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Market Analysis: Alan Brugler

posted on December 23, 2011

Market Analysis: 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: We had a rally this week in about everything in commodities, and a couple of things have kind of jumped out at me. One is what's happening with oil prices. We've had some big swings here in the past couple of weeks. What are your thoughts on that? We're strengthened again, getting close to the hundred dollar level. Where are we headed and what's it telling us?

Brugler: Well, there's a couple different things going on in oil all at the same time. You've got the discussion about shutting off Iran or blockading the exports or otherwise eliminating that supply of oil in the world market. You've also got the change in the pipeline arrangement at Cushing, which means more oil leaving that storage, and that is the deliverable point for WTI crude in the United States. The market is a little bit unstable. There's some things going on there. And you had a lot of money parked on the sidelines that wanted back in, or you had shorts that were starting to get nervous because of oil prices were going up.
They were buying back positions this week. We saw that happening in quite a few markets, actually.

Pearson: What are we headed with oil? Where do you think with the global economy? Are we weakening or strengthening? That's seems to be what everybody is wondering about.

Brugler: I don't think anybody knows for sure. You would assume that Europe is probably going to go back into recession, that the austerity measures and the economic issues they've got are going to force a slowdown in GDP growth there. China, I think, has gotten the desired slowdown from their tightening last summer. Now they're trying to say, okay, that's enough, let's turn it back up a notch, mainly to offset Europe. U.S. I think is actually doing fairly well right now, considering that we've still got an overhang in housing and that's affecting the unemployment picture.

Pearson: China, is there a real slowdown there?

Brugler: You are seeing some decreases in consumer costs, the CPI type things, and that was deliberate.
At one point earlier in the fall, the pork prices in China were up 50 percent above last year. That's not an acceptable situation for very long. So the government did some things to try and force that back down, including importing a bunch of pork from the United States. But the big question is can they in fact manage their economy as closely as they would like to. They tried to slow things down with all the interest rate hikes and the bank reserve requirements last year. Now they are probably in a situation where they need to
Loosen them a little bit and maybe stir up the growth of little bit. Can they do that without a strong Europe in the picture.

Pearson: A little bit of a bounce on the euro against the dollar this week. Certainly just a very small move
relative to what it's done here for the last couple weeks. But as we look at Europe and if we look at what's happening in China and we look at all these markets that have been big, the big overhang is what's going on with the weather. There's been some concerns about what's going on in South America. You've got a lot of contacts down there. What are they telling you?

Brugler: What we're hearing in South America is that there are some dry pockets. The soil moisture has continued to get drier, if you will, particularly in the southernmost states of Brazil and in much of Argentina.
In Argentina, the corn crop is about 40 percent pollinated now, so it's getting to that key area where it needs a lot more moisture. The soybean crop is under some stress but, of course, until it gets into the reproductive phase, it's not as vulnerable as it will be later on, say mid January.

Pearson: I want to thank Tim from Minnesota who tweeted a question about this and just wondering just what percentage of crop is at risk. Is it that significant?

Brugler: Well, again, you're talking about fairly big countries, and in Brazil's case a lot of north to south geography. You know, it's probably in the at this point now, it's probably no more than 5 or 10 percent off of the production. So if Brazil's crop is 75 million tons, maybe 7 million, 8 million at risk. Now, I want to emphasize it's very early and they could easily still have a 73 to 75 million ton crop of soybeans there.
We know that some of the corn in Paranaue and in Rio Grande do Sul has actually been torn up already because there was no crop there. And that will be replanted as soybeans, and it will be fairly late soybeans that will have to contend with frost risk later on.

Pearson: And I know you follow these weather trends. I had a chance to talk with Elwynn Taylor, the well known climatologist from Iowa State University today, talking about still a moderate La Nina out there, so doesn't necessary bode well, particularly for South America production, but also he's concerned about north central united states as well.

Brugler: Well, La Nina, as we know, can have drought impacts. The problem we had in the Southern U.S. last year was a classic La Niña phenomenon, a La Nina then kind of moderated and went back to la nada, to nothing, and then it reappeared again. We didn't ever go to El Nina, which is the counterpart. We went back to La Nina. We definitely have dry weather in the Midwest. If you look at the drought monitor, you're starting to see a big yellow splotch on the map there from Minnesota and Iowa. Some of the rivers in Iowa here showing a lot of gravelly bottom right now. But the pattern in the spring is not that reliable. If you look crop district by crop district with this weak La Nina, you're going to X amount of dryness. That's not there so it's a concern. We'll know better in April.

Pearson: Let's take some cases here. Let's start with the wheat market and what you see happening there. Obviously we're going to watch and see what happens along the Black Sea and where some of this business goes to. It was a good week for U.S. wheat.

Brugler: Yeah, wheat exports still a little on the slow side, but what you're seeing is the world price starting to pick up a little bit. The Russians have actually started a price support program in the areas away from the export ports, but that's drying up some of the supply to the ports. So that's helped their price prop up.
You've got some dryness in the Ukraine, which is another big exporter that is causing them to wonder how much of this year's crop they should allow to be exported. So we're seeing a little positive here and there.
Of course, we do did get some better rains here in the central plains and some snow down south. That's making our hard red winter wheat crop look just a little bit better. With the challenges that Putin is getting over there, could he jump the gun on that if he is concerned about dry weather?

Brugler: Well, again, it's mostly the Ukraine rather than Russia at this point but, yeah, they could at some point say, you know what, I think we've sold enough for this year, let's just kind of put a lid on it.

Pearson: It will be interesting to see. It will certainly give us some volatility. What do you recomment to wheat producers at this stage?

Brugler: Basically we are sitting on our hands right now. We're fairly well sold with last year's crop.
We just made very minimal sales for 2012. We like the chart action right now, the technical action. We think the funds want to get out of some of their short positions, so we're just kind of taking it slow right now.

Pearson: Where are the funds, Alan? We miss the funds.

Brugler: Well, some of them have just gone away, Mark. Unfortunately, a lot of individual traders got caught in the MF Global problem. And if you look at open interest in all of these ag commodities, it's come done. It's mostly the individual traders that have left. The professional managers are still there. But one thing we are watching for is what kind of investments do they want to make as we turn to 2012. Typically you get a of new money at the beginning of the year.

Pearson: Okay. How is that going to influence the corn market? What do you see happening there on corn? They're talking about big numbers for 2012, not surprising after the prices we've had. What do you see ahead?

Brugler: Well, we think that, first of all, the export market is picking up. We're seeing that wheat is going to limit that to a degree. We are seeing the first half of the year, we see excellent ethanol demand. We will see how that plays out over the course of the year. We will have bigger acreage next year. That's fairly certain. I'm not so certain about the yield, though. You hear this talk, okay, we've had two bad yields. Certainly it will be a big yield. We have to remember that this 94 million acres is including a lot of double crop ground, It's including a lot of fringe states that usually don't have the same yield that the core of the Corn Belt has, and you also are counting on some prevent planting acreage that was sitting under water for three months last year. Historically you don't get 100 percent yield the first year you put that ground back into production. So I think those factors all work against a 165 kind of a corn yield. I certainly do hope that it's better than this past year was.

Pearson: All right. We'll see. With pricing action and pricing decisions by producers, it sure looks like everything that we've been learning anecdotally. We didn't sell a lot of that 2011 corn crop yet.

Brugler: Well, I think you had a lot to go cross the scales that was sold early.

Pearson: And some of the 2010 that was sold in-

Brugler: Correct. But after that, the guy said, hey, it's a dollar, dollar and a half below where I couldn't sell it and I think I want more money. You saw the market try to buy it with basis, the cash bids over the futures. Now the board is kind of trying to react here. We are seeing more sales here in the last week as cash prices gotten above $6, and here in the Midwest, you're seeing guys saying here's the grain, I don't want the check till January for tax reasons, but we are seeing movement. Conversely that is actually bullish because that creates sell paper, hedge paper from the elevators and gives the funds something to buy against.

Pearson: What do you think about ethanol demand for next year?

Brugler: I think the demand is pretty good, although I'm concerned the gasoline consumption is down about 3 4 percent right now. If you're not selling the gasoline, you're not selling the 10 percent blend. But we're seeing excellent exports of ethanol. That will continue at least through march and perhaps longer.
That makes up for some of the- absorbs some of the excess production that is not required under the mandate.

Pearson: Real quick, where do you think corn is going to be in 2012? A little outlook for next year.

Brugler: Well, our worst case scenario actually about 440 on the downside. I'm not even going to put odds on what that would be. We still think there is a possibility of seeing $7, although we don't think we'll get back to the 2011 highs.

Pearson: Real quick, soybeans. Concerns in South America have to be moving this market.

Brugler: That's a big story. We're starting to see the export business pick up. South America has gotten rid of a lot of their old crop production. We're now into the U.S. as the main supplier to the global market.
We're also seeing that with this little price bounce that some of the other countries besides China have gotten off the sidelines and they're starting to pick up some beans right now. So I think the export situation is picking up. Crush margin is still not that great. China's support price is still high enough that they can afford to buy from whoever they want to right now. It's just a question of, yeah, if South America gets more stress and less likely production, the price will tend to go up and the U.S. will make more exports.

Pearson: On soybeans, again, kind of bracket me. Where do you think we're going to be in 2012? What do we have for highs and lows?

Brugler: Well, part of that is going to be determined by the South American crop and weather next spring here. Our trendline assumption right now is at maybe 1040, 1050 on the downside would be your risk.
Outside chance of 950. Then the upside 13, 13.5 max.

Pearson: All right. Let's talk real quick about cotton. Where do you think that one is going? There's a lot of factors going on in cotton. We talked about the global economy earlier, but global fashion also is an issue.

Brugler: Well, fashion is an issue. The fact that we're still trading 85 cent cotton is a big issue. Even though crude oil is a hundred bucks, synthetic fiber is still fairly cheap compared to cotton. Cotton hasn't come down to the 50 or 60 cent level that it spent a lot of years at. We've also got a lot of foreign mills that bought a lot of cotton from the United States last spring and last summer at much higher prices. Now they can't pass that cost onto the consumer. The people are complaining about the cost of that shirt or that coat in the store because it's got more of this high priced cotton in it. So we've got a demand problem.

Pearson: All right. Let's talk livestock. Positive week on the board for fed cattle and for the calf market as well. Where are we going? With the stronger dollar, we've become somewhat dependent on what's happening in the export market. And obviously the U.S. economy continuing to recover is always good news for cattlemen. Where do you see us going in fed cattle?

Brugler: I think that supplies of cattle or finished cattle are going to tighten as we go into the second half of next year. There's actually a window here in January/February where it's going to be a little snug too. You saw a big jump in cash cattle prices this week. Packers got caught a little short bought because of the short storm down there and some other things. So feeder cattle are going to be tight. That's going to limit the number of cattle you can put in the lots in 2012. If the export market remains strong and that's a function of the dollar and the global economy that we talked about earlier. If it remains strong, then I think USDA's forecast for the 124, 125 type cattle prices are fairly realistic.

Pearson: You're buying some expensive calves. How are you making that work?

Brugler: Well, right now it doesn't work very well. The cattle crush spreads are negative out through May.
The fall spreads actually are much better. So the market is looking ahead and saying it thinks we will have more corn after the 2012 crop. The margins look a little better there right now.

Pearson: What do you tell that rancher out there? These are awful strong calf prices?

Brugler: I say if you can tolerate the high risk and the high expense of the calf the cows, get those calves out there because there'll be a market for them.

Pearson: Okay. Well, it certainly looks that way. Let's go over to hogs. Again, good week on the board this week. Concerns about numbers. That's what I keep hearing from people in the hog business. Were those numbers substantially bigger than what we thought?

Brugler: Not really. We did get a hogs and pigs report today, Friday. And 101.5 percent for all hogs, and I believe it was 101.7 for market hogs. I think the most bullish thing in the report was that the breeding herd was smaller than the trade had feared. It was 100.4 percent of a year ago. Farrowing intentions do suggest a little bit of an expansion, and you'd expect that because margins are pretty good right now. But again, what I keep coming back to is that pork cutout value, what the packers, they will get for the hog is still about $85 or so. That's about $15 higher than last year, so he can afford to pay more for the hogs. And that gives the producer the incentive to ramp up production. So we are probably going to see some higher numbers in 2012.

Pearson: All right. So you're fairly friendly to hog prices, then.

Brugler: Friendly right now. Again, once we start to see the expansion, then that will put a little more pressure on it. But exports are the other piece of that. Again, the global market has wanted more pork.
We're seeing lower per capita consumption estimates for the U.S. for pork and beef, mainly because it's leaving the country. The consumers are still eating it, but there is less available for them, so they're having to pay a higher price for it.

Pearson: We had a tweet from a young fella. We don't like to overemphasize the metals when it comes to commodities, but it's been so dramatic to watch what gold is doing. And as one of our analysts said, gold has been a currency. It stopped being a commodity. Is gold a buy in here? That's our question from Joe over in the great state of the land of Lincoln in Illinois.

Brugler: Again, gold is basically a proxy for currency. You've got a combination of buying this year. You had people fleeing the euro buying gold and had people buying gold for a while because the dollar was cheaper. We had a classic selloff toward the end of the year because of profit taking. It's gone up for, I believe, seven or eight years in a row now. I'm not a big fan of trying to predict where gold is going to go.
I think from a technical standpoint, it could go back and test 1900 bucks, but if the U.S. economy continues to improve, the dollar continues to firm, then gold is going to go down.

Pearson: Okay, so if there's a calming and then a rebuild of confidence, it may not be a buy.

Brugler: When gold is priced in dollars, if dollar become stronger, typically that means fewer dollars per ounce.

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 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 website. Be sure to join us again next week when we'll look back at developments in 2011 and their impact in rural America. And, on behalf of everyone here at Market to Market, I'm Mark Pearson wishing you the best this holiday season.

Tags: agriculture cattle commodity prices corn economy feeders hogs markets news soybeans wheat