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Market Analysis: Market analyst Alan Brugler

posted on July 8, 2011

Grain futures contracts declined precipitously last week after the government estimated near-record corn acreage. This week, despite bearish developments in Washington and a stronger dollar, prices rallied.

For the week, September wheat gained 39 cents, while the September corn contract moved 35 cents lower.

Soybeans also recovered a bit this week as the September contract advanced 35 cents. Nearby meal prices followed suit with a gain of nearly $6 per ton.

In the softs, cotton trended lower again this week as the December contract settled Friday with a weekly loss of almost $4 per hundredweight.

In the dairy market, August Class III Milk futures gained 26 cents, and the deferred contract was up 30 cents.

Over in livestock, the August cattle contract gained $1.80. Nearby feeders rose $3.13. And the October lean hog contract settled Friday with a weekly gain of nearly $3.

In the currency markets, the Euro lost 264 basis points against the dollar. Crude oil added to last week's move with a weekly gain of more than $1.25 per barrel. Comex Gold's days below $1,500 were brief as the August contract gained $59 per ounce. And the Goldman Sachs Commodity Index gained more than 20 points to close at 686-even.


Market Analysis: Market analyst Alan Brugler

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

Pearson: Good to see you. Let's talk a little bit about the week that was. There was some negative news in the grain market maybe, and that's regarding ethanol. There's some people saying that the blenders credit won't make much of a difference. Usage is still going to be high. Ethanol replaces MTBE. There's been no other viable options. Still going to be good demand for it. Oil prices remain high. America is still dependent on a lot on foreign oil. A lot of people are kind of blowing off this whole political stand regarding what we talked about earlier in our earlier feature about the blenders credits and, of course, the tariff being lifted. Overseas ethanol has been high. We've been exporting ethanol. So kind of a nonfactor in a lot of ways there. But we also had some news regarding this crop and crop conditions out there, including your home state of Ohio maybe not being as bad as people earlier thought. So all these things all added up to a little bit of recovery after last week's selloff. Where do we go from here, Alan? Let's start with the wheat market. What do you see happening with wheat prices?

Brugler: Well, the bottom line in wheat is we've been selling it off for a month now and we've had a fairly substantial decline. But that's all being driven by the Europeans, specifically the Eastern European market and the Russians, Ukrainians, and their folks. Russia has been out of the wheat export market. They're trying to buy market share. They're selling wheat at extremely low prices. That's pulling down the global average price, regardless of what's going on fundamentally. Here in the United States we've got a smaller crop this year. The use crop turns out to be a little disappointing on their yields because the drought had an impact on their yield. Canadian crop is going to be small. But again, with this extra ten or twelve million tons coming -- for export coming out of the black sea area, the prices are under some pressure. I think you're currently discounted enough that the market could have a little bit of a bounce here. But the global picture longer term is until we find a home for a lot of that new wheat that wasn't available a year ago, it's going to be tough to really make wheat go up and make it stay there.

Pearson:: I had a chance to visit with a friend of mine, Mike Erman with the Andersons over in Ohio. They're buying wheat and processing it into ethanol. He's the ethanol guy for the Andersons, and that's the first time in my lifetime, I think, we've seen wheat being used as part of a biofuels mix.

Brugler: There are a couple of small plants that use wheat exclusively but --

Pearson: One in Canada for sure.

Brugler: But this is a major plant, and they're not using a hundred percent wheat is my understanding.

Pearson: About 10 percent.

Brugler: They're having a hard time buying corn. As we saw on June 30, the Ohio corn stocks are 33 percent smaller than a year ago, so there's just not much corn there. I think they made a rational decision to try and stretch their supply of corn by putting a little new crop wheat in there. And they can take a little bit of amatoxin in that wheat and still make decent ethanol and decent DDGs out of it. So it's going to use up some of this extra soft red winter wheat. Soft red is the category we've got a little too much of.

Pearson: That's the lower quality, lower protein wheat. But also good crop over in Ohio; 75 bushel average yield in some cases. It looks really good.

Brugler: Yeah, very good yields. I talked to a producer today: 87 bushel average; neighbor got 94, or was claiming it at least.

Pearson: This is like a fish story. It's always the first one who says a number is the one that's off. Anyway, good yields over there, which we're glad to hear about because I know they struggled getting the corn and soybean crops in that part of the state. So wheat prices, what are you telling the producer to do right now? When kind of a sales target should you be looking at?

Brugler: Well, we're basically about half sold on our wheat. We've got some put --

Pearson: You probably got most if that sold at about what, 8, 9 bucks.

Brugler: Right, a while ago. We've got some puts on just in case it does continue to deteriorate, but we're really looking for a 50-cent to a dollar rally somewhere in here to make additional sales.

Pearson: All right. So make some sales 50 cents to a buck up from where we are right now. So sell a rally. Let's talk about the corn market too and where you see that going. This is all this -- all this back-water discussions about ethanol and everybody now has turned against ethanol and, gee, it's a bad idea. We chased away a bunch oil rigs. I talked to a friend of mine who is down in Houston who said we chased all those oil rigs out with all the regulations we put on after the new horizons well, which people have already forgot about. That was a year ago we were all looking at that oil spewing out of the Gulf. Now we've got a situation where we charged BP $20 billion. I was down in Florida. I didn't see any oil on the beach when I was down there. We need 13 billion gallons of fuel in this country. We're not finding new sources. We're not working very hard at it. Ethanol looks like it's still going to be a contender.

Brugler: Yeah, I think the market is there. We'll have some adjustments to make if there's no blend credit. You can argue whether that becomes on the volume of the ethanol or on the price of the corn going into the ethanol, which, of course, would be a concern.

Pearson: The price at the pump.

Brugler: The price at the pump. If we don't have the ethanol, you're going to see the gasoline price go up. We've seen some studies that said that if we had no ethanol, gasoline prices would be 85 cents a gallon higher right now. That's a fairly substantial market impact. But we don't want to lose track of the fact that there's other consumption too. China bought corn this week from the U.S.

Pearson: How big of a deal was that, in your eyes? Was that big to the trade?

Brugler: We'd have rumors of --

Pearson: Forever.

Brugler: Several weeks. And we finally got them to say, yeah, we're buying it. And it is old crop, which is the tighter supply and demand situation that we know about. You've also got to look at cattle and hogs. The prices there have gone up. That's keeping that demand sector up. The only area you're slipping on is the chicken placements. Chick placements are down. And you're seeing this concern about the ethanol consumption. But overall, I think you're going to see a little bit of an increase in the ending stocks figure from USDA this week because we already know the bushels were there on June 30.

Pearson: All right. That's a good point. We've got to be looking for that. Now, let's go on further, though. If you haven't made sales yet -- and I've talked it a lot of producers who still are holding some old-crop corn. Let's forget about them for the time being. If $8 doesn't do it for you -- new crop corn, where are you going to make sales? You don't want to do it here, I'm guessing.

Brugler: No. Although, we like the rally we've had in the last week or so. But, yeah, basically the issue there is we don't know what the production is going to be. We know high temperatures are not necessarily favorable to yield development. We've got a blocking high setting up here for at least a week or two. If it persists, that's going to hurt the yield. Yeah, $7 on Dec. corn is a pretty good price. We think old crop can't get above 7 right now. Dec it will be stretched to get there, but certainly we've got put protection under the market. We're just going to wait it out and see what this yield actually does.

Pearson: All right. With that in mind -- so $7 would be kind of your target for additional sales of new crop.

Brugler: We might not wait that long, but that's -- right now we still think that's possible.

Pearson: That's basis December. Alan, let's talk real quick about the bean market. Again, it was an up week this week in soybeans. It looks like there's a lot of beans coming out of South America at this point but, you know, we've seen sold China an awful lot of soybeans. Ahs that business kind of peaked, China's soybean buying?

Brugler: Actually, we think they'll buy more beans total than this did this past year. Basically, we got interrupted a little bit in terms of our export flows just because of the price limits that the Chinese put on their domestic vegetable oils. That basically made it uneconomical to run a crush plant, and that backed up imported beans at the port because nobody could make any money using them. But despite that, the Chinese were still importing about 4 to 5 million tons a month. And the current estimates are that for this coming marketing year, they'll import 58 million tons. That's more than a million tons a week; 40 million bushels if you round up a little bit. And they've got -- so they've got to keep buying. They're a substantial part of the world market.

Pearson: Absolutely. Sales targets on beans, what are you looking for? I know you sold a lot of beans this month.

Brugler: We're basically down to the nubs on old crop, and we've -- 70 percent price in some fashion on new crop but from higher levels. But we think the market is basically a trading range market between 12 and $14 for new crop.

Pearson: You think we'll kind of hold there through harvest?

Brugler: That's probably a twelve-month range.

Pearson: Okay. All right. Alan, let's talk about the cotton market real quick. Big selloff there this week. New crop cotton we noted also was done. Are blooms off the cotton market for the time being?

Brugler: Cotton is definitely ahead of the other markets. We had the big blow off back in March, basically screwed up demand everywhere. We're still seeing cancellations week by week of the old-crop sales because you just can't make the yarn and sell the textiles using $2 to cotton. That's where we were at the highs. New crop is under pressure because of that. We're only trading at $120 type level here. We think that we found a base of support technically here that we haven't gone below. But, we know, of course, there's a lot of problems with the cotton crop in Texas, which is the number one producer.

Pearson: Big issues down there. But again, like I mentioned, demand has slowed down. That was all kind of a trading thing too that we had going in cotton. There was some insanity there. Let's talk where there's no insanity, where it's always rational. That's the fed cattle market, which was up. You were friendly the last time you were on to fed cattle. Boy, that's played out pretty good.

Brugler: Yeah, we had a nice move in the cattle. Again, that's a combination of supply and also demand -- consumption at least. Export market is really the key there. We continue to make export sales of 13,000, 14,000, 15,000 tons a month. That's meat that we don't have to move into the U.S. market. U.S. market got a little nervous here because of the unemployment data floating around here. But again, the export market has been so solid that it's allowed us to keep those boxed beef prices up. The packer has been able to pay up for the cattle and, of course, the futures are going to reflect that cash value.

Pearson: You're friendly to cattle then for the next few weeks?

Pearson: Yeah. We're starting to put a few pits on just because we've had such a nice rally and the market is getting a little toppy looking. But, again, we don't have an actual sell signal yet.

Pearson: Feeders were up this week too. Talk about the hog market, another export dependent one certainly.

Brugler: Yeah, pork exports have been excellent. You saw the big surge back in the spring with South Korea and Japan, and that displaced some other buyers like Mexico that are still there. Again, we know seasonally that pork tends to top out in the summertime and then fall off just because of the raw number of animals coming through the system. I would expect that we'll see some of that pattern again this year.

Pearson: All right. And covering feed needs with these breaks in corn and beans?

Brugler: We've bumped up our cash ownership. We want to have enough cash corn to cover us into October right now.

Pearson:Alan Brugler, thank you so much. That wraps up this edition of Market to Market. But if you'd like more information from Alan, on where these volatile markets just may be headed, visit the "Market Plus" page at our web site. You'll find "Expanded Market Analysis," audio podcasts and streaming video of our program -- all FREE -- at the Market to Market Web site.

Pearson:And be sure to join us again next week when we'll examine the market impact of USDA's latest estimates on supply and demand. Until then, thanks for watching. I'm Mark Pearson. Have a good week...


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