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Market Analysis: Oct 08, 2004

posted on October 8, 2004


Grain prices held steady despite the bearish crop estimates, suggesting the trade already may be shifting its focus from supply to demand. For the week, nearby wheat futures lost a half-cent. December corn was down 1 1/2 cents.

LDPs and the largely unsold South American crop continue to influence the soybean markets. For the week, November beans were down six cents. The nearby meal contract lost 60 cents per ton.

The cotton market remains quiet and for the week gained just 37 cents.

In livestock, the October live cattle contract was up 35 cents. Nearby feeders were up 58 cents. But the October lean hog contract retreated $1.35.

In the financials, Comex gold gained another $3.60 an ounce. The Euro was up just nine basis points against the dollar. And the CRB Index advanced nearly three points to close at 287.60.

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: Oct 08, 2004 Brugler: GOOD TO BE HERE AGAIN.

Pearson: WELL, THE CORN CROP IS STARTING TO ROLL BIG TIME HERE THIS WEEK AS WE GET INTO THE -- START THE SECOND WEEK OF OCTOBER, THE SECOND FULL WEEKEND OF OCTOBER. WHAT'S YOUR TAKE NOW ON THE CORN MARKET? THESE LDPs HAVE BEEN FAIRLY ATTRACTIVE, BUT ARE PRODUCERS GOING AHEAD AND SELLING THE CASH?

Brugler: I THINK THERE'S A LOT OF PEOPLE THAT ARE ATTRACTED, IF YOU WILL, BECAUSE OF THE SIZE OF THE LDP. THEY'RE SAYING: GEE, 30 CENTS A BUSHEL; LET'S JUST TAKE IT; THIS HAS GOT TO BE A HARVEST LOW AND WE'LL GET A BOUNCE AND I'LL BE FINE. I'M NOT CONVINCED THAT WE'VE ACTUALLY SEEN THE MAXIMUM LDPs YET. AS YOU KNOW, LDP IS A COMBINATION OF PRICE AND BASIS, AND TYPICALLY THE BASIS BOTTOMS OUT WHEN YOU GET TO ABOUT 50, 60 PERCENT OF HARVEST OR MAYBE A LITTLE BIT LATER. WE'RE NOT THERE YET. THE BOARD IS SITTING THERE BASICALLY TRYING THE 2.02, 2.04, 2.06 RANGE AND REALLY HASN'T GIVEN US ANY EVIDENCE OF A BOTTOM YET EITHER. SO I'VE BEEN ENCOURAGING PEOPLE TO GO SLOW ON THE LDPs AND TO LOOK AT THE STORAGE THAT THEY CAN PICK UP FROM THE CARRIES IN THE MARKET AND MAYBE EVEN PUT IT UNDER LOAN, DO A 60-DAY LOCK, SOMETHING OF THAT NATURE.

Pearson: ALL PRETTY GOOD SCENARIOS. WE'RE GOING TO GET A USDA CROP REPORT NEXT WEEK. THE NUMBERS OUT THIS WEEK, WE JUST TALKED ABOUT THE PRIVATE NUMBERS. YOU KNOW, WELL ABOVE 11-BILLION BUSHEL CORN CROP. KIND OF WALK US THROUGH. WHAT DOES 11-BILLION-BUSHEL CORN CROP DEMAND-WISE, WHAT NEEDS TO HAPPEN THIS YEAR THAT DIDN'T HAPPEN IN 2004 TO EAT ALL THAT CROP UP?

Brugler: BASICALLY WE'VE GOT TO CONTINUE TO EXPAND THE ETHANOL BUSINESS. WE'VE GOT TO KEEP PROFITABILITY REASONABLY ATTRACTIVE FOR LIVESTOCK SO THAT WE KEEP PUTTING THE POUNDS ON THE CATTLE AND THE HOGS. OF COURSE, THAT HAS IMPLICATIONS FOR THE PRICE OF THOSE COMMODITIES. AND THEN WE NEED TO HAVE A BIG EXPORT PROGRAM. USDA IS STILL SAYING THAT THEY THINK WE'LL HAVE A 2.1-BILLION-BUSHEL EXPORT SALES PROGRAM IN CORN. WE'RE NOT SEEING THAT YEAR-TO-DATE. WE'RE DOWN ABOUT 8 PERCENT FROM LAST YEAR AT THE MOMENT, RATHER THAN BEING UP. BUT TO KEEP THAT PILE -- THAT BUILDUP TO A MINIMUM, WE NEED TO KEEP THE DEMAND SIDE IN ALL THREE SEGMENTS GROWING.

Pearson: DO YOU WANT TO KEEP CONTROL OF THE CORN CROP?

Brugler: I THINK THAT WE'RE PROBABLY GOING TO STRUGGLE HERE A LITTLE BIT AFTER HARVEST JUST BECAUSE OF THE SIZE OF THE CROP. THERE'S A LOT OF PILES, AS YOU MENTIONED EARLIER. WE'VE GOT TO GET THOSE PILES MOVED. THAT'S GOING TO TEND TO SQUASH ANY RALLIES INITIALLY, BECAUSE IT WILL ATTRACT SELLING EVERY TIME WE BOUNCE IT UP A DIME OR 15 CENTS OR SOMETHING LIKE THAT. BUT I THINK OVER TIME THE MARKET WILL CHEW THROUGH THE PILE. THE DEMAND WILL BE PRETTY GOOD, AND WE'LL HAVE TO HAVE ANOTHER CROP THIS BIG AGAIN NEXT YEAR. THE DEMAND BASE AT 10.5 OR 10.7 BASICALLY DEMANDS A NEAR RECORD CROP AGAIN NEXT YEAR, AND THE SECOND LARGEST EVER. SO THE MARKET HAS GOT TO MAKE SURE WE HAVE THOSE ACRES IN THE SPRING.

Pearson: ALL RIGHT. LET'S TALK ABOUT SOYBEANS. A LOT OF INTERESTING SCENARIOS GOING ON THERE STILL RELATED TO LAST YEAR'S CROP IN TERMS OF THE CASH MARKETS AND SO FORTH, WHERE THE DEMAND IS STILL STRONG FOR MEAL IN SOME AREAS. WHAT'S AHEAD NOW FOR A SOYBEAN PRODUCER? LET'S SAY YOU'RE TALKING TO SOMEBODY WHO HASN'T DONE ANYTHING. DIDN'T SELL BEANS WHEN THEY WERE HIGH, AND HE'S SITTING THERE NOW, NOT MUCH OF AN LDP. WHAT DO YOU RECOMMEND HE DO?

Brugler: WELL, THAT'S KIND OF A SCARY SCENARIO, AND I HOPE NOT TOO MANY OF OUR READERS OR LISTENERS OR VIEWERS ARE IN THAT CATEGORY. BUT YOU BASICALLY -- AGAIN, YOU'VE GOT TO LOOK FOR THAT FALL LOW. YOU'VE GOT TO TRY AND TAKE YOUR LDPs AT THAT POINT, AND THEN LOOK FOR A LITTLE POST-HARVEST RALLY. I THINK YOU WILL SEE SOME IMPROVEMENT IN BASIS POST-HARVEST. WE PROBABLY HAVEN'T SEEN THE WORST BASIS YET BECAUSE AS WE MOVE FURTHER NORTH ON THE HARVEST, YOU'RE STILL SEEING SOME WEAKNESS THAT SOME OF THE CRUSHERS THAT WERE HAVING TROUBLE GETTING BEANS, THEY'RE GETTING THEM NOW. THEY'RE STARTING TO LOWER THEIR BIDS. BUT AGAIN, I THINK THERE'S SOME POST-HARVEST RALLY POTENTIAL, PARTICULARLY BETWEEN NOW AND DECEMBER, NOW AND JANUARY. AND THAT'S PROBABLY WHAT YOU'RE PLAYING FOR AT THIS POINT. I CONTINUE TO BE CONCERNED ABOUT THE SOUTH AMERICAN PRODUCTION. SAFRAS CAME OUT THIS WEEK AND SAID THEY STILL THINK IT'S A 66-MILLION-TON CROP IN BRAZIL. THEY THINK A 40-MILLION TON IN ARGENTINA. IF THOSE REALLY HAPPEN AND WE'VE GOT A 2.9- OR 3-BILLION-BUSHEL CROP HERE, THAT'S A LOT OF BEANS SITTING AROUND NEXT SUMMER THAT HAVE GOT TO GO SOMEWHERE.

Pearson: ALL RIGHT. SO MAYBE A LITTLE MORE DEFENSIVE IN YOUR MARKETING DECISIONS FOR THIS YEAR?

Brugler: BASICALLY WE THINK YOU OUGHT TO PROBABLY HAVE PUTS UNDER EVERYTHING AS A FLOOR, TRY AND PICK UP THE LDP, AND HOPE THAT THE PUTS EXPIRE WORTHLESS, BASICALLY BECAUSE THE MARKET HAS RALLIED.

Pearson: ALL RIGHT. LET'S TALK ABOUT WHEAT. AGAIN, VERY FLAT WEEK AS FAR AS PRICE MOVEMENT WAS CONCERNED. BUT WHAT'S THE PICTURE? WHAT'S THE GENERAL PICTURE FOR WHEAT AS WE GO FORWARD NOW?

Brugler: WELL, SEASONALLY WHEAT SHOULD START TO LEAD CORN OUT OF HARVEST. WHEAT NORMALLY GAINS ON A WHEAT-CORN SPREAD, BUT WE'RE NOT SEEING THAT BECAUSE THERE'S SO MUCH EXTRA FEED WHEAT AROUND THIS YEAR. WE'VE GOT A LOT OF COMPETITION FOR FEED USE FOR LIVESTOCK USE BETWEEN THAT FEED WHEAT AND THE CORN, AND THAT'S BASICALLY SQUASHING THE RALLIES. I WAS A LITTLE DISAPPOINTED TO SEE THAT WHEN WE HAD THE BIG SALE TOTAL FROM USDA THIS WEEK AND THE SALE TO EGYPT OF 110,000 TONS THE SAME MORNING THAT WE COULDN'T GET MORE THAN A 3- OR 4-CENT POP IN THE WHEAT AND WE LOST ALL THAT BY THE END OF THE DAY. SO WE'VE STILL GOT SOME WORK TO DO HERE. I THINK TECHNICALLY YOU'VE GOT GOOD SUPPORT IN CHICAGO WHEAT AROUND 2.97, 2.98., K.C. A LITTLE BIT HIGHER THAN THAT. BUT THE MUSCLE JUST ISN'T THERE YET FOR A BIG RALLY.

Pearson: LET'S TALK ABOUT COTTON, WHICH HASN'T SEEN MUCH OF A RALLY DESPITE THE HURRICANE ACTIVITY AND ALL THE DAMAGE IN THE SOUTH, NOT MUCH MOVEMENT IN COTTON. JUST A REFLECTION OF WHAT'S HAPPENING AS FAR AS PRODUCTION WORLDWIDE?

Brugler: WORLD PRODUCTION IS UP CONSIDERABLY. SOMEBODY ONCE SAID PRICE MAKES AN EXCELLENT FERTILIZER, AND WE'RE SEEING THAT. WE'VE GOT A BIG INCREASE IN WORLD PRODUCTION THAT WILL FLOW THROUGH TO ENDING STOCKS. U.S. PRODUCTION IS STILL ASSUMED TO BE UP A MILLION TO TWO MILLION BALES FROM A YEAR AGO. THE MARKET IS PROBABLY A LITTLE COMPLACENT ABOUT THE PRODUCTION NUMBER. THE NUMBERS I'M HEARING ARE STILL 20 MILLION BALES AND UP FROM TUESDAY'S REPORT, DESPITE THE HURRICANE DAMAGE AND THE RAIN IN TEXAS. IF WE COME OUT WITH SOMETHING WITH A 19 IN FRONT OF IT, I THINK YOU MIGHT GET A LITTLE BOUNCE. BUT THE CHART ACTION SUGGESTS THE MARKET STILL WANTS TO SPEND A LOT OF TIME BETWEEN 40 AND 50 CENTS.

Pearson: AT THE HIGH END OF THAT RANGE, WOULD YOU MAKE SOME SALES?

Brugler: I THINK UP -- 50 TO 52, UP AROUND LOAN RATE, I THINK YOU'D PROBABLY MAKE SOME SALES. THERE'S PROBABLY SOME OPPORTUNITIES TO PLAY THE LDP AND POP GAME THERE IN COTTON, AS WELL.

Pearson: LET'S TALK ABOUT THE AREA WHERE THERE IS NO LDP, AND THAT'S LIVESTOCK, THE FED-CATTLE MARKET. WE'RE POST-LABOR DAY. YOU TALKED ABOUT IT A MOMENT AGO. YOU KNOW, CHEAP CORN, OVERFEEDING CATTLE AND BACKING CATTLE UP IS ALWAYS THE WORST THING, IT SEEMS, THAT CAN HAPPEN IN THE MARKET IN THE ENTIRE MARKET STRUCTURE RIGHT NOW. WE SEEM TO HAVE BEEN DOING THAT FOR A WHILE. ARE WE STARTING TO GET CAUGHT UP?

Brugler: WELL, WE'RE DEFINITELY RUNNING AT HIGHER AVERAGE CARCASS WEIGHTS THAN A YEAR AGO. THE THING THAT'S HELPING US IS WE JUST DON'T HAVE AS MANY CATTLE OUT THERE AS WE DID TWO OR THREE YEARS AGO. I MEAN THE WINDOW IS JUST NOT AS BIG, SO THAT HELPS US. TOTAL BEEF PRODUCTION YEAR-TO-DATE IS STILL 9.5 TO 10 PERCENT BELOW A YEAR AGO. AND THAT'S HELPING THE SUPPORT PRICES HERE. WHAT HAS HAPPENED IS IT'S HURT OUR LEVERAGE. WHEN THE PACKERS ARE $4 OR $5 APART FROM THE FEEDLOTS, THE FEEDLOTS CAN'T STAY AND JUST SAY WE'LL HOLD THE CATTLE OVER UNTIL NEXT WEEK. BY FRIDAY, IF THE PACKER HASN'T COME TO THE BID -- HASN'T RAISED THE BID TO THE ASK, THEN PRETTY MUCH WE'RE GIVING IN. WE SAW THAT AGAIN THIS WEEK. WE ENDED UP WITH EVEN MONEY ON THE WEEK.

Pearson: WHAT'S YOUR OUTLOOK NOW FOR FED CATTLE FOR THE BALANCE OF 2004?

Brugler: I THINK IT'S BASICALLY A SIDEWAYS MARKET. THERE COULD BE A LITTLE BIT OF SEASONAL BOOST AS WE GO LATE IN THE YEAR. BUT I'M LOOKING FOR MOST OF THE TRADE ACTION TO BE BETWEEN $82 AND $88 ON THE FUTURES.

Pearson: ALL RIGHT. SPRING ABOUT THE SAME OUTLOOK?

Brugler: THAT ONE IS A WILD CARD BECAUSE WE DON'T KNOW ABOUT JAPAN AND WE DON'T KNOW ABOUT CANADA. AND THOSE ARE KIND OF MARRIED, JOINED AT THE HIP, IF YOU WILL. IF WE DO SUCCEED IN OPENING UP THE JAPANESE MARKET, WE'LL GET AN INITIAL BOOST. BUT I WOULD ANTICIPATE THAT WHATEVER TERMS WE OPEN THAT MARKET WITH WILL ALSO BE USED TO LOOSEN UP THE CANADIAN BORDER A LITTLE BIT.

Pearson: THIS CORN KEEPS GETTING CHEAPER. THIS FEEDER-CATTLE MARKET KEEPS GETTING HOTTER. AND YOU MENTIONED IT, THE NUMBERS ARE DOWN. WHAT DO YOU SEE FOR FEEDER CATTLE?

Brugler: THE FEEDER-CATTLE MARKET IS BASICALLY BEGGING FOR THAT CANADIAN BORDER TO BE OPEN. WE'RE KEEPING THOSE PRICES UP THERE IN THE $114, $115 RANGE, WHICH IS A PRETTY HIGH PRICE. AND TECHNICALLY THE CHARTS SAY THAT $118 WAS IT. WE'VE GOT LONG-TERM SELL SIGNALS IN THE FEEDER CATTLE, BUT ON THE OTHER HAND, THE CURRENT CONTRACTS, THE NOVEMBER AND THE JANUARY, ARE BELOW THAT. SO THAT DOES ALLOW US TO RALLY FEEDERS $3 OR $4. CLEARLY THE HEDGERS ARE THE ONES THAT ARE MAKING THE BIG PAYMENTS FOR FEEDER CATTLE. THEY'VE GOT THE MONEY TO SPEND. THEY WERE LONG IN THE FUTURES. THEY CAN REINVEST. THIS IS THE POINT IN THE CYCLE WHERE YOU TEND TO LOSE MONEY OTHERWISE.

Pearson: REAL QUICK, HOGS IN THE NEXT 90 DAYS. IT'S OCTOBER PORK MONTH. WHAT DO YOU SEE?

Brugler: HOGS ARE STRUGGLING A LITTLE BIT ON THE NUMBERS SIDE. WE'RE KILLING TWO MILLION HEAD A WEEK. SO FAR WE'VE ABSORBED THAT PORK, BUT IT COULD BE A PROBLEM.

Pearson: ALL RIGHT. THANKS MUCH, ALAN BRUGLER. THAT WILL WRAP UP THIS EDITION OF "MARKET TO MARKET." BUT IF YOU'D LIKE MORE INFORMATION FROM MR. BRUGLER ON JUST WHERE THESE MARKETS MIGHT BE HEADED, THEN BE SURE TO CHECK THE STREAMING AUDIO ON THE "MARKET PLUS" PAGE ON OUR "MARKET TO MARKET" WEB SITE. AND BE SURE TO JOIN US AGAIN NEXT WEEK WHEN WE'LL LEARN HOW SOME ILLINOIS PORK PRODUCERS REMOVE THE MIDDLEMAN BY LAUNCHING THEIR OWN PACKING PLANT. UNTIL THEN, THANKS FOR WATCHING. I'M MARK PEARSON. HAVE A GREAT WEEK.

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