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Market Analysis: Aug 13, 2004

posted on August 13, 2004


With harvest just around the corner and basis slipping, the prospect of LDPs is starting to loom. For the week, nearby wheat futures lost more than 16 cents. September corn fell back by another eight cents.

From tight old crop supplies to lingering weather worries, all the factors in the soybean market look positive. For the week, August beans advanced more than 45 cents. The nearby meal contract gained $9.80 per ton.

The cotton market continues to founder, and for the week lost $1.35.

In livestock, the August live cattle contract jumped $3.00. Nearby feeders were up $2.50. But the August lean hog contract fell by $1.05.

In the financials, Comex gold slipped 90 cents an ounce. The Euro jumped 78 basis points against the dollar. And the CRB Index improved three-quarters of a point to close at 269-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 13, 2004 Brugler: GOOD TO BE HERE, MARK.

Pearson: WELL, WILD WEEK. LONG-AWAITED REPORTS CAME OUT. AND LET'S TALK FIRST ABOUT THE IMPACT ON THE MOST VOLATILE OF ALL, AND THAT'S BEEN THE SOYBEAN MARKET. A BIG PUNCH ON THAT OLD CROP NUMBER JUST BEFORE IT WENT OFF THE BOARD. WHAT'S YOUR TAKE ON THE USDA'S 2.877-BILLION-BUSHEL ESTIMATE?

Brugler: WELL, THE ESTIMATE WAS CLEARLY LOWER THAN TRADE ESTIMATE. TRADE ESTIMATE WAS ABOUT 2.95 TO 2.97 BILLION, DEPENDING ON WHOSE SURVEY YOU WERE LOOKING AT. SO IT DID CATCH THE MARKET LEANING THE WRONG WAY. WE'D SOLD IN THE NEW LOWS THE DAY BEFORE THE REPORT. A LOT OF THAT POP THAT WE SAW ON THE EXPIRING AUGUST CONTRACT DIDN'T HAVE TO DO WITH THE USDA REPORT. IT WAS JUST THE LACK OF LIQUIDITY IN THAT CONTRACT WHEN WE GOT DOWN TO EXPIRATION. WE'D HAD NO DELIVERIES WORTH MENTIONING AGAINST AUGUST. WE BASICALLY HAD TO GET SOME PEOPLE OUT OF THAT CONTRACT BEFORE EXPIRATION. BUT IT'S CLEARLY A TIGHTER ENDING STOCK SCENARIO; 190 MILLION BUSHELS IS WHAT USDA IS SAYING NOW FOR NEXT SUMMER. AND WE'RE VERY VULNERABLE TO ANY KIND OF A FREEZE OR FROST DAMAGING SOME OF THESE LATE BEANS IN THE NORTH.

Pearson: SO THERE'S STILL SOME CONCERN OUT THERE. AND I KNOW IT'S EARLY AUGUST -- OR MID AUGUST, BUT IT'S STILL A LITTLE EARLY TO TALK ABOUT AN EARLY FROST, BUT THERE HAS BEEN STRANGE, COOL WEATHER ACROSS MOST OF THE CORN BELT.

Brugler: AND I THINK THAT'S WHAT'S DRIVING IT. WE'VE GOT THE COOLER-THAN-NORMAL TEMPS, AND YOU'VE GOT THIS POOL OF COLD AIR UP IN CANADA THAT'S EVENTUALLY GOING TO COME ACROSS THE BORDER. AND BECAUSE SOME OF THE CROPS ARE BEHIND AND BECAUSE THE STOCKS ARE RELATIVELY TIGHT, IT'S SIGNIFICANT. NOW, WE KNOW FROM PAST EXPERIENCE, IT'S HARD TO KILL A LARGE NUMBER OF BUSHELS OFF THIS WAY BUT WE DO HAVE A LARGER-THAN-NORMAL NUMBER OF ACRES IN THE NORTH THAT'S SOMEWHAT VULNERABLE AT THIS POINT IN TIME.

Pearson: YOU'VE BEEN OUT TALKING TO A LOT OF FARMERS AROUND THE MIDWEST. I'VE BEEN OUT TALKING TO A LOT OF FARMERS AROUND THE MIDWEST. IT SEEMS LIKE AN AWFUL LOT OF PEOPLE STILL HAVEN'T DONE MUCH IN TERMS OF SELLING THIS NEW CROP THAT'S OUT THERE. WHAT ADVICE DO YOU HAVE TO A SOYBEAN PRODUCER WHO HASN'T DONE ANYTHING YET?

Brugler: BASICALLY I'M ADVISING PEOPLE THAT THEY HAVE TO SELL RALLIES. YOU NEED TO GET THAT $10 FIGURE OUT OF YOUR HEAD. THAT WAS THE FOURTH TIME SINCE THE 1970S WE'VE DONE THAT. IT'S DONE. IT'S OVER. UNLESS, YOU KNOW, SOMETHING REALLY, REALLY MAJOR COMES ALONG, WE'RE NOT GOING TO SEE THAT FOR SEVERAL YEARS. I THINK WE HAVE TO BE REALISTIC THAT USDA HAS GOT A PROJECTION OF A WORLD ENDING STOCKS FIGURE OF 50.2 MILLION TONS NEXT YEAR. THAT WOULD BE RECORD LARGE. AND BY IMPLICATION, RECORD LOW PRICES COULD OCCUR IF THAT ALL TRANSPIRES. SO WE WANT TO BE ACTIVE SELLERS ON RALLIES LIKE THE ONE WE HAD ON THURSDAY AND ALLOW FOR THE POTENTIAL OF SOME LDPs. AND THEREFORE, THAT MEANS NOT LETTING GO OF CONTROL OF ALL OF YOUR BEANS RIGHT AT HARVEST.

Pearson: SO MAINTAIN CONTROL. AND HOW WOULD YOU DO THAT?

Brugler: WELL, SO I'M SELLING -- WHEN I'M SELLING, I'M SELLING DEFERRED CONTRACTS. I'M FORWARD CONTRACTING FOR JANUARY OR FOR MARCH, OR I'M DOING SOME KIND OF A PUT OPTION OR FUTURES POSITION THAT ALLOWS ME TO MAINTAIN THE PHYSICAL BEANS, BECAUSE THE MOST LIKELY TIME TO GET AN LDP IS DURING HARVEST WHEN THE BASIS IS WEAK. THE SECOND MOST LIKELY TIME WOULD PROBABLY BE NEXT SPRING IF WE HAD A MAJOR SIZED CROP IN SOUTH AMERICA AND WE WERE STILL TRYING TO CLEAR SOME OF OURS OUT OF THE PIPELINE.

Pearson: OKAY. LET'S TALK ABOUT THE CORN MARKET. AGAIN, USDA NUMBER NOT AS FRIENDLY THERE TO PRICES. CLOSE TO 11 BILLION BUSHELS. THEY'RE KIND OF DANCING AROUND IT, 10.9 SOMETHING, BUT CLOSE TO 11-BILLION-BUSHEL CORN CROP. AS FAR AS THE TRADE, LOOKING AT THAT SIZE OF A CROP COMING IN, THAT'S GOT TO GIVE US SOME ADDITIONAL CARRYOVER FOR NEXT YEAR, BUT I KEEP HEARING PEOPLE TALKING ABOUT GOOD DEMAND -- GOOD FEED GRAIN DEMAND. CAN WE CHEW THROUGH THAT? I KNOW WE WILL. BUT CAN WE CHEW THROUGH IT AT DECENT PRICES?

Brugler: WELL, PRICES IS THE KEY. IF YOU'VE GOT THAT BIG OF A PILE, YOU'RE GOING TO HAVE SOME PRESSURE AT HARVEST, JUST BECAUSE WE'VE GOT TO FIND A PLACE TO PUT ALL THIS STUFF AND WE'VE GOT TO HAVE SOME ASSURANCE THAT THE BUYERS ARE COMING IN AND TAKING IT. EXPORT SALES HAVE NOT BEEN GOOD IN CORN FOR THE LAST MONTH OR TWO, AND SO THE MARKET IS DISCOUNTING THE PRICE A LITTLE BIT TO TRY AND GET THE WHEELS GREASED AND GET SOME OF THAT STUFF MOVING. I THINK THE 1.1-BILLION-BUSHEL CARRYOUT FIGURE IS NOT PARTICULARLY BURDENSOME, BUT IT DOES HAVE A FAIRLY SUBSTANTIAL EXPORT COMPONENT IN IT. USDA IS LOOKING FOR OVER TWO BILLION BUSHELS IN EXPORTS, AND WE'VE GOT TO HAVE A PRICE THAT'S DOWN LONG ENOUGH LOW ENOUGH TO GET THOSE BUSHELS ON THE BOOKS. RAISING THE CHINESE CROP BY 5 MILLION TONS DID NOT HELP US IN THAT REGARD. IT BASICALLY SUGGESTS THEY'RE NOT GOING TO BE IN THE MARKET FOR A WHILE. BUT HAVING SAID THAT, THE WORLD SUPPLY/DEMAND SITUATION IS MUCH TIGHTER IN COARSE GRAINS THAN IT IS IN SOYBEANS. SO I THINK THE LONG-TERM POTENTIAL FOR A RALLY IS MUCH BETTER IN CORN. THE SOLID DEMAND BASE FROM THE ETHANOL INDUSTRY IS GOING TO CONTINUE TO PULL BUSHELS IN. YOU KNOW, IF YOU CAN'T MAKE MONEY IN THE ETHANOL BUSINESS NOW, YOU'RE NEVER GOING TO BECAUSE YOU'VE GOT HIGH FUEL COSTS AND RELATIVELY LOW CORN COSTS. SO WE'VE GOT A GOOD DEMAND BASE. I THINK WE COULD LAY HERE FOR A LITTLE WHILE JUST BECAUSE OF THE SIZE OF THE CROP THAT WE ANTICIPATE COMING OUT OF THE FIELD.

Pearson: SO WITH THAT IN MIND, AGAIN, A LOT OF PRODUCERS WHO HAVE NOT PRICED ANY NEW CROP YET, WE TALKED TO SOME TODAY, YOU AND I, THAT HAVEN'T PRICED SOME OLD CROP. SO WHAT ADVICE DO YOU HAVE FOR THEM?

Brugler: WELL, BASICALLY ON OLD CROP, I'M SUGGESTING THAT THEY CAN'T WAIT TOO LONG BECAUSE THE BASIS IS GOING TO GO TO POT, PARTICULARLY WHATEVER INTEREST OR PREMIUM YOU'VE GOT IN THE OLD CROP. YOU SEE MORE OF THAT IN BEANS THAN IN CORN. BUT HOLDING IT INTO HARVEST WHEN YOU'VE GOT A RECORD CROP COMING DOESN'T MAKE A WHOLE LOT OF SENSE. YOU'VE JUST GOT TO SAY, OKAY, IF I NEED THE BIN SPACE, I'VE GOT TO LET GO OF IT. NOW, WE DO KNOW THAT THE AVERAGE ANNUAL TRADING RANGE IN CORN IS 97 CENTS A BUSHEL AND THE SMALLEST RALLY WE'VE EVER HAD OFF OF A FALL LOW OR REALLY A SEASONAL LOW IS 43 CENTS. SO THAT SAYS THAT ONCE YOU SEE SOMETHING THAT LOOKS LIKE A TURN, YOU'VE GOT TO HANG ON AT LEAST FOR THAT 40-CENT TYPE OF A MOVE AND PROBABLY MUCH MORE THAN THAT.

Pearson: BECAUSE OF THE FACT WE'RE LOOKING AT 11-BILLION-BUSHEL CORN CROP THIS YEAR, YOU BRING UP THE CONCERN ABOUT POTENTIAL EXPORT PROBLEMS THAT COULD ALSO BE A FACTOR IN THIS CORN MARKET. WHAT ABOUT PRICING SOME '05 AND '06?

Brugler: WELL, ACTUALLY WE'RE DABBLING IN THE '05. HISTORICALLY, IF YOU CAN PRICE DECEMBER CORN AT 262, 265, SOMEWHERE IN THAT RANGE, THE MARKET GIVES YOU THAT OPPORTUNITY ALMOST EVERY YEAR. AND SOME YEARS, HEAVY STOCKS YEARS IN PARTICULAR, THAT'S ONE OF THE BETTER PRICES YOU'LL SEE ALL YEAR. IN OTHER YEARS YOU HOPE IT'S JUST THE LOW PRICES TO HELP START SCALING UP SELLING PROGRAM. BUT I THINK IT BEARS WATCHING JUST BECAUSE OF THE CARRIES, JUST AS SELLING JULY CORN VERSUS SELLING DECEMBER CORN SEEMS TO MAKE SOME SENSE HERE IF YOU'RE GOING TO BE DOING HEDGING, BECAUSE THERE'S A 20-CENT PREMIUM TO THE JULY THAT WILL PAY YOUR BIDS OR YOUR BIDS WILL PAY YOU, IF YOU WANT TO LOOK AT IT THAT WAY.

Pearson: ABSOLUTELY. GET THE RETURN ON THOSE. WHAT ABOUT THE WHEAT MARKET? AS WE SAW FROM THE USDA REPORT AGAIN, WORLDWIDE PLENTY OF WHEAT. PRETTY GOOD CROP HERE IN THE U.S.

Brugler: YEAH, WE'RE HAVING TROUBLE IN WHEAT AND, ACTUALLY, WE KNEW WE'D HAVE TROUBLE IN WHEAT. WE JUST DIDN'T KNOW IT WAS GOING TO TAKE THIS MUCH PRICE DROP TO ACCOMPLISH THE OBJECTIVE. WE KNEW THAT THE WORLD PRODUCTION WAS GOING TO BE UP 40-SOME MILLION TONS BECAUSE OF EUROPE COMING BACK TO NORMAL PRODUCTION THIS YEAR, BECAUSE OF THE INCREASES IN EASTERN EUROPE IN THE OLD FSU. THERE'S JUST A LOT OF SUPPLY OUT THERE. WHAT WE'RE RUNNING INTO IS THAT THE UKRAINE IS SELLING A LOT OF FEED WHEAT AROUND THE WORLD. YOU'VE GOT EASTERN EUROPE AND THE E.U. VERY COMPETITIVE ON FREIGHT RATES TO NORTH AFRICA, TO EGYPT. WE HAVE BEEN SUCCESSFUL IN GETTING SOME EGYPTIAN TENDERS AND SELLING SOME SOFT RED WINTER AND SOME SOFT WHITE WHEAT TO THE EGYPTIANS. BUT WE'RE NOT SELLING OUR HIGH PRICED WHEAT TO THEM. WE'RE JUST NOT COMPETITIVE ENOUGH AND ATTRACTIVE ENOUGH IN THAT AREA. SO ESSENTIALLY WE'RE PUTTING WHEAT ON SALE. OUR EXPORT SALES ARE ACTUALLY AHEAD OF NORMAL AND AHEAD OF LAST YEAR TO THIS POINT. SHIPMENTS ARE AHEAD AND SALES ARE AHEAD. BUT WE'RE AFRAID THAT OVER TIME AS THESE OTHER COUNTRIES GET THEIR CROPS OUT OF THE FIELD, WE'RE NOT GOING TO BE ABLE TO COMPETE. SO LET'S KNOCK THE PRICE DOWN NOW, GET THE SALES ON THE BOOKS, AND THEN WE CAN RALLY BACK LATER IF WE SOLD TOO MUCH.

Pearson: ALL RIGHT. SO WE'RE NOT GOING TO BE IN TOO BIG OF A HURRY HERE. LET'S TALK ABOUT COTTON. ANOTHER BAD WEEK FOR COTTON PRICE-WISE.

Brugler: YEAH, COTTON GOT ACTUALLY HAMMERED. ON THURSDAY THE NET CHANGE FOR THE WEEK WASN'T THAT BAD. THE USDA REALLY SHOCKED US WITH THE 20.2-MILLION-BALE PRODUCTION ESTIMATE. THE TRADE ESTIMATE WAS ONLY 18.84 SO THAT'S, ON A PERCENTAGE BASE, IS A VERY LARGE JUMP. THE WORLD STOCKS WERE INCREASED BY ABOUT WHAT EVERYBODY THOUGHT. WE'RE AT FAIRLY GOOD PRICE LEVELS HERE. TECHNICALLY SPEAKING, THE MARKET HAS GOT SOME GOOD SUPPORT AT 43 CENTS OR SO. I THINK THE FUNDS ARE FAIRLY BIG SHORTS IN THE MARKET. THEY WILL BREAK BACK TOWARDS 38 IF WE CAN'T HOLD IT HERE. BUT AGAIN, THIS IS A FAIRLY DEFENSIBLE PRICE POINT, AND THE BUYER SHOULD START TO STEP IN.

Pearson: ALL RIGHT. LET'S TALK ABOUT THIS FED-CATTLE MARKET, WHICH HAS BEEN AMAZING ALL YEAR. IT HAS BEEN HANGING RIGHT IN THERE. WHAT'S YOUR TAKE ON LIVE CATTLE AS WE GO FORWARD?

Brugler: BASICALLY, AS LONG AS THE BEEF PRODUCTION YEAR TO DATE IS RUNNING 10 PERCENT BELOW A YEAR AGO, WE'VE GOT A PRETTY GOOD SITUATION. WE'VE GOT A FAIRLY TIGHT SUPPLY. IT FITS THE MARKET WELL. CONSUMERS HAVEN'T BEEN TOO CONCERNED ABOUT BEEF PRICES. THEY'VE BEEN COMPLAINING ABOUT GASOLINE INSTEAD. AND WE'VE BEEN ABLE TO CONTINUE TO MOVE BEEF BOXES IN THE UPPER END OF THE PRICE RANGE. SO LONG AS LONG AS THE PACKERS CAN GET THE MONEY FOR THE BOXES, THEY CAN BID FOR THE CATTLE.

Pearson: FEEDER CATTLE -- A LOT OF NEW PICKUP TRUCKS OUT IN COW/CALF LAND.

Brugler: THE MARKET -- THE FEEDER CATTLE MARKET IS BASICALLY SAYING WE'RE NOT MAKING ENOUGH. BUT AS YOU KNOW, WITH THE BIOLOGY IN THE CATTLE BUSINESS, YOU CAN'T MAKE ENOUGH VERY QUICKLY. AND FRANKLY, A LOT OF THE COW/CALF GUYS ARE SAYING, GEE, YOU'RE GOING TO GIVE ME $800 FOR THIS HEIFER TO PUT HER IN THE FEEDLOT; WHY DO I WANT TO PUT HER OUT ON GRASS AND WAIT A YEAR TO GET A CALF THAT MIGHT NOT BE WORTH ANYWHERE NEAR WHAT WE'RE SEEING TODAY? SO THAT'S KIND OF SLOWED ANY PRODUCTION RESPONSE ON GETTING MORE FEEDERS. AND, OF COURSE, THE BIG NUT IS THE CANADIAN SUPPLY. AND AT THE MOMENT THE BORDER IS STILL CLOSED.

Pearson: LET'S TALK ABOUT THE HOG MARKET. WHAT'S YOUR FEELINGS TOWARDS HOGS AND HOG PRICES AT THAT STAGE?

Brugler: ACTUALLY, I THINK THE HOG PRICES -- CASH HOGS, THE INDEX UP AROUND $79 HAS HELD UP MUCH BETTER, MUCH LONGER THAN I ANTICIPATED. THE MARKET DID SELL OFF A LITTLE BIT THIS WEEK. WE SAW A PRETTY NASTY LITTLE BREAK IN THE OCTOBER HOGS BUT, AGAIN, WE'VE GOT TO REMEMBER THAT OCTOBER IS AT A BIG DISCOUNT TO THAT INDEX. WE'RE ABOUT $10 BELOW. SO FURTHER LOSSES IN OCTOBER ARE A LOT HARDER TO JUSTIFY. YOU'VE GOT TO BASICALLY BE SAYING YOU THINK THERE'S GOING TO BE A BIG BREAK IN THE CASH. CERTAINLY THAT'S POSSIBLE THIS TIME OF THE YEAR FROM A SEASONAL BASIS. BUT WHAT WE'RE GOING TO WATCH CLOSELY ARE THOSE WEEKLY KILLS. IF WE'RE 1.9 MILLION HEAD OR IF WE'RE 2 MILLION -- YOU KNOW, 2 MILLION WOULD BE VERY BURDENSOME, I THINK, BUT --

Pearson: BUT YOU DON'T SEE THAT GOING FORWARD.

Brugler: WE DON'T SEE THAT RIGHT NOW.

Pearson: ALL RIGHT. ALAN, THAT'S THE LAST WORD. THANK YOU SO MUCH. THAT WILL WRAP UP THIS EDITION OF "MARKET TO MARKET." BUT IF YOU'D LIKE MORE DETAIL FROM ALAN ON JUST WHERE THESE MARKETS MIGHT BE HEADED, BE SURE TO CHECK THE STREAMING AUDIO ON THE MARKET PLUS PAGE AT OUR "MARKET TO MARKET" WEB SITE. AND BE SURE TO JOIN US AGAIN NEXT WEEK WHEN WE'LL EXAMINE THE GLOBAL COMMUNITIES' EFFORTS AT TURNING THE GREEN REVOLUTION INTO THE GENE REVOLUTION. UNTIL THEN, THANKS FOR WATCHING. I'M MARK PEARSON. HAVE A GREAT WEEK.

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