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Market Analysis: Alan Brugler

posted on June 1, 2012

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, it has been certainly a week again -- what's back in the news? Greece. For two hundred years, 50 percent of the time, Greece has been in default of its sovereign debt. You have to wonder what's new, except they're part of the euro and are they going to all hang together. You talk to an awful lot of people. Greece, Spain, have you got a scenario for us?.

Brugler: Well, we call it the crisis that keeps on giving, Mark.

Pearson: That's it.

Brugler: You seem to get it resolved. You go a few months and then it comes back either in Greece or in one of the other five countries that we're tracking closely. Basically the most recent polls suggest that the Democratic Party is coming back a little bit and maybe we're not going to have the Socialist Party win the election in June. That's obviously up to the Greeks to decide. If Syriza does win, then it appears likely that they would be much more likely to have to pull out of the euro because of what they're asking for would not be palatable to Germany and France. As you say, though, the banking community in the European governments have had over two years to prepare for this. It's been a continuous process. I think we've probably made a lot of adjustments in our banking credit default swaps and what have you so that it wouldn't be as bad as it could have been. But that said, it's still a recession in Europe. It's already underway and China is slowing down. That makes it hard to keep the U.S. economy going at a pace that we'd like to have it.

Pearson: All right. so that can be a problem as we go forward, but the U.S. dollar with its strength out there, which, again, we've got cheaper oil prices. We've got a lot of things going to our favor when we have a stronger dollar. However, folks in the ag community just wonder what the headwind is going to be with the strong dollar.

Brugler: Well, obviously commodities are priced in dollars and a stronger dollar means it takes less dollars per bushel or per ton. So that's working against any price advance in the ag commodities if the dollar is going up. It does in some cases make us less competitive in the world market against someone else who flows their currency, say Brazil. But fundamentals are going to rule in the end. If we have weather problems or something else that tightens supplies, the market will go up even if the dollar is stronger.

Pearson: Good point. Let's talk about those fundamentals. Let's talk about the wheat market first. We had some rains finally, and it's been dry. It's been dry in key parts of the Corn Belt, Indiana, Illinois, Iowa, even further over in the Eastern Corn Belt over in your home area. Beans were planted in dry dirt and they've been sitting there and there's been some stress. Finally a little bit of shower activity occurred. Maybe more is coming. But let's talk about the wheat market first and what you see happening there. The U.S. crop may be improving a tad.

Brugler: well, we got the rains. Part of the crop that is not mature yet will benefit from the rain. Now, they're already 41 percent harvested in Oklahoma. Not going to have much impact their. In fact, the rain is actually negative.

Pearson: A chunk of Kansas.

Brugler: Negative for Kansas and Oklahoma because we're into harvest, and that just hurts quality. You did see the market at least talk about rallying there on that factor. But the wheat crop is still going to be quite large. Our analysis of the crop ratings and the interrelationship with final yields suggest USDA will have to lower their final production number for the winter wheat crop because of the damage that's occurred from the weather. But globally we've still got a pretty good supply. The rally that we had a week and a half ago in wheat basically priced it out of some feed rations, though, which means probably a little more supply, and that hurts price.

Pearson: Sales wise where are you?

Brugler: Basically we're about half sold on the hard red winter type varieties. We don't have quite as much cash sold in the Chicago, but we have more hedges in Chicago. We're fairly defensive on wheat because, again, the global supplies are adequate. It is the North American -- actually Northern Hemisphere harvest period, and there's plenty of supply right now.

Pearson: All right. Plenty of wheat out there. You could argue going forward that if we hit close to what USDA is predicting for our corn crop, we could have excessive corn supplies come the fall.

Brugler: I don't think there's any question about that. If we hit the 166-bushel yields with anywhere near the acreage that was projected back in March at the Intensions Report, yeah, we're talking a 1.8-2 billion carryout potentially. I don't think at the moment that we're going to get that. I'd say that there's a lot of second-guessing going on in the trade, particularly about the yield numbers. Crop condition ratings are good. The crop is definitely more mature than it normally would be the first of June, but we also know that high temperatures hurt the crop the last two years. We're looking at much above normal temperatures for the first and second week of June right now. So that's too early to affect the crop, but if it persists, it may take the edge off that production.

Pearson: This corn crop went in so fast and so early, I've heard people say that June is actually July this year.

Brugler: Well, I've heard them say that. I think we are a week to ten days ahead, but it's very regionalized. Iowa did not plant as aggressively as Illinois, for example, so Illinois is a lot further ahead maturity wise. Coming across Iowa, it's hard to find anything above mid chin right now. So it's not going to be pollinating in June.

Pearson: No. but where are you on the weather front? Are you a La Nina believer or an El Niño believer at this point? Where do you think we're going to go?

Brugler: La Nina is ending. In fact, by some measures already, the Australians think that El Niño will kick in  August/September/October. Most of the models, if you look at the composite, they're not quite to full El Nino status. So you're in the middle. You're in a la nada. What we've got, though, is we've got some -- Pearson: La nada --

Brugler: La nada, the nothing.

Pearson: The nothing.

Brugler: The nothing.

Pearson: Bueno.

Brugler: But what we've got is we've got some lingering effects of La Nina in terms of the weather patterns. That's where some of the dryness in the South is coming from. That's impacting the crop development.

Pearson: all right. So old crop, now, we're kind of wrapping up. There was corn out there. People didn't think there was, but if you offer a high enough price, people are going to show up with it.

Brugler: Yeah, there's corn. We know that the stocks even in the March 30 Report, were below a year ago for both the Eastern Corn Belt and Western Corn Belt, and that's exactly what the market is acting like. You're seeing the strong basis bids, but there's corn out there, and it did move on the last rally. Unfortunately, exports have been the real problem there. The Chinese have been the main buyer. They've got about what they need for old crop, we think. They're still nibbling. And so now you've got to go back and sell it to the domestic market, to the hog guy and the cattle guy and the ethanol plant, and that's taking the edge off the price.

Pearson: It's going to be interesting to see. Obviously it's a big contrast from $7 corn to maybe what could be with a nearly 2 billion bushel carryout. Are we at $4 corn on the board or $4 cash? Where do you think we are this fall?

Brugler: Well, our forecast is at -- the twelve-month low for new crop would be somewhere around 440. That's contingent on where that yield ends up, of course. That's our worst-case scenario right now. We don't have anything below four in our model right now.

Pearson: All right. And of course, the old crop, we're just cleaning that up as the rally and merchandising opportunities present themselves.

Brugler: Yeah, we're looking for -- if you get back to 6, 6.25, you're going to see some interest in selling some of that remaining old crop, particularly where guys have been able to lock in a 40- or 50-cent over basis on it.

Pearson: they were talking about China's economy slowing down. I want to reference both corn and soybeans. Is there going to be that much of an impact? They've been trying to drive a better nutrition program for the people of China. Do you think they'd back off on food purchases with the economy slowing down?

Brugler: I don't think that's the issue so much as the fact that they've increased their corn production and they've increase their hog production, which has helped us in terms of exports, but they're also importing more DDGs from us, and that means a little less corn in some cases. We are seeing in the soybean oil and the palm oil, the prices on the futures exchange have dropped sharply for those commodities. Crush margins are negative. The Chinese had record soybean imports in May from all sources. And therefore, they're just kind of in a period where they're trying to absorb what they already bought. They know there's a tight supply this fall and they'll have to buy more, but right now they don't need it.

Pearson: Is competition from South America a factor here on beans?

Brugler: They're becoming less of a factor in the current market, in the spot market. What everybody is afraid of is that they're going to have a huge acreage this fall and have a decent record weather crop next spring. And therefore the U.S. makes most of our sales in the first six months of the marketing year.

Pearson: Well, we keep hearing that from them, and we're waiting for them to execute that one. The last couple of years, that hasn't happened. What's your soybean price outlook for new crop, Alan?

Brugler: Basically we could see something down in the 11, 11.5 area, once we get past this period of knowing what this Southern American acreage is going to be. On the high side, we can still see 13.5 to $14.

Pearson: All right. So we still have some opportunities there to sell some beans at some decent prices. But another market that has really fallen is cotton. It seems like -- was it a year ago we were talking $200 cotton and now we're sub 70?

Brugler: Cotton is a classic example of what we call a short crop, long tail. You have a huge rally based on very tight supplies here in the United States and the global market, and then all of a sudden we priced all the users out of the market. People wouldn't buy the shirts at the store because they'd gone up so much in price because of the cotton.  At the same time we've got a big production increase worldwide. now you've got the Chinese stockpiling cotton, but they're also saying their usage is going to go down, and the U.S., of course, the USDA actually is saying we could actually have a bigger cotton crop this year on less acres because they think the weather is better.

Pearson: Right. And it's certainly tracking better than we saw last year. Let's talk about the livestock sector. Alan, as you look at what's going on with fed cattle, we tend to talk about futures on this show because they're universal. There's some different cash markets, and that's also true in the calf market. Give us your take on the fed cattle market going forward.

Brugler: Well, the futures in the cash have a little bit of a disconnect right now. The cash cattle are trading $121 or $122. The board is trading 116 for June.

Pearson: And cash seems to be moving.

Brugler: Cash cattle are moving?

Pearson: Are they current?

Brugler: The cash cattle price appears to be reasonable, given what's going on in the wholesale beef market and the export market. So what you've really got is you've got a speculative position that's short in the futures and the longs want out for various reasons. And nobody is stepping up to buy. So the board is at a discount. Basically what that will translate to is as we get into the delivery process for June cattle, there won't be any. The two will converge at some point.

Pearson: So what's you're target price on cattle. Will we hold these cash markets?

Brugler: We think that the odds are pretty good that you can hold 118, 119 at least. We know there's tighter supplies for finished cattle for the second half of the year. We just don't have the placements. so the market, as long as the exports and domestic demand hold together, we think they'll go back up to 125, 128.

Pearson: All right. What's your take on the calf market?

Brugler: There are not a lot of cattle available at the moment. We think that because of the mild winter, we probably had a little bit bigger calf crop, better survival rate than we did last year, so we may be surprised in the July Inventory Report on the number of calves. But as you know, the cow herd was also downsized quite a bit last year because of the drought down south. So feeder cattle will go up if the live cattle -- if the finished cattle go up. It's a function of how much the feed lot can pay for them.

Pearson: And the hog market. This futures market this week is pretty stunning. Cash market has been so-so.

Brugler: Cash market has to respect what the packer can get for the cutouts. The cutouts up until this week were struggling. We had fairly big cold storage inventories. We just couldn't -- we weren't moving it. Now all of a sudden we've kind of taken off. Memorial Day appears to have been pretty good clearance. We've got good demand since the holiday, and packer offerings are down, which means they found a home for most of the product they had in the cooler. So again, you get a nice rally in the cutouts. You get a nice rally on the futures.

Pearson: I'm just curious, just because of the move has been so stark, the crude oil move, what's your take on producers? Should we be locking up some fuel needs at this point, or is this thing going to soften up some more on WTI?

Brugler: WTI chart wise says $79 was one support. The deeper one, the more severe one would be 71.95, $72. So we're not recommending that you do anything right now. As long as the dollar is going up, crude kind of trades as a currency. If the dollar is going up, the crude will tend to drift lower. There's always that opportunity for some Middle East thing to go wrong, and it bounces. But right now you've got an adequate supply. Gasoline use is still running 5.3 percent below a year ago, so you just don't need as much crude domestically. In fact, we're exporting gasoline. So no hurry there. 

Pearson: All right. Alan, as usual, some outstanding insights. We appreciate it. Alan Brugler, that will wrap up this edition of “Market to Market.” Now, if you’d like more information from Alan on where these volatile markets just may be headed, all you have to do is visit the Market Plus page at our website. You'll find expanded market analysis. There's audio podcasts, streaming video of our program and, of course, links to our Twitter feed and Facebook page, and it's exclusively at the “Market to Market” website. Of course, we urge you to join us again next week when we'll examine the impact of a water shortage in the nation's salad bowl, the San Joaquin Valley of California. 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