysts that are saying that if the South American crop is 107 or 108 million tons in Brazil and Argentina that we could see a number with a 4 in front of it eventually. But at the same time we also have to look at soybeans as an asset class and what the folks in Wall Street and London and Paris are looking at and they're saying beans might be cheap at this price even if the supply is more than adequate.

Pearson: So, you wouldn't agree with one of those scenarios that would say maybe even look out at say November 2007 where we've got beans around $6.40 or so, maybe making some sales there?

Brugler: I'm not ready to sell anything in 2007. I'm trying to make some 2006 sales just a few dimes higher than where we were trading this past week. But that is just to put a base position on at a price that I can make money growing soybeans.

Pearson: Alright, let's talk, we've talked about wheat, corn, soybeans. The cotton market has been a bright spot in terms of price. We've seen a nice rally.

Brugler: Yeah, we've seen a nice recovery in cotton. The export sales have really expanded over the last three weeks. This week wasn't quite as good as the two previous weeks but good pick up in sales, China seems to be coming on in a big way. And that is boosting the price.

Pearson: Alright, let's move over and talk about what is happening in the livestock world. Cattle on feed report came out on Friday before Christmas. Some pretty amazing expansion numbers in there. Were you surprised by that inventory number, that 117% jump on cattle going into feedlots?

Brugler: Well, the placements number was expected if you took the average of the trade estimates as published by one of the wire services, 114%. So, this was a small incremental surprise. It certainly wasn't as big as the largest number that I saw. I think it does say that we've got continued impact from the Canadian feeder cattle coming across the board, ten or twelve thousand head a week. We're also starting to get into the expansion part of the cattle cycle. And normally that means larger and larger numbers, lower highs and lower lows. We haven't seen that yet. We're sitting at some of the highest prices we've seen. But it can happen.

Pearson: Okay, so cattle, the cattlemen out there, let's talk about feeder cattle too here because that has been just an amazing market for the last really 30 months. This feeder market has continued to be extremely strong. We've seen it back off here in the last 30 days on the board. But it looks like demand has remained strong to put these calves in these lots.

Brugler: Yeah, I think unfortunately there has been some producers that took a gamble on high priced feeders a few months back. They were rewarded for that gamble by these $95 and $96 fat prices that we have just seen recently and they are reinvesting that money in the feeders again. So, we're still seeing fairly high feeder prices. I'd think that is probably going to taper off as we get into 2006 here. Obviously if you start to lose any of the value in the finished cattle and corn and soybean meal prices go up at the same time that kind of takes some of the glamour out of buying feeder cattle.

Pearson: Alright, let's go back to that feed lot operator for a minute. Now, he's bought these calves, some fairly high priced ones, things have pretty much gone his way on the input side. Demand, the potential for Japan, something e talked about earlier in the show, we may not get back to those 300,000 metric tons a year of U.S. beef going into Japan but we're hopeful we're going to see some product moving in over there and recapture some of our market share. Is it going to be enough to offset what we're seeing come down from Canada?

Brugler: Japan itself won't carry us but if we also see some entry into South Korea and a few other countries I think it could offset the expansion that we're seeing. The Brazilians at the moment have about 50 countries that are embargoing beef shipments from at least one or two states in Brazil because of Foot and Mouth disease. That certainly creates some opportunity for us, a little leverage for people who don't want Brazilian beef to suddenly say well maybe the U.S. stuff is okay. And beef is a very tight supply and demand balance. It doesn't take much change in exports to cause a bigger price move.

Pearson: Let's talk about the hog market and what has been happening there. Now, they're not going to be beneficiaries of the reopening of U.S. beef to Japan because actually what has driven a lot of this hog price.

Brugler: Well, I think that's true but you also have to look at the fact if that beef leaves the U.S. to go to Japan then there is a consumer here in the U.S. that needs some meat to eat. And it's a zero sum game. Now, the expansion in the cattle supply, that is more competition for pork. But I think the export market in itself won't affect pork that much.

Pearson: Alright, what is ahead now for the hog business? We really haven't seen much in the way of expansion so far. Has it been occurring and it's been more or less under the radar because of the integrators?

Brugler: Yeah, it's just a real slow pace of expansion, you know, one, one and a half percent here and also in Canada. I think over time you do see hog prices drift lower. That is just the way the hog cycle has worked but we've shown really good discipline so far and not creating the big surge of hogs.

Pearson: Alright, Alan Brugler, as usual we appreciate your insights. That is going to wrap up this edition of Market to Market. But be sure to join us again next week when we'll look back at the year that was in agriculture. Until then, thanks for watching. I'm Mark Pearson. Have a great holiday.

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