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Market Plus: Alan Brugler

posted on January 4, 2013

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Pearson: This is the Friday, January 4, 2013 version of the Market Plus segment.  Joining us now is Alan Brugler.  Alan, welcome back.

Brugler: Good to be here.

Pearson: Glad to have you.  We've got a lot of questions send in via Twitter and Facebook and so I'd like to get your opinion on a couple of them.  Martin in Carroll, Iowa is asking, what is causing all of this volatility?  Is it just the fiscal cliff deadline issue?  Or what is really driving it out there?

Brugler: Well, I think one particular reason is just the level of prices.  We are still at historically high prices even though we have sold off from where we were back in the fall.  You've got people who were trading the drought market that are still trying to get out of those positions.  They're realizing it's over and they're not sure there's another drought in 2013.  So you've got some come and go there.  You've had a few hedge funds that have just decided to get out of the market all together. You've got a major pension fund that has basically decided to reduce their fund exposure in the commodity area.  So that is just money that is leaving.  But because we're still at very tight stocks to usage ratios, for corn and soybeans particularly, there's not much margin for error.  If you drop the price too fast because of these other issues you end up using too much commodity and next summer you're sitting saying, wait a minute, we thought we had some left then there isn't any.

Pearson: So market participants are just trying to analyze where things are headed.

Brugler: Yeah, we're trying -- as I said to one of my audiences this week, I said we're just trying to figure out if we've got enough bullets to last until the cavalry arrives.

Pearson: And we're just going to have to wait and see.

Brugler: Yes.

Pearson: All right.  The other one in Crookston, Minnesota is asking a question that has been asked a lot this winter.  As China has cancelled their orders he is asking, what is with China?  They book a bunch of beans one day, cancel them the next.  The market goes down further on the cancellation and then it goes up on the purchase.  Why do we put up with that?  Are they just such a big player they can do these sorts of things?

Brugler: Number one, they are a big player.  They're roughly 63% of all of the beans that leave the country of origin end up in China.  So they're roughly, that would be five-eighths of the world trade almost.  So it does matter what they do.  But we tend to think of them as a monolithic entity but in reality it is a bunch of individual firms.  Some of them are controller stake connected, some of them are not.  So you can have one guy cancel and another guy buy, they're basically dealing in the same market segment.  It's not centrally planned to that degree.  The other thing that's going on there is you've got some changes in the overall system.  Their hog industry has been expanding and they need more soybean meal but the crush margins haven't been that good with bean prices where they are and, in fact, the Chinese support price is going to be over $20 a bushel for this coming year.  And then you also had a change in the regulatory structure that makes it more difficult to import palm oil starting January 1.  They changed the requirements as to what kind of quality they're getting in.  So that has tightened up the supply of palm oil.  It has made soybean oil much more of interest there and propped up the price of soybean oil and caused them to import a bunch of soybean oil which had ripple effects for us.  So China can cancel.  Two years ago we saw cancellations in cotton for almost three months straight when we came off the record high prices in cotton.  There's consequences there, you go to arbitration and then you've got to pay a penalty and a lot of firms get black listed because they go out of business rather than pay the penalty.  So it gets murky there and certainly there's going to be some firms that are in hot water on these cancellations too.  I think the bottom line is that they're still the biggest customer and we're reliant on their business.  We need to do whatever market adjustments we need to do to make them buy our stuff.  And we want to sell them all the beans we can before the Brazilians get into the market in a big way.

Pearson: Right.  Better to have a cancel and re-sell than a cancel and wait three months until Brazil -- Now, speaking of Brazil, I know the soybean harvest has gotten just underway there.  Can you speak to a little bit what kind of quality we're looking at coming out of South America from the preliminary reports so far?

Brugler: Preliminary reports are that the crop is in pretty good shape.  In some parts of the country they've had a lot of rain, they have had a lot of potential for soybean rust but the producers have been very aggressive at spraying for the rust on a regular schedule.  They have learned their lesson from several years ago not to let that get out of hand.  They spent the money early and made sure the quality was there.  Now, there are some areas up in the northeast that are very dry and that will affect the oil yield of those beans but those are not the major production areas.  Mato Grosso we're hearing is so-so, average, maybe a little better than average and most of the early beans are coming out of that Mato Grosso, Bahia area.

Pearson: And so the market will just continue to take those numbers under consideration as the harvest moves along.

Brugler: Yeah and we won't get major quantities until the end of February.

Pearson: All right.  Something to look for.  Now, in the report next week do you have any thoughts on what we might be seeing with corn and where the market may be headed, just your opinion?

Brugler: Well, I think there's a couple of things.  As I mentioned on the show, we're probably going to see a cut in exports, projected exports.  We're just not making the numbers to hit USDA's target.  But I think the two wild cards are the harvested acres and what percentage of the planted acres USDA finds out is harvested.  They haven't adjusted that since October.  They were waiting on the farmer surveys in December to find out what actually happened, how much extra corn was chopped for silage versus a normal year.  We've done quite a bit of work on that and it looks like they were actually fairly aggressive in their cut.  In other words, they have a fairly high abandonment rate compared to the last ten years already and actually including some of the more recent drought years like 2002.  That said, in '88 they went clear down to 86% harvested and that would be -- we're at 90.5% now so that would be a much more severe cut.  We don't think they can go below 88% harvested and may not make any change at all.  But that is a $200 million bushel swing there just between '88 and where they're at.  So if they chose to, well they won't chose to, if the data says they have to it is going to be a bullish item in the market.  The other wild card is first quarter feed use which gets into how much did we feed in July and August that was new crop and ends up being reported this quarter?

Pearson: So those are the big things to keep an eye out for next week.  Now, as we look for next year there's been a lot of numbers thrown around for estimated corn acreage.  People are saying anywhere between 96 and 100 million acres in corn.  What are your thoughts on that from talking with the farmers you work with?

Brugler: Well, it was no question that the numbers, straight cost production minus revenues expected still say plenty of corn.  So that gives us a bias towards same number of acres or more.  On the other hand you had quite a few producers who had bad experiences with corn on corn in the drought this year.  They're saying well maybe I should got a little bit back towards a 50/50 or closer to it than I have been.  So we're taking middle of the road approach and saying we don't think there will be over 97.5 million planted for corn. Beans aren't going to willingly give up a lot of acreage.  You'll probably see some reduction in cotton.

Pearson: So those are things to watch for as we head into next year.  Thank you so much Alan, really appreciate you being on here with us today and I hope you have a great week.  Thank you so much for submitting your questions via Twitter and Facebook.  We really appreciate getting them and we'll continue to ask our analysts as they come on.  Have a great week. 

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