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Market Analysis: Market Analyst Alan Brugler

posted on September 30, 2011


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.

Brugler: Good to be here, Mark.

Pearson: Well, yes, I'm sure it is, especially in these kinds of markets, Alan. In the month of September, we've taken a buck 75, I think you told me it was a buck 80 off the corn market. Almost $3 or more off the soybean market, with a pressured week. Crude oil has come down. Gold has come down. Virtually every commodity we track on this program has been contracting. Give us a quick macroeconomic thought of what is driving all this.

Brugler: Well, ultimately it goes back to Europe and to Greece and Italy and their debt problems and concerns that they are not going to be able to pull out without serious damage to the European banks and indirectly the U.S. Banks. That is causing a lot of money to head for the sidelines. It's a lot of investment funds are pulling back their horns a little bit. To a degree, if you lose economic activity over there, you lose demand for commodities. So we've seen index funds and hedge funds and various types of investors pulling back on the commodity investments. At the same time the dollar has been rallying against the euro because of the concern about the euro and typically stronger dollar prices – or stronger values of the dollar hurting commodity prices in dollar terms.

Pearson: Absolutely. That’s certainly the case with both corn and soybeans. Then, of course, we had a USDA Report out today. We will talk about that in a moment, the stocks report. Let's talk first about the wheat market and how this is playing out. We certainly have not had relief for most of the plains from this dry weather, from the report stated earlier. Are we going to start to tighten up wheat conditions? Is that going to be a fundamental concern going forward?

Brugler: Well, wheat is definitely a concern. The planting progress is behind normal for the winter wheat crop because it's been too dry. You just don’t plant it if it's not going to come up. That's it. Some producers, if you give them one rain, they are going to put it in and take your chances with the crop. The big problem is globally we do have an expansion in production. Russia has still got a fair amount to sell, the Ukraine. We are starting to see some tightening in the feed wheat supply, that is some of it is feed wheat, some of it is milling quality and worth more. We are starting to see the price firm up a little bit in parts of the export market, where we are more dependent on the milling wheat. So there is some potential here, but for right now they're still little bit too much wheat available, and that's kind of keeping a little downward pressure on the price.

Pearson: All right. What are you telling wheat farmers today? Buy? Sell? Hold?

Brugler: Basically we have sold more than half of our wheat. We’ve got hedges on most of the rest of it. We're not selling any of next year’s. We think we are closer to a short term bottom than a short term top. Basically holding on that part of it.

Pearson: This pull back, though, if you are in the livestock business, great time to buy cheap feed.

Brugler: We are setting up a good buying opportunity. Actually it’s something the grain guy should be happy about in a way because the margins for the livestock guys went back to positive territory in this grain break. So that keeps them using the product over the next year and basically ultimately will help clear up the supplies of wheat, corn, and soybeans.

Pearson: And it wasn’t overlooked by those livestock guys either, based on where our futures went this week. Let's slide right into corn. The USDA stocks number came out and said we've got more corn than we thought. Who new?

Brugler: There's a lot of debate.

Pearson: I know. I’m not going to go there because what’s the point.

Brugler: I'm not questioning the number at all. I think it's a legitimate number, 1.1 billion bushels. I think there’s questions as to the way they count ethanol, the way they count old crop, new crop, whatever. But the bottom line is we’ve got an extra 200 million bushels worth of old-crop corn that’s going to be carried over into the new corn. That is equivalent to adding a couple bushels per acre to the new-crop production. So the market reacted in a very bearish fashion today.

Pearson: When we get over a billion, comfort levels grow dramatically around the world about the need to buy corn.

Brugler: Yeah, and particularly at harvest time because you've got a certain amount of grain that's flowing because it was already forward sold for harvest. So the end users are getting grain even if the farm is not selling any more at this price level. They are still getting grain and there is no real interest. Now, commercials, the end users, the ethanol plants and feedlots, basically have been reducing their hedge coverage, their long positions, hoping to get a chance to buy cheap here at harvest. So, yeah, we kind of hit a demand vacuum here between the macro fundamentals where the people are just bailing out of corn and the other grains and then the end user sitting here saying, well, it's harvest and, guess what, it's not as tight as we thought.

Pearson: And the corn is coming. It’s a normal expectation that this would happen. So what we do here?

Brugler: Basically we quit doing cash sales. In fact, our last cash sale was actually at 770 Dec. futures back at the end of August. We've got long put positions to protect our downside on the ’11 crop, or at least most of it. And we think there's going to be a normal harvest low here in October, and then we’ll get a bounce back.

Pearson: Okay. Let's talk about the soybeans. Obviously it was a huge selloff there. We got a $3 move down on soybeans. People are trying to look they don't want to make bad decisions here because of the market pullback, because we saw this last year and we are seeing could've made sales. Do we have enough carry in this bean market to hold onto these beans going forward?

Brugler: Well, the bean world market is expected to tighten this year. The global ending stocks are going to shrink about six million tons, based on production estimates. Basically what this break is doing is telling the South Americans don't take any extra steps to plant soybeans, we don't need them all that badly, particularly with the shift in the Brazilian real. It's changed the dynamics down there a little bit. Here the producer basically needs to sit on it. He needs to say, okay, I made my early sales, my forward sales, I don't need to sell at this price, I can wait for the thing to settle down a little bit. The Chinese have been very active buyers in the last week and a half because of the price break. Their internal crush margins are getting much better here. They are on holiday for the next week and a half, but once they come back, we think they are going to be active in the market again.

Pearson: And you are still going to see the strong demand coming again from china. The growth we saw last year was huge. Is this as good?

Brugler: Again, we think China's imports are going to be slightly larger than last year. They bought about 52 million tons from world sources last year. Fifty-six million is a good guess for this year. The slowing of their economy does not necessarily mean they are going to bring in fewer beans. Their domestic bean crop in China is smaller this year. They’ve still got a huge expansion in their pork industry, trying to get the price of pork under control. So they're going to need a lot of feed wheat, a lot of corn, and a lot of soybeans.

Pearson: Let’s talk about livestock. You mentioned their demand for pork. Talk about beef prices. Obviously we saw a huge move on the board this week. A lot of livestock people are looking at this shrunken cow herd from the drought in the plains. There are basically reduced numbers in all the produce because of $7 corn. It looks like it could be a good year for cattlemen going forward.

Brugler: Well, we've always got to fight the margin battle, no matter what your feeder cattle cost, your corn costs, and what can you sell the cattle for. At the moment those margins are positive. The cattle crush spreads, at least in some of the months, are now positive. So that’s good news for the cattlemen. We are going to see a tighter supply of feeder cattle next year because we won’t have the calves, because the cowherd has been reduced, as you mentioned. We're also seeing a lot of cattle being on feed longer. They were put in the feedlots early because there wasn't any grass in the southern plains. That's considering more corn. That means there’s a lot of cattle that are not ready to market right now because they were put in light. That's helping boost the cash price in the short run.

Pearson: Well, we’re sure seeing it on the boards. Eventually we can buy them now and make them work. Talk about the hog business and what’s happening on that front because, like I say, China demand, there’s tremendous export demand. But this higher dollar, is that going to put the kibosh on some of that?

Brugler: We think eventually the stronger dollar is going to hurt the experts. There is not evidence that it is happening right now. The pork cutout value, kind of your one indicator of export demand, has gone up in the last week, when it normally would be going down this time of the year. Very good demand for pork overall, whether it's domestic or expert. And that's allowing the hog market to come back up from the levels. We were down in the low 80s here on the futures. Now we are trading closer to 90.

Pearson: Well, it certainly has been a shift. You mentioned the macroeconomic issue out there, what's happening in Europe, all the currency that's been printed. The strengthening dollar, that's benefiting certainly some on the energy side.

Brugler: Anytime your dollar goes up, the relative cost of imports goes down. It's more attractive to you to import. It doesn't help you on the export side, but it does help you for inputs, such as your fertilizer and your fuel. I think we do get a benefit from having the stronger dollar.

Pearson: Well, one more quick question about corn, beans, and wheat. What about next year's crop? How much of the 2012 crop are you selling?

Brugler: Well, we sold 10 percent of our 2012 corn. Basically I've encouraged producers who have purchased their fertilizer already and locked in their land rents to go a little further than that but, again, we are thinking this is developing to be a normal harvest low, and we don't want to do a lot of pricing right here for new crop. Even with the increase in the carry, we still think there’s better opportunities down the road.

Pearson: All right. So let’s not get panicked here. We're just under some pressure it will come back. What about the gold bugs? What are you telling them these days?

Brugler: Well, I try not to talk to them too much. Clearly, the reason gold went to $1900 was everyone was hiding it. The Europeans were ditching the euro and going to gold. And now that’s not looking quite as attractive.

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, streaming video of our program and links to our Twitter feed and Facebook page-- all FREE -- at the Market to Market Web site. And be sure to join us next week when we'll examine the outlook for U.S. crop production ahead of the government's October estimates. Until then, thanks for watching. I'm Mark Pearson. Have a good week...


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