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Market Analysis: Aug 26, 2005

posted on August 26, 2005


With combines already at work in some corn fields the notion of an early harvest with better-than-expected yields is pressuring prices. For the week, nearby wheat futures lost 13 cents. While the September corn contract lost more than six cents. Late season moisture and bearish projections on global ending stocks drove soybeans lower as well. For the week, the September contract lost more than 6 cents. The nearby meal contract was down $3.10 per ton. The cotton market treaded water with the October futures contract gaining a fraction of a cent. In livestock, the August cattle contract was up $1.90. Nearby feeders gained $2.48. And the October lean hog contract jumped $2.07. In the financials, Comex gold gained 20 cents an ounce. The Euro rose 129 basis points against the dollar. And the CRB Index rallied 7 points to close at 319-even. 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: Aug 26, 2005 Brugler: Good to be back, Mark.

Pearson: Well, we talked about the corn harvest is not that far away, we had the Pro Farmer Crop Tour that went all across the country, all across corn and soybean country I should say and they came out with some numbers that were not overly friendly to corn or soybean prices. In fact, a little bit better than what some people were expecting. Let's talk about the soybean market first, Alan. There is obviously some pressure there. We have had some decent weather in the last 30 days. It will be interesting what the USDA has for a crop report in September. But between now and then it looks like the trade is expecting some bigger numbers.

Brugler: I think the trade is looking at some bigger numbers, at least compared to what we were looking at in July during the heart of the drought. I think you also need to look at what is going on in the soybean products, though. Most of the decline over the last two weeks has been factored into the soybean meal and soybean oil prices as well. In other words, if you multiplied the number of pounds of oil times the price drop in oil and the pounds of meal and the price drop of meal it explains almost all of the decline in the soybeans. So, whether that is because of speculative liquidation or some underlying problems in product values is what the market has got to look at.

Pearson: What are the funds doing right now? We heard about the funds when things were going up.

Brugler: We're definitely seeing some fund liquidation. They've actually gone completely out of their long positions in corn. They're down to probably ten or twelve thousand net long in soybeans, a little bit of a net long in the meal yet.

Pearson: Alright, okay producer strategy, what are you telling people these days?

Brugler: Well, basically we've had some put protection on for most of the grain that we haven't sold in the soybean complex. We're looking for a harvest low some time in the next 30-45 days, could be sooner, could be later within that period. But I think at this point you deliver what you forward sold, you try and sock the rest away and wait for a post-harvest basis rally, a little bit of a price rally into the end of the year.

Pearson: Alright, let's talk about the corn market. And, again, smaller corn crop in 2005 but, of course, we had such a perfect year in 2004 we've got plenty of corn left over and now going forward it looks like this corn crop is starting to get a little bit bigger. What is your take on the corn market? What should we be doing?

Brugler: Well, I think we've got to realize that we've got a tremendous basis problem right now. The old crop stocks in the Western Corn Belt are coming to elevators that don't have any place to put it, don't have the freight and know there is a fairly big crop in the Western Corn Belt to come in right on top of the old supplies. So, number one rule is avoid selling the cash corn if you can but that implies you've got to have home storage because the elevators are really knocking the basis down because they don't want it, they can't handle it right now. So, number one strategy is try and get past that harvest low on the basis side. There are some very good carries in the market. The market will pay you to store it until next spring or even next summer but you've got to have a place to put it.

Pearson: And, again, this is the year to have some on-farm storage.

Brugler: On-farm storage is going to pay. I think the real game here is going to be first of all do we have the size of crop that the plant population counts and ear links would suggest? A lot of that variability won't be determined until October when USDA can actually do their ear weights and dry down all their samples. The other variable, obviously, is high fuel costs and what that does to planting intentions for next year.

Pearson: And, of course, that is going to be something where the market is going to have to buy some corn and bean acres next year perhaps.

Brugler: Our operating assumption is that particularly with nitrogen prices where they are that the market is going to have to bid pretty aggressively for corn and may need to big pretty aggressively for certain classes of wheat.

Pearson: Okay, and let's talk about the wheat market. Obviously things have gone relatively well but again the situation there worldwide there is still plenty of wheat?

Brugler: Plenty of wheat, smaller crop than a year ago, ending stocks are expected to be down. The European crop is down, they had a drought in Spain and Portugal in particular. The U.S. crop was big enough to grow our ending stocks, USDA did pair that estimate back a little bit in August. But we've got plenty of wheat to get rid of and you're seeing that in the price charts. You've seen a little bit of a declining pattern in all three of the exchanges. The wild card here recently has been the Vomitoxin issue up in the spring wheat country, we had a lot of scab on wheat, that is causing some problems with millers as far as the level that they can accept of that and that has caused a bit of rally in Kansas City hard red winter wheat which is really, really helpful to the Kansas City producers.

Pearson: Absolutely, at this stage of the game wheat producers this is not a selling opportunity.

Brugler: No, I don't think so. I think we've got some storage hedges on, some short marches to pick up basis and basically pay us to wait but what we're really looking for is a little bit of a rally into the end of the year.

Pearson: Real quick, on these energy prices, we're hearing about crude prices, 67, 68 dollars a barrel. Alan, you talked to a lot of producers, what is the feeling out there? And have we seen that market top?

Brugler: Well, I don't think we can say that it's topped yet. I think the general attitude is it's got to, something has got to happen here as you look at your budgets for next year. It's just really difficult to make any money particularly if you're in an area that does a lot of irrigation. Obviously fertilizer is expensive, your fuel for your pivots or for your chemical inputs all very expensive. So, the market is saying we've got to have some kind of relief. I'm hearing it's very difficult to even get a bid or an offer from an elevator or a farm supply company for some of the next year's inputs because they don't know what they're going to have to pay for the wholesale.

Pearson: That's right, so that is going to make things even more interesting this winter as we try and buy a crop. Let's talk about the cotton market. The cotton market has been relatively flat, we've been seeing it down a little bit from the fifty dollars, you were saying make some sales. We're under that now, are you willing to sit and wait now?

Brugler: Yeah, I think we're standing pad as far as adding to further sales. We're kind of at a standoff here, the new crop is going to be large here in the United States, probably the second largest crop we've ever had. But the Chinese are buying very aggressively. This week's export sales were phenomenal and most of that was going to China and as long as the Chinese can find a place to put the textiles that they are producing with all that cotton I think they're going to be an excellent buyer for us this year. And that standoff is what is stabilizing the prices here in the high forties. I think there is a little bit of risk going into harvest low here as more of the cotton comes out of the field. But I'm not anxious to be a real heavy seller here.

Pearson: Alright, let's talk about livestock. And I've heard this comment from several analysts and from others that are worried about the fed cattle market. Futures were up this week, we're back above 82 and people feeling a little better about the cattle market. But high energy prices can also impact that market.

Brugler: Yeah, I think there are several factors at work in cattle. The technical side of things is not bad. We've got a 45-week cycle low in place and we're trying to rally back. We've got a rally in the product prices, the choice beef in particular has gone up. But working against that we've got a couple percent more cattle on feed and we've got a few coming in from Canada also and a tendency for that number to pick up seasonally after the first of September.

Pearson: As you go forward, cattle feeders right now are buying these feeder cattle. They are making this corn price come down and we always have that correlation to work out. Right now what do you see for profitability for buying feeders?

Brugler: Right now the profitability is not there. You have to bet a little bit. If you look at the cattle crush spread, which is one way that we monitored that, you're at least ten to twelve dollars ahead from a good price that you can lock in for any extended period of time. I think the potential is there for a seasonal rally into the end of the year, again, because that is what cattle tend to do. Fourth quarter tends to be a higher cash price than the 3rd quarter as the weights start to come down and the weather cools off. But it's going to be very difficult to make a lot of money in cattle here in the scenario of expanded supplies and the higher costs for the energy.

Pearson: You talked about higher supplies. Are we starting to retain heifers a little bit more aggressively now?

Brugler: Definitely, definitely. The cattle inventory report in July showed a four percent increase in beef heifers, cow slaughter is down also so we've kind of gotten rid of a lot of the old cows, we've freshened up the herd. The cow/calf guys are making excellent money on these feeder cattle. So, you're going to see bigger supplies. And, again, you'll start to see a few more Canadian feeders coming in seasonally as we go into fall.

Pearson: Fed cattle, hedge opportunities, what would you tell somebody?

Brugler: I think it's going to be tough to get the front month futures over 85 or 86 dollars. Now, some of the backs are already trading in that neighborhood so we've got some up trends in place, we're not anxious to sell unless we break those up trends technically. But the market will give us what it'll give us but I'm not looking for any huge price movement here unless, of course, the funds, the speculators want to come in, in a big way.

Pearson: Do you think they'll come into this hog market? What has been going on there? We've seen some nice strength with hogs.

Brugler: Nice rally in hogs, the pork market has been pretty good. We've seen a tremendous increase in the pork cut out values, 74 dollars and change here recently for the lean cut out. The CME index is around 72 and change and the futures, the October futures had a huge discount to where August was trading. So, I think in a way the futures market is just playing catch up with the cash market realizing that while there is a tendency to sell off into October that it hasn't started yet and to the degree that we're still going up, the board is too cheap.

Pearson: Alright, we've got about five seconds left. Do you want to do anything with hogs right now in terms of a hedge?

Brugler: Basically we're almost done hedged in hogs, we've got a little bit we'll add if we drop them a dollar.

Pearson: 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 American farmers are benefiting from the research of a harvesting expert from down under. Until then, thanks for watching. I'm Mark Pearson. Have a great week.


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