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Market Analysis: Feb 06, 2004

posted on February 6, 2004


Grain prices held their ground this week despite repeated attempts by the trade to break lower. For the week, the March wheat futures contract lost more than 10 cents. But nearby corn was up nearly three cents.

The soybean market withstood a run by the bulls last week and, backed by heavy fund purchases, came roaring back. For the week, nearby beans advanced more than 20 cents. Soybean meal edged up by 80 cents a ton.

March cotton fell $1.66.

In livestock, nearby cattle lost $1.25. March feeders dropped 52 cents. But the lean hog contract jumped $4.67.

In the financials, Comex gold was up $1.40 an ounce. The Euro gained 233 basis points against the dollar. And the CRB Index fell more than a point-and-a-half to close the week at 260.50.

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: Feb 06, 2004

Brugler: GOOD TO BE HERE, MARK.

Pearson: WELL, LET'S TALK FIRST ABOUT THIS WHEAT MARKET. OBVIOUSLY, THE SNOW COVER THAT HIT A BIG PART OF THE PLAINS HAS GOT TO BE A PLUS, SO MAYBE A LITTLE BIT BETTER ON THE PRODUCTION SIDE ON WHEAT THAT'S MAYBE PUSHING PRICES LOWER?

Brugler: YEAH, YOU CAN SEE THAT IF YOU LOOK AT THE UNDER-MARKET SPREADS BETWEEN THE THREE EXCHANGES. KANSAS CITY TOOK THE HIT BECAUSE WE GOT THE INCREASED MOISTURE IN THE SOUTHERN PLAINS, AND THAT AT LEAST GIVES US A LITTLE INSULATION, A LITTLE LESS FREEZE DAMAGE RISK IN THE NEAR TERM AND SOME MORE MOISTURE FOR SPRING. I THINK THE TRICK WILL BE HOW MINNEAPOLIS WHEAT REACTS BECAUSE IT'S THE ONE CLASS OF WHEAT THAT WE CAN STILL USE TO ATTRACT ACREAGE IF THE MARKET WANTS MORE WHEAT.

Pearson: OVERALL, WHEAT DEMAND HAS BEEN SOFTER. WHAT'S -- WORLDWIDE, WHAT'S AHEAD? WHAT DO YOU SEE FOR THE COMING YEAR?

Brugler: ACTUALLY WE'RE DOING FAIRLY WELL ON EXPORTS COMPARED TO A YEAR AGO. WE'RE UP A COUPLE HUNDRED THOUSAND -- I'M SORRY, A COUPLE HUNDRED MILLION BUSHELS. BUT THE PROBLEM IS, OF COURSE, CANADA HAS GOT A BIGGER CROP AND OUR FRIENDS IN AUSTRALIA HAVE GOT A BIGGER CROP. ARGENTINA IS DOING OKAY, SO WE DON'T HAVE THE EMPTY VOID THAT WE HAD TO WORK WITH OVER THE PAST YEAR. WE'VE GOT ADEQUATE SUPPLIES HERE WITH A 500-SOME-MILLION-BUSHEL CARRYOUT. SO IT'S REALLY JUST A MATTER OF HOW HARD WE CAN PUSH IT USING THE LOWER DOLLAR AS OUR LEVERAGE TO MAKE THOSE EXPORT SALES.

Pearson: ALL RIGHT. WHAT DO YOU TELL PRODUCERS OUT THERE?

Brugler: I THINK YOU ALREADY HAVE TO BE LOOKING AHEAD AT PRICING SOME OF YOUR 2004 CROP. WE'RE UP ABOUT 90 CENTS A BUSHEL FROM THE CONTRACT LOWS IN THE JULY FUTURES. AND I'M NOT SAYING YOU HAVE TO DO IT TODAY, BECAUSE WE'VE KIND OF SOLD OFF A LITTLE BIT, BUT YOU'VE GOT TO LOOK AT IT AND SAY, GIVEN THAT THE AVERAGE ANNUAL MOVE IS ABOUT $1.10, HOW MUCH MORE IS THERE FOR THOSE PARTICULAR CONTRACTS AND IS THIS AN ATTRACTIVE PRICE THAT I NEED TO AT LEAST PUT SOME KIND OF A FLOOR IN.

Pearson: LET'S TALK ABOUT THIS CORN MARKET. WE HAVE SEEN THIS WEEK AGAIN -- WE'VE GOT THE VOLATILITY BACK IN THESE GRAIN MARKETS AND LIVESTOCK MARKETS AS WELL, SO IT'S AN EXCITING TIME. DESPITE ALL THE VOLATILITY, WE FINISHED UP ABOUT 3 CENTS ON CORN. THERE'S A LOT OF CONCERN ABOUT GETTING ACRES BOUGHT FOR THE COMING YEAR. THERE'S A LOT OF CONCERN ABOUT DEMAND AND PRODUCTION LEVELS IN KEY PARTS OF THE CORN BELT AS WE LOOK TO THE NEW YEAR. WHAT'S YOUR TAKE ON THIS CORN MARKET? FROM THE BIG PICTURE, WHAT DO YOU SEE IN CORN?

Brugler: WELL, FIRST OF ALL, WE'VE GOT USDA SAYING 981 MILLION BUSHEL ENDING STOCKS. AND, OF COURSE, WE'LL GET A NEW SET OF NUMBERS ON TUESDAY. AND THAT'S NOT A VERY BIG SUPPLY. THAT ONLY WORKS OUT TO 27- OR 28-DAY SUPPLY COME NEXT FALL. SO THE MARKET NEEDS A 10-BILLION-BUSHEL CROP OR LARGER, DEPENDING ON YOUR DEMAND ASSUMPTIONS, JUST TO HOLD THAT LEVEL OF STOCKS. AND MOST OF THE ESTIMATES THAT I'VE SEEN, INCLUDING SOME I'VE PUT OUT MYSELF, DON'T GO BEYOND A MILLION AND A HALF ACRES OF ADDITIONAL CORN FOR THIS COMING YEAR. AND MOST OF THAT IS COMING IN IOWA, SOUTH DAKOTA, AND MINNESOTA, THE WESTERN CORN BELT, AND SOMEWHAT RELATED PROBLEMS IN THE SOYBEAN CROP LAST YEAR. SO THE MARKET IS TRYING TO BID SOME EXTRA ACREAGE. I THINK WE SAW THAT WITH CONTRACT HIGHS IN DECEMBER CORN ON FRIDAY, TRYING TO GET A LITTLE MORE CUSHION THERE IN PRODUCTION FOR 2004. THE DEMAND SIDE IS HOLDING UP PRETTY WELL. WE'RE STILL SHIPPING 38 TO 40 MILLION BUSHELS A WEEK IN EXPORTS, AND WE'RE RUNNING 120 PERCENT OF YEAR-AGO LEVELS. SO THE USDA'S NUMBERS LOOK PRETTY SOLID IN TERMS OF THE DEMAND SIDE. WE'VE JUST GOT TO HAVE ENOUGH PRODUCTION TO MEET THAT.

Pearson: WELL, LET'S TALK ABOUT -- FROM A SALES STANDPOINT, A LOT OF CORN HAS BEEN MOVING TO TOWN. WE'VE BEEN SEEING IT. OLD CROP, WHAT ARE YOU TELLING PEOPLE? WHAT ABOUT PRICING NEW CROP?

Brugler: WELL, I THINK ON OLD CROP YOU'VE GOT TO HOLD A LITTLE BIT BACK BECAUSE OF THE TIGHT STOCKS LEVEL. THERE ARE SOME HISTORICAL TENDENCIES IN TIGHT STOCKS YEARS FOR CONTRACTS TO MAKE NEW HIGHS GOING INTO APRIL OR MAY EVEN. SO I DON'T THINK YOU SELL EVERYTHING. ON THE OTHER HAND, IT DOES CONCERN ME. I'M HEARING A LOT OF $3, $3.50 KIND OF NUMBERS FROM PRODUCERS. AND IF EVERYBODY IS THINKING THAT WAY, WE'RE NOT GOING TO GO THERE. ON THE NEW CROP SIDE, $2.70 OR $2.80 IS AN EXCELLENT PRICE TO START A SCALE-UP SELLING PROGRAM. AND IN FACT, WE LEAKED A LITTLE 10-PERCENT SALE INTO THE MARKET THIS PAST WEEK. BUT AGAIN, THE AVERAGE ANNUAL TRADING RANGE IN CORN IS ALMOST A DOLLAR, AND THAT WOULD SUGGEST THAT, PARTICULARLY FOR THOSE NEW CROP CONTRACTS, THERE MIGHT BE JUST A LITTLE MORE ROOM YET.

Pearson: SO NOT IN A BIG HURRY TO PRICE --

Brugler: NOT IN A BIG HURRY. IT'S A GREAT SELLING PRICE IF YOU NEED SOMETHING TO PUT ON THE BOOKS TO SHOW THE BANKER. IT'S NOT BAD TO PUT A LITTLE FORWARD CONTRACT IN HERE OR BUY A PUT OPTION TO PUT A FLOOR UNDER PART OF THE PRODUCTION BUT AGAIN, PARTICULARLY WITH THE WAY THE REST OF THE GRAIN MARKET IS ACTING RIGHT NOW, I'M NOT IN A HURRY TO MAKE SALES.

Pearson: LET'S TALK ABOUT SOYBEANS. AND AGAIN, THAT'S BEEN A WILD SITUATION. IT LOOKS LIKE IT'S GOING TO CONTINUE TO BE WILD TILL WE GET THROUGH THIS MARKETING YEAR. EVERYTHING WE'RE HEARING UNDER SOUTH AMERICA IS FAIRLY POSITIVE SO THAT CROP LOOKS FAIRLY GOOD DOWN THERE. WHAT'S YOUR TAKE ON THE BEAN MARKET? WHERE IS THIS THING HEADED?

Brugler: WELL, AGAIN, THE SOUTH AMERICAN CROP DOES LOOK PRETTY GOOD. BUT WHAT'S HAPPENING IS WE'RE GETTING BLINDSIDED BY A COUPLE OTHER THINGS SUCH AS FREIGHT RATES. OCEAN FREIGHT RATES TO SOME DESTINATIONS ARE AS HIGH AS $80 A TON, WHEN THEY WERE $35 A TON A YEAR AGO. WHAT I'M HEARING IS THAT, AT THE PRESENT TIME, THE U.S. IS STILL COMPETITIVE ON SOYBEAN EXPORTS SALES INTO ASIAN DESTINATIONS, JAPAN AND CHINA IN PARTICULAR, EVEN THOUGH THE BRAZILIAN PRICES AT THE PORT -- THE FALL PRICES ARE 60 CENTS A BUSHEL LESS BECAUSE THEY'VE GOT SUCH AN INCREASED DISTANCE TO HAUL THE SOYBEANS. THAT MAY MEAN THAT WE SHIP A FEW MORE BEANS OUT THAN WHAT WE WERE ANTICIPATING WE'D BE ABLE TO DO AFTER THE FIRST OF MARCH. THE SOUTH AMERICAN CROP IS COMING OUT OF THE FIELD. MATTO GROSSO IS ABOUT 5 OR 6 PERCENT HARVESTED NOW. THAT HARVEST BASE WILL PICK UP DRAMATICALLY OVER THE NEXT COUPLE WEEKS, AND WE ARE GOING TO SEE A BIG DROP-OFF ON OUR EXPORT SALES. BUT AGAIN, WE'VE ALREADY MADE 91 PERCENT OF THE COMMITMENTS -- THE COMMITMENTS ARE OVER 90 PERCENT OF USDA'S PROJECTION FOR THE YEAR, SO WE DON'T REALLY HAVE TO HAVE A VERY LARGE WEEKLY SALES PACE OVER THE NEXT SIX MONTHS TO MEET THE USDA NUMBERS OR EXCEED THEM.

Pearson: PRODUCERS RIGHT NOW -- I'M NOT HEARING THAT THERE'S A LOT OF BEANS STILL LEFT OUT THERE IN THE COUNTRY FOR OLD CROP, BUT FOR THOSE THAT DO, ARE YOU -- WOULD YOU WANT TO STEP UP SOME BEAN SALES, THEN?

Brugler: I THINK YOU -- AGAIN, YOU HAVE A LOT OF PRICE LEVERAGE HERE. YOU'VE GOT A TIGHT STOCKS ESTIMATE OF 125 MILLION BUSHELS FOR NEXT YEAR. USDA SAYING THAT'S PIPELINED. THEY DON'T WANT TO LOWER THAT NUMBER BECAUSE THEY THINK IN THE END IT HAS TO BE ABOUT THAT NUMBER, BUT THAT DOESN'T MEAN THE PRICE CAN'T VARY IN ORDER TO RATION THE EXPORT DEMAND AND THE CRUSH DEMAND. AND CERTAINLY WITH THE SOYBEAN OIL SETTING NEW HIGHS FOR THE DECADE AND ACTUALLY THE HIGHEST PRICE SINCE 1988 THIS WEEK, THERE'S SOME INCENTIVE TO CONTINUE TO CRUSH BEANS HERE IN THE U.S. THE MARKET MAY NEED TO RUN THE PRICE UP A LITTLE FURTHER IN ORDER TO SLOW THAT DOWN.

Pearson: SO HANG ONTO SOME BEANS, THEN?

Brugler: I THINK YOU AT LEAST HAVE TO HANG ONTO 20, 30 PERCENT OF YOUR OLD CROP BEANS JUST TO SEE HOW IT PLAYS OUT. YOU CAN CALL THEM YOUR GAMBLING STOCKS IF YOU WANT. BUT AGAIN, I DON'T THINK IT'S A GOOD SITUATION TO JUST SELL OUT AND GO AWAY.

Pearson: AND NOT MUCH OF AN INCENTIVE RIGHT NOW TO PRICE NEW CROP BEANS.

Brugler: BASICALLY MY STRATEGY THERE HAS BEEN TO TRY AND PUT SOME FLOORS IN WITH SOME PUT SPREADS AND WALK THOSE HIGHER IF THE MARKET WILL ALLOW ME TO DO THAT, ROLL THEM UP TO HIGHER STRIKE PRICES. IT WILL COST ME A FEW CENTS TO DO THAT, BUT WHEN THE BIG BREAK COMES AND THE FUNDS ARE LEAVING, I'LL HAVE SOME HEDGE COVERAGE IN PLACE.

Pearson: REAL QUICK, COTTON TOOK A HIT THIS WEEK. PRETTY MUCH CHINA. WHAT'S THE TAKE ON COTTON? WHAT ARE YOU TELLING PEOPLE?

Brugler: BASICALLY COTTON HAS A PROBLEM WITH DELIVERIES. WE'VE GOT THE MARCH CONTRACT COMING UP FOR DELIVERY REAL QUICKLY HERE, AND CERT STOCKS HAVE RISEN BACK INTO THE 220-, 230,000-BALE CATEGORY. THEY WERE DOWN IN THE 180S. THAT MEANS THAT BASICALLY THOSE WHO HOLD THE STOCKS, WHICH WOULD BE THE MERCHANTS, HAVE A BIT OF A HAMMER HERE. THE FUNDS HAVE A FAIRLY LARGE SPEC LONG POSITION HERE, AND THERE'S GOING TO BE A BIT OF A PUSH HERE UNTIL WE CHASE SOME OF THOSE FUNDS OUT OF THE MARKET.

Pearson: LET'S MOVE OVER TO LIVESTOCK AND WHAT'S AHEAD FOR THIS FED-CATTLE MARKET. OBVIOUSLY THE EXPORT SITUATION IN FED CATTLE IS GOING TO BE AN ISSUE, BUT WHAT ARE YOU TELLING PRODUCERS?

Brugler: BASICALLY WE'VE GOT TO ABSORB THAT 2 BILLION, 2.5 BILLION POUNDS OF BEEF THAT, IF WE ASSUME THERE'S NO EXPORTS FOR THE YEAR, THAT'S WHAT WE'RE LOOKING AT. BUT PRODUCTION IS DOWN ABOUT A BILLION POUNDS FOR THE YEAR. ONE THING I AM CONCERNED ABOUT IS CARCASS WEIGHTS ARE STARTING TO GO UP. WE'RE NOW WITHIN ABOUT 15 POUNDS OF A YEAR AGO. PACKERS HAVE SLOWED THE KILL. DRESSED-BEEF PRICES ARE KIND OF SLUGGISH, SO I THINK WE HAVE TO BE A LITTLE DEFENSIVE YET ON CATTLE.

Pearson: ARE YOU GOING TO STEP UP SOME HEDGES?

Brugler: AGAIN, I'VE GOT FLOORS UNDER A LOT OF THINGS. I'M NOT AGGRESSIVELY SHORT IN IT BECAUSE WE'RE TECHNICALLY OVERSOLD.

Pearson: ALL RIGHT. THE HOG MARKET HAS IMPROVED THIS WEEK DRAMATICALLY. WHAT HAPPENED?

Brugler: BASICALLY THE WEATHER CAUSED SOME OF IT. WE'VE GOT ROADS THAT WE JUST CAN'T GET A TRUCK DOWN RIGHT NOW OUT HERE IN THE MIDWEST. THERE'S 20 INCHES OF SNOW, 30 INCHES OF SNOW IN SOME AREAS. THERE'S SOME DEBATE IN THE INDUSTRY. DOES THAT MEAN THE HOGS AREN'T THERE OR WE JUST CAN'T GET THEM TO THE PLANT. BUT CLEARLY, BACON DEMAND HAS PICKED UP. WE MAY IN FACT BE SEEING SOME EXPORT SALES OF PORK TO JAPAN AND OTHER PLACES THAT HAVE BANNED BEEF. WE TEND TO DO PRICING IN PORK ON THE MARGIN, WHICH MEANS THAT LAST 1 OR 2 PERCENT CHANGE IN DEMAND HAS A BIG IMPACT ON PRICE. WE'VE GOT SOME CHART BREAKOUTS THIS WEEK ON THE WEEKLY CHARTS, MONTHLY CHARTS, THAT SUGGEST $63 TO $65 IS POSSIBLE FOR THE NEARBY. AND I THINK WE HAVE TO LOOK AND SEE IF THE MARKET CAN DO IT.

Pearson: FOR BOTH CATTLE AND HOG PRODUCERS, YOU TALK ABOUT THE VOLATILITY, THE TIGHT SUPPLY WE'VE GOT GOING IN. WHAT ABOUT COVERING FEED NEEDS?

Brugler: FEED NEEDS, YES, YOU'VE DEFINITELY GOT TO HAVE SOME COVERAGE ON FEED NEEDS. WE'VE GOT SOME LONG CALL POSITIONS ON. WE'VE ALSO ACTUALLY PRICED SOME SOYBEAN MEAL BECAUSE THE ALTERNATE SCENARIO TO MEAL PRICES GOING UP, THAT IS IF WE SLOW DOWN CRUSH, THE ALTERNATIVE SCENARIO IS THE BOARD DOESN'T GO UP BUT THE BASIS GOES TREMENDOUSLY HIGHER. YOU KNOW, I'VE ALREADY HEARD STORIES OF ASKING PRICE IS $50 OVER THE BOARD FOR SPRING AND SUMMER MEAL. SO WE'VE CHOSEN TO LOCK SOME OF THAT MEAL IN WITH EITHER BASIS CONTRACTS OR ACTUAL CASH SALES OR CASH PURCHASES, AND THEN WE'LL TAKE IT FROM THERE.

Pearson: VERY GOOD. ALAN BRUGLER, THANK YOU SO MUCH. THAT WILL WRAP UP THIS EDITION OF "MARKET TO MARKET." BUT IF YOU'D LIKE MORE DETAIL FROM ALAN ON WHERE THESE MARKETS MAY BE HEADED, THEN BE SURE TO PAY A VISIT TO THE MARKET PLUS PAGE ON OUR "MARKET TO MARKET" WEB SITE. AND BE SURE TO JOIN US AGAIN NEXT WEEK WHEN WE'LL EXAMINE THE CHANGING NATURE OF THE BARGE BUSINESS ON THE TROUBLED MISSOURI RIVER. UNTIL THEN, THANKS FOR WATCHING. I'M MARK PEARSON. HAVE A GREAT WEEK. CAPTIONS BY: MIDWEST CAPTIONING DES MOINES, IOWA


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