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Market Analysis: Oct 21, 2005

posted on October 21, 2005

Grain prices were pressured despite news that mid-October corn exports hit a marketing year high. For the week, nearby wheat futures lost nine cents. The December corn contract fell two cents.

Healthy sales to China and some long positions held by the funds failed to stem a slide in soybean prices. For the week, November beans slumped more than 17 cents. The December meal contract dropped $7.10 a ton.

The rise in cotton prices came to a halt this week, with the December futures contract falling $2.44.

In livestock, the October live cattle contract was down 70 cents. Nearby feeders lost $1.72. And the December lean hog contract dropped by 73 cents.

In the financials, Comex gold slipped $2.20 an ounce. Nearby crude oil prices fell $2.00 a barrel. The Euro lost 152 basis points against the dollar. And the CRB Index gained three points to close at 332-even.

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

Market Analysis: Oct 21, 2005 Pearson: Here now to lend us his insight on these and other market trends one of our regular market analysts, Alan Brugler. Alan, welcome back.

Brugler: Good to be back.

Pearson: Well, let's talk about this grain market first and let's talk about wheat in particular. Up in Minneapolis and in Kansas City this market has been on fire, Chicago has been kind of the weak sister of the wheat complex. What is ahead? What is your take? What should producers be doing for raising wheat?

Brugler: Well, I think we got a little overbought, a little too frothy on the wheat market. Minneapolis led, as you said, because of the tight wheat stocks, spring wheat stocks that USDA found in their last report. But we found out we were not competitive in the export market. Egypt has had a couple of tenders in the last two weeks and the only thing we've been able to sell them is soft white wheat. Our other wheat classes were anywhere from ten to twelve dollars a ton too high. So, I think we're having a little bit of a correction here just to kind of put things on sale and see if we can find some buyers.

Pearson: Alright, so at this stage of the game have we missed the opportunity to sell?

Brugler: Well, I think in the middle of a correction we actually bumped our sales up a little bit by adding some more hedges against that short-term tendency. I can't say that there is a top for the year but certainly we need to take a breather here if and when there is another leg up.

Pearson: Alright, we mentioned Chicago wheat which is the one we track on the program and I always hear about that whenever I'm in North Dakota or if I'm down in Kansas. We tend to follow the Chicago market. The soft red market has been pretty weak.

Brugler: Yeah, soft red has got problems because we've got 100 million bushels give or take a couple that we don't think we're going to sell this year. Soft wheat is where we had the most competition from the EU and from Eastern Europe, the Ukraine. It looks like the Ukrainian crop is going to be much smaller next year because of drought there. A lot of the fall plantings didn't take place. But on the other hand we're seeing an increase in both hard red and soft red winter wheat plantings this fall here in the United States.

Pearson: True enough, let's talk about the corn market. We know basically all we're going to know about this year's corn crop now from the USDA's standpoint and it's a big one according to the USDA. Cash market has been extremely weak, LDP levels are extremely high in most parts of the Corn Belt. Strategy wise what are you telling a producer?

Brugler: Basically find a place to put it, don't sell it for cash if you can avoid it. Even in that case, even the back of a truck or in your machine shed is probably a good solution at the moment. There is tremendous carry in the cash market just from now until December. So, the market is saying don't give it to us now, we don't have the freight to move it, we don't have storage in the commercial locations. It's a boring market on the futures, very narrow trading ranges. It does remind me of the saying don't sell a sleeping market but in this case that princess needs somebody to come and wake her up and that hasn't happened yet.

Pearson: Alright, so strategy wise let's take it out a little bit here. We've got a big carry out this year. Going forward next year who knows what is going to happen. But should we be looking at pricing some next year's crop?

Brugler: Well, I think you can nibble at the December '06 contract if you're up around that $2.50 area or high $2.40's thinking that it probably won't go any lower than $2.35 or $2.40. But I'm not real fond of the new crop selling, the '06 crop selling because the energy costs are so high, fertilizer costs are so high and producers are going to have a hard time making the decision to plant corn acreage next year at this cost level. The soybeans just pencil out much better at this point in time.

Pearson: And if you don't have on farm storage or access to storage what do you do?

Brugler: I think you probably have to move it and then when we get some kind of a chart bottom you buy a call option or something to try and participate in the rally or you just focus on selling next year's crop. But it's just, the market is telling you in every way it can don't sell now. It's basically saying find a low, take your LDP, sit on it and let us chew through the pile and maybe next spring or next summer it'll be worth something. Our two million stocks isn't really that burdensome given the demand base that we've got but we've got to chew through the pile. We're at the peak of the pile right now.

Pearson: Exactly, we've got all that left over from last year a huge crop and a bigger crop than most people were anticipating.

Brugler: Exactly.

Pearson: Alright, let's talk about soybeans. And am I wrong or has there been kind of a shift now that the U.S. harvest is getting close to getting wrapped up? Has there been a shift of more of what has happened down in South America already?

Brugler Yeah, I think, again, we know what the U.S. crop is or minus 100 million bushels and certainly the focus is shifting there. All the advisory services and wire services are focusing on South American weather despite the fact the weather didn't seem to affect our crop size much here in the U.S. this year. It's the next game in town. We have a six month marketing year in soybeans, the U.S. has got to sell most of its crop in the six months after harvest. Then the Brazilians and Argentines take over. So, it's natural that once we know the size of ours the market starts worrying about that other crop down there. I think we have to keep an eye on demand though, Chinese demand particularly. They have bought quite a bit this week but a big portion of what was reported was a switch from unknown destinations, it wasn't new business. They had an Avian Flu outbreak in inner Mongolia. We don't know if that is spreading down further south with the weather. So, we have to kind of keep an eye on it and I think that is what the market was worried about Friday.

Pearson: What is your take on South America? Are we going to see big acres? Are they going to pull a lot of beans down there?

Brugler: Argentina is going to be up. They under planted their corn crop due to the energy costs, fertilizer costs that I've mentioned and Brazil is probably going to be down just a little bit on acreage according to my sources. The bigger question will be what kinds of inputs they use. If they shortcut on fertilizer a little bit or if they don't do the four fungus sprays for rust, you know, what does that do to their final yield. But, you know, farmers being farmers if the ground is there you're going to try and find a way to put something into it.

Pearson: Alright, for U.S. producers, strategize for me for soybeans.

Brugler: Well, our strategy there is we want to have some down side protection. We've got a nice little gap up and rally here after the USDA crop report. Now we're back into that gap. Normally we would expect that gap to stay open because it red flags tighter U.S. stocks in USDA's estimation. If it does stay open I think we can rally on up to $6.36 or $6.40 on the nearby contract. I think the concern is if we close the gap that tells us that the Avian Flu outbreak is becoming more of an issue on the demand side and I think there is some risk of going down into the $5.60's or lower in that case.

Pearson: Okay, so put some protection in place.

Brugler: Exactly.

Pearson: Alright, Alan what about the cotton market now? That has had a nice run here, it slowed up.

Brugler: Yeah, cotton, again, I think just got a little too far too fast. We choked off the export sales although this week's sales were better than the trade had anticipated. But we're counting on the world absorbing 16 million bales of U.S. cotton exports and that is an all-time record high number and it's a lot easier to do that at 48 or 50 cents than it is at 55 or 60 cents a pound. So, periodically we're going to have these kinds of breaks just to stir up some more demand and keep that product moving out of the country.

Pearson: Hold off on sales for the time being?

Brugler: I think you hold off on sales. What we want to do here, again, is most icons on our loan we want to play the LDP or the pot programs and look for a week when you've got a three or four cent rally in the market where you can pick up last week's LDP and this week's cash price.

Pearson: Alright, good strategy. Let's talk livestock for a minute. Fed cattle market, the cattle on feed report, give us your take on that.

Brugler: The cattle on feed report was probably just a little bit negative. We have a few more numbers on feed. Some people were looking for this to be the first month of 2005 where numbers were down year over year. That didn't happen, we're right at 100%. Placements were a little larger. I'm not sure yet, I haven't had a chance to really chew through the data as to whether that was because of imports or just miscounting some of the placements. Marketings were also a little lighter than expected for the month as a whole. So, I think you've got to interpret it as a little bit bearish. The market did sell off this week, not in a major way, but we were also having a little bit of trouble moving the beef. Box beef was up a couple days, down a couple days. Pork is under pressure, the lean cut outs and so forth. So, beef is going to be kind of limited in how far it can go up here.

Pearson: Okay, so going forward cattle feeders who have paid a lot of money for those calves that are in the feedlot, this feeder cattle market is, we've got the slide of it here for you, that feeder cattle market has been on fire and now we're starting to see it kind of back off a little bit.

Brugler: Yeah, we set new all-time highs here in October, over $119 on the index. I think that is, again, at some point you say why am I paying this much for feeder cattle. And we needed the live cattle market to move up a couple more dollars to make it pencil. I think we are attracting a few more cattle out of Canada and a few more cattle just off the grass. The high energy costs were a factor there, trucking costs were just astronomical coming out of Montana or even further north than that with some of the fuel costs coming down, cash diesel really hasn't but it's become a little easier to move some of those cattle and with an increased supply we've got a lower price.

Brugler: I can say that I've got some technical counts that go much higher to new all-time highs in feeders but I think, again, we've got to have a little bit of a correction here before that can happen.

Pearson: Okay, and again on the fed cattle side hedge opportunities out there?

Brugler: I think you've got to have them hedged. With the kind of input costs you've got on the cattle side USDA's cash estimate is well below where the market is currently trading for the fourth quarter. So, if they're right then you've got to have hedges on either short futures or at least a long put position.

Pearson: Let's talk about the hog market. You mentioned pork and of course we've had strong export business for hogs. The hog business looked pretty good after Labor Day.

Brugler: Yeah, actually the hog business is very good. The producers are making pretty good money yet and everybody is scratching their heads and saying why aren't they expanding? How are we able to keep this profitability level going this long? It, again, I think the big piece of it is the export market and the fact exports could actually benefit from the Avian Flu problem.

Pearson: Alright, could be a for the pork side. So, again, be aware of what your opportunities are.

Brugler: Yep.

Pearson: Excellent. Alan Brugler, thank you so much. That will wrap up this edition of Market to Market. But be sure to join us again next week when we'll learn how Midwestern farmers are helping hungry people to feed themselves. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices corn markets news