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Market Analysis: Alan Brugler

posted on August 3, 2012

Grain prices were mixed this week as the trade pondered the outlook for intervention by the Federal Reserve and spotty rainfall in parts of the Corn Belt. 

For the week, September wheat fell 7 cents, while the nearby corn contract rallied back above the $8 mark with a move of 12 cents.    

Soybeans followed corn higher with the September contract gaining 8 cents, while the nearby meal contract advanced by nearly $8 per ton.       

In the softs, cotton also trended higher as the December contract posted a gain of $1.77.          

In the dairy market, August Class III Milk futures gained 17 cents, while the deferred contract was up 31 cents.    

Over in livestock, October cattle lost 90 cents, nearby feeders were off $1.45, and the October lean hog contract declined by nearly $5.50.               

In the financials, the Euro advanced 65 basis points against the dollar.  Crude oil gained $1.27 per barrel.  Comex Gold fell $16.70 per ounce, and the Goldman Sachs Commodity Index gained nearly 10 points to close at 647-even.  

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: Great to be here.

Pearson: Thank you. It's been a busy week in the broader market. There's been a lot of longer term trends that have been going on there. What have you seen affecting commodities' prices?

Brugler: We saw the dollar get a little weaker this week against the euro. That's usually supporting commodity prices as you heard with the Goldman Sachs Index there. The money is still flowing into the U.S. Treasury out of other places in the world. There's still a flight to safety. You saw some upward movement on the bonds and the notes.

Pearson: They backed off a little on Friday.

Brugler: Lower interest rates are supportive in general to money flow and commodities and equities. A supportive environment for ag overall from that direction.

Pearson: All right. As we look at continued high prices on a lot of the grains and if we see that the dollar is weakening, at some point is that going to help exports combat these high prices, or what do you think is going to be the bigger driver there on exports? Is it mainly grain prices?

Brugler: We care more about exports after the growing season. The uncertainty to the uncertainty is about the production, or the main issue. Once you get past the harvest and you've got a known quantity or somewhat close to a known quantity at least, then it is more demand driven and a lot of that, of course, is exports, particularly in something like soybeans. So the focus on the dollar becomes more significant after we get past harvest.

Pearson: Are there any indications that you are seeing out of Europe or anywhere else as to where the dollar may go?

Brugler: It's all tied into the European debt crisis, as we call it, the crisis that keeps on giving. It just cycles around in Greece and Spain and then it's Italy, and we don't have a handle on that. It's going to be a problem for a while. They've got ongoing issues with government finance and it's kind of a catch-22 in that if you have the austerity to straighten out your debt problem, you slow your growth and you slow your taxes, which makes your debt problem worse. So it's not going to resolve itself anytime soon. It's likely to hurt U.S. Exports to Europe. It's affecting Chinese exports to Europe as well, which is part of the reason they are slowing down. It's a more complicated problem.

Pearson: We'll keep seeing that in headlines for the foreseeable future. Moving into commodities, let's talk a little bit about wheat. We've been watching the past couple weeks as wheat has just consistently followed corn higher, more or less. This week we saw little bit of a break. Wheat, both nearby and deferred were down a little bit. Corn was up a little bit. Are we seeing a week in that following or --

Brugler: Think it's more of a temporary correction. Wheat is a little more volatile than corn is. It's a higher priced commodity, although they are both up there right now.  You've got a Canadian wheat harvest that's already started that looks to be pretty large. You've got, of course, the spring wheat harvest here this early, so you've got fresh supply coming into the pipeline. You are still getting some support out of Europe. The Russians have had some drought issues, but they did come out this week and say that they intend to continue to export. There wasn't going to be a 2010 type embargo on exports. So that knocked the wheat back a little bit, but I think it's a temporary dip. If wheat drops too far, it works its way back into the feed rations, and I don't think the world market wants that because we're at a three- or four-year bottom --excuse me, a decline in ending stocks now for wheat.

Pearson: So for producers out there, what should they be looking for on price?

Brugler: I think you have to reward the market with some sales here. This is just historically a high price. We know that in '08 we got higher, so you don't sell everything. We're not encouraging people to sell next year yet, 2013. But we're starting to bump up our sales on 2012 crop.

Pearson: Any price points out there that we should keep an eye on?

Brugler: I think anything between $9-$9.5 is a pretty good price in sales, and I think we've had a couple opportunities to do that.

Pearson: So strike those with your harvest, if you can. Let's talk corn a little bit. We're still above $8. What is --the drought is the big driver there. What are the other factors that are keeping corn that high?

Brugler: Well, it's the uncertainty of the production. There's a speculative element, of course, because it's a story. It's not on the front page of the Wall Street Journal yet, but it's making a lot of headlines. We have got --the real question other than production is on the demand side; how much ethanol cutback are we seeing, and we do have plants shutting down and we are taking extended downtime; how much is export market shrinking -- and it is --and to a degree, what are the livestock guys doing; are the poultry guys going to cut back? They've been trying to ramp back up after their '09 cutbacks. Are they going to continue to expand? We don't think so. We think that they've seen the writing here and they're going to slow down. All those need to happen to make the demand fit the production that it looks like we're going to have this year.

Pearson: Okay. In terms of ethanol and as far as the RFS Mandate goes, do you foresee any major changes in that going forward?

Brugler: It appears to me that the political situation doesn't lend itself to a reduction. The EPA has got certain rules they have to follow. They've got to have a comment period. There's political issues tied to that.  If you start shutting down ethanol plants, you increase unemployment. You also will probably, in that scenario, increase gasoline prices because you are restricting part of the U.S. fuel supply. So there's negatives to doing it. I think the bigger issue, though, is even if it were to be implemented, I'm not certain that we would cut back on the amount of corn that's been used for ethanol production. Right now the market is taking the production. The ethanol was priced cheap enough relative to gasoline. We're using it without the mandate. Frankly, if you had this RFS2 adjustment, ethanol prices would drop, and that would make it even more attractive as it relates to livestock.  

Pearson: Then we'd see the opposite of the intended --

Brugler: The market would balance out and gone on about its way. So I think we should see some reduction in corn used for ethanol, and we are seeing that. But it's being done in the marketplace with the individual plants and the economics of those plants.

Pearson: All right. For producers out there in the field, any price point that we should be looking? What do you see going forward?

Brugler: Well, there's a big difference between a 10 billion-bushel crop and a 11.5 billion-bushel crop. That's going to drive the pricing. If we're closer to the 10s or 10.2s, like we're starting to get estimates, swags, I call them, that are that low, then we are not high enough yet. We might have to have an $8.50-$9.00 front month of futures, at least for a while, if we're toward the lower end of those estimates. Our internal numbers suggest the crops no larger than133 bushels per acre national average. But we're not prepared yet to go down to the 120s that some folks have done.

Pearson: 117 I think I saw earlier today.

Brugler: We're going to do our virtual.corn tour over the next two weeks. We're going to collect data anywhere from Texas to North Dakota and Ohio, and we think we will have better handle in another two weeks.

Pearson: So pretty much hold off on making any major movements until we get updated figures from the USDA.

Brugler: We think you ought to have a few puts in place, just to protect your crop insurance payments or to protect bushels that you are pretty sure you are going to have but you're not willing to commit to a cash sale on.

Pearson: Let's talk beans a little bit. We've have a little bit of rain in some parts of the Midwest. It's a crucial time for beans. What is that doing to the futures market?

Brugler: The market has kind of slowed down the upward momentum. We're not exactly falling up out of bed yet, and for good reason. You definitely are seeing improvement in the crop in Ohio and in parts of Indiana that saw the 2-inch type rains over the last couple of weeks. And in spotty areas of Iowa, where you happen to be under the right shower, that's parts of Central Nebraska and so forth. But on the other hand, you have got areas that haven't seen a lick of rain since late June, and the beans just aren't doing anything. We're hearing about some of the early flowers falling off and not podding. So the market is going to have to deal with that. But August, you can still add bushels in August. So the rainfall this weekend is critical. The rains the next two weeks are probably critical as to where that final yield is a 34 bushel per acre or 38 is still to be determined.

Pearson: All right. In terms of producer advice on beans, it's a wait-and-see?

Brugler: It's pretty much wait and see. We've done several three-week spreads. We've got 1620 November puts as a price floor. We've sold some $18 and higher calls against those. We've got some downside puts sold, so if it does suddenly decide tomorrow we've done enough, nobody sends you a notice when the market is going to top out. We think good risk management is to have a little bit of protection in place. Don't need to go heavy on the cash sales here, but have some headline news protection.

Pearson: All right. Be smart out there. Let's talk a little bit about cotton. What are we seeing out there this year in terms of cotton?

Brugler: Cotton is a little more heat tolerant and a little bit more drought tolerant. Last year it did hurt us down in Texas and Oklahoma. The yield estimates for this year are still fairly attractive. In fact, we're talking about producing more cotton with less acres because of a better yield. Globally the situation is getting a little tighter, but it's still ample. Cotton is still my nightmare as it pertains to corn just because we saw what happened. We went to $2.27 in cotton. Now we're trading at 70 cents.

Pearson: That was demand destruction.

Brugler: That was demand destruction and --and the other parts of the world. As part of that, we have end-users, importers in the countries to chased the cotton market higher and then realized that they couldn't use the product at the price and canceled. In cotton last year we had three months straight where we had weekly net negative export sales. And we had a net negative corn export sale two weeks ago, and it kind of got my attention, although we were back up this week.

Pearson: All right. In terms of price on cotton?

Brugler: We think there's pretty decent support in the 68- to 72-cent range. It doesn't seem to want to go much higher than 73 or 74 right now. So we're not making any sales when it's below 70, but we want to reward rallies.

Pearson: All right, let's talk livestock a little bit. They're feeling the brunt of these high-speed prices. What are you seeing on feeder cattle?

Brugler: Feeder cattle are very much the inverse of the corn market. When corn is rallying, feeders have gone down and vice versa. They can rally if the live cattle market wants to go, but as you know, we've got fewer --we had a smaller calf crop. We've got the smallest calf crop in fifty years. And last year wasn't a whole lot bigger, so we have a limited number of feeder cattle. Placements have kind of gone from light one month to heavy the next month. We think that they will probably pick up a little here in the fall, the price, because of what we expect in the cattle market.

Pearson: And so what are you expecting in the cattle market?

Brugler: Well, we're looking at extremely tight beef supplies in the fourth quarter. USDA's most recent estimate was in the 92-93 percent of a year ago range. That's a fairly substantial drop-off year over year. Our place against members suggest there's a definite drop-off in September and October, so that from the supply side, we will have less to work with. That typically is going to drive the price up. You're seeing that with the December futures acting much better than, say, the August.

Pearson: So what are you advising folks to do if they've got fears or cattle out there?

Brugler: Well, basically we've had hedges on in the feeders from 150 on down. We're starting to roll them down to add the money to take the hedge profits out. Starting to look at buying some call options in feeders that we've also had a couple opportunities to do counter crush spreads in the November placement period where we can lock in a $13, $15 head profit. So we want to do those if we can get some more of those on. That would be great.

Pearson: Let's talk about hogs. It was a big week in the hog market. We had over the week a $5.50 decline. What do you see there? What does the future look like for hog producers?

Brugler: Well, this is normally a time when you start to see slaughter going down, and that didn't happen this week. We were up year over year and also week over week. So the market is having to deal with a little bit of supply that it usually doesn't anticipate. The cutout values are still the second-highest in ten years, They're not as good as last year, but they're still up there. What we are not seeing is the big export market that we had last fall, where China came in and bought something. It's a little early for that if they're going to do it on a seasonal basis. But that's --we're now export dependent --we export about 20 percent of the pork that we produce. We need that export market. The stronger dollar that we had been seeing doesn't help that. The weaker dollar that we saw this week should help us a little bit in the exports, but if cattle start to rally in wholesale beef goes up, the pork will probably follow it.

Pearson: All right. As far as the global sense, the market as a whole, what do you see happening if we get widespread rain in the next two weeks? 

Brugler: We'll sell off in that case. But that's almost --how can that happen? They are widespread --we are kind of in the mode now where even if we get rain, We're discounting the amount. Okay, well, there was an inch there but these other guys didn't get it. It's going to be difficult to change that psychology. I heard a meteorologist last week talking about hurricanes. A lot of folks saying, hey, we get a good gulf hurricane, that will solve the problem. He said a hurricane is not what you want. It would tend to precipitate most of the moisture along the Gulf Coast. What you want is a tropical storm. If something doesn't make hurricane status, it will throw some humidity up here in the Midwest.  

Pearson: All right. Thank you so much, Alan. Appreciate you being here.  That wraps up this edition of "Market to Market." But if you’d like more information from Alan on where these volatile markets may be headed, visit the Market Plus page at our website. You'll find expanded market analysis, audio podcasts and streaming video of our program, as well as links to our Twitter Feed and Facebook account all free at the “Market to Market” website. Be sure to join us again next week when we’ll travel to Illinois where the harvest of corn, or silage, is already underway. Until then, thanks for watching. I'm Mike Pearson. Have a great week.


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