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Market Analysis: Alan Brugler

posted on March 30, 2012

Market Analysis: Alan Brugler

Pearson: Alan, everyone has been waiting for this USDA report that's come out. It was kind of a huge upset in the marketplace and still the tale of a very tight old crop and big corn acres for new crop. But wheat was impacted in a big way. We always start with wheat, so let's talk about your reaction to USDA's numbers as it relates to wheat and the reaction to wheat.

Brugler: I think the big story in wheat was the spring wheat acreage. The trade was looking for over 13 million acres. We only got 11 million and change that brought the total wheat acreage down, and it's a much tighter supply scenario for the next year than what we previously thought. It affects the hard red winter wheat the most for Kansas City and Minneapolis, or milling wheat, baking wheat. That's where the leadership was again, we have had a very large speculative short position in wheat, so this bullish news caused a lot of people to head for the exits today they had to buy their way out. We've had one of the biggest rallies that we've had in years.

Pearson: Is this a selling opportunity in wheat?

Brugler: I think you're coming into one now that would be the million-dollar question for Monday and Tuesday is how much further can we push this thing. It's certainly a dynamic reaction today.

Pearson: A good follow-up on Monday or Tuesday. You're looking at maybe pulling the trigger?

Brugler: We've still got quite a bit to sell, particularly in new crop. Global supplies are still fairly ample. We're still looking at ten-year highs in projected global ending stocks. Any rally is going to have a tendency to have a short rope.

Pearson: Where do the spring wheat acres go?

Brugler: Some of them went to corn. Some of them went to soybeans. There's still about a million and a half to two million acres of prevent plant ground from last year that doesn't really seem to show up in the U.S. Acreage Table today. Probably producers weren't sure if they could get it back into condition to farm it this year. So there's still potential to get a little bit more acreage if this rally continues to draw some more spring wheat acreage in. Again, most of it has shifted to corn and soybeans. Corn, for example, we're looking at record corn acreage for North Dakota, South Dakota, Minnesota, and Idaho, you know, across that whole northern tier where most the spring wheat has grown.

Pearson: There has been a huge shift in corn also in Wisconsin too, so a lot of corn definitely is going to be out there. The acreage number, the acreage intentions was a big number, 95.9 million acres, but that really wasn't what this really was about, was it. It was more about stocks and declining stocks for old-crop corn to hair-trigger tight levels.

Brugler: We were very tight to begin with. The forecast in May was 801 million-bushel ending stocks. They only missed by 200 million bushels or so on the trade estimates for today. The USDA --

Pearson: Which is huge when you're talking 810-575.

Brugler: Yeah, it's a big undershoot. In fact, a couple days ago the trend had been that USDA is going to show a really big stocks number, even bigger than the average trade guess. So it caught everybody leaning the wrong way, and so you've got to limit up move in the nearby May. The corn number for the new crop, the planted acreage number is actually fairly bearish, but if you are running out of old crop, you're going to tend to pull the whole pile of contracts up in some ways it's reminiscent of 1995, '96, which was year when we had the most similar stocks-to-use ratio. In that year the July really took off against the December new-crop contract right after the March report. That's kind of today at least the script that we are following.

Pearson: Of course, we can still have some shifting again. Those were the intentions on the acreage, but the stocks number, a lot of analysts were talking that maybe we'd be back up over a million bushels carryout. We were at 575. That's almost a 400 million-bushel swing. What was the explanation for that?

Brugler: Again, it's the shortfall in the March 1 stocks projected forward for the last half of the year. We only basically have the usage numbers for the first half. If you analyze the numbers, clearly the feed and residual use was higher than what the trade was expecting, and the ethanol held up its end. Exports at the time the survey was taken were keeping up with a year ago. So everything was still hitting on all cylinders.

Pearson: Alan, we need to move on, but corn sales. A lot of people are still holding old crop. Is this going to be --is this going to be a wild deal in July and August; do you think? Should we hold on here or should we take advantage of this move?

Brugler: I think you have to be patient with at least the last 20 percent or so with your production. It's okay to reward the rally if you are behind on sales, but we think you need to keep those gambling stocks because --I'm using 95-96 as an example. It can get pretty woolly out there.

Pearson: All right, 95.9 million corn acres. Should we be selling some new crop?

Brugler: Again, you'd probably want to reward the rally. It depends on where you are at. A lot of producers have already made some sales earlier for fall delivery. We're basically 20-25 percent sold with a few hedges around that.

Pearson: So if you're not there, you may want to step up there, particularly if we get follow through on Monday and Tuesday. We've got to switch to soybeans and again, that may be the most bullish story out there now.

Brugler: Definitely. We've got a slight bullish surprise on us on the old-crop stocks. We've got a very big bullish surprise on the acreage, at 73.9 million acres. The trade was comfortable that corn was getting more acres but soybeans would still hold all of theirs. The juice would come from elsewhere. It turns out that the bean acreage intensions are down and, of course, South American production has dropped fairly dramatically. Private estimates are another 300 bushels smaller than the most recent USDA numbers. So the world needs more beans at the moment they are not going to get them from the United States, so the market is trying to fix that before we get too far into planting.

Pearson: Maybe we'll see some shift in acres. What about bean sales? Do you want to hold off for the time being and see how this thing shakes out?

Brugler: We been fairly bullish on beans, even going back to December. We've made very minor sales of cash -- cash soybeans, but you probably don't want to ride that horse too long on the old-crop sales because, again, South America does have beans to ship. It's just they're going to run out a lot quicker in the fall, and that has big impact for new crop.

Pearson: Sell 14 on the board November?

Brugler: Well, we think you can get a little better on old crop, particularly.

Pearson: All right, real quick on cotton. It was an up week for cotton. There's some acreage down there. What's your outlook real quick on cotton?

Brugler: Basically acreage intentions are about as expected. We didn't really get much market reaction in cotton today. We've got plenty of old-crop stocks to carry us there.

Pearson: Okay, not near the tightness. Let's switch to livestock. It was a terrible week on the boards as far as the livestock market we're concerned. We see a lot of pressure in the cash market as well. Obviously this discussion about the finely textured beef product is having an impact. Where are we headed? When we get through this, fundamentals are still good?

Brugler: Fundamentals have actually deteriorated a little bit. I don't blame the whole break on the textured beef. I think the problem is that we've got carcass weights are built up to about 25 pounds a head versus a year ago, heavier. So we're putting out more beef. We're getting into some bigger cattle numbers for all the cattle that were placed last summer off of the Southern Plains drought; those are all starting to come out of the feed lots. Basically when we get the wholesale prices up in the $190 range per hundred pounds, we have a hard time selling it to consumers. So we've got a demand problem. We've got a supply problem. The board is reflecting that.

Pearson: But the closeouts that look pretty good on gains on these cattle this winter too.

Brugler: Phenomenal performance, but again that's become a problem because we're getting the cattle sooner and they're heavier.

Pearson: Calf market was under some pressure too. What's your take there?

Brugler: Margins are deteriorating whenever you've got the cattle dropping and the corn going up, that's a bad combination for feeder prices. It's great if you're buying the feeders for the feed lot, but it's not so good if you're selling them.

Pearson: Absolutely. Let's talk hogs, what you see ahead on this pork market. We've become so export dependent. I think that almost a fourth of our hogs now are exported. Is that market going to stay strong? Are we hearing about this slowing in Asia? What's your take?

Brugler: Well, we are very export dependent. When the exports slow down as they did here in February and March, we see it on the cutout values. That's what we are experiencing right now. Typically the cutout starts to turn higher as we get into April and may because of domestic demand and because we slowed down the hog slaughter as we get into summer. So I think we've got a little window here where we're still under pressure, but things should start to firm up.

Pearson: We've got a break on crude oil, Alan, this week, a positive one. Hopefully good news for gas prices here soon. As you look at crude oil going forward, it looks like domestic supplies are adequate. Where do you see supplies going?

Brugler: Well, again, the problem is your gasoline and your diesel are priced off the Brendt Crude, the international crude. Our domestic crude has come down, as you point out, the West Texas intermediate -- the international is much more dependent on what happens for the Middle East and what happens with the U.S. dollar. So, yeah, I think we can get a little bit of a pullback on the crude. The problem with the gasoline and the diesel, though, is that we've been shutting down refineries. There's another one here in the Midwest that's going to be taking downtime for most of the summer. They're tightening up the physical supply of the commodity.

Pearson: So there's plenty of crude but it's a refining issue.

Brugler: Yes. 

Pearson: Do you think we'll hover in this $100 range?

Brugler: I think there's a good chance we can hold that or at least above 96/97.

Pearson: I always watch gold to kind of see the pressure on commodities. We were up just a hair this week. Your take on gold? Five seconds.

Brugler: Don't buy anymore but you don't have to sell what you have.

Pearson: All right. I like that reaction. I think that's about as gooda way to put gold as you can. Alan Brugler, thank you very much. As usual, that will wrap 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 website. You'll find expanded market analysis, audio podcasts, streaming video of our program and links to our Twitter feed and Facebook page, and it's all free at the “Market to Market” website, and be sure to join us again next week when we'll visit an auction that was billed as the end of an era. Until then, thanks for watching. I'm Mark Pearson. Have a great week. 

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