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Market Plus: Alan Brugler

posted on April 12, 2013

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Pearson: This is the Friday, April 12th, 2013 version of the Market Plus segment.  Joining us now is Alan Brugler.  Alan, welcome back.

Brugler: Good to be here again.

Pearson: We've got a lot of great questions from Facebook and Twitter and I'd just like to kind of toot our own horn here.  We hit a milestone on Facebook.  We've got 800 likes.  So we're making in roads in cyberspace.  But we do have a question here, I think we'll just start off with this one.  Andy in Earlham, Iowa is asking, how producers can interpret the difference between the extra acres that are coming in, the difference between the intentions and what we actually get.  What are your thoughts there?

Brugler: Okay.  It's important to understand that the planting intentions report is an intentions report.  The producers are telling the government what they think they're going to plant so that we can find out if we have too much company.  You know, if every Tom, Dick and Harry wants to plant the same thing maybe I shouldn't plant that.  Now price, there's another saying in the industry, price makes an excellent fertilizer.  So the higher you have prices the more acreage you tend to put into production one way or another.  Now, people say, well, where's that acreage -- how do we get more acreage?  You've reduced your CRP acreage 20 -- now we're down to well under 30 million acres.  You have double crop bean acres which essentially create acreage out of thin air.  We're talking 5 or 6 million this year.  One of the big things that happened last year is we increased principle crop acres by 11 million, 10 million of that was the prevent plant acres that we had the previous year but were able to farm last year because it was drier.  Alright, so there's good reasons why you get a bigger acreage number.  This year we're looking at, again, more double crop acres, about 2 million less CRP so therefore 2 million more that can be farmed that way.  And then you're also looking at the double crop beans. 

Pearson: In cotton.

Brugler: In cotton.  So you can get probably 327 million principle crop acres which would be the largest in a decade.  But it's -- it's -- all those things have to happen.  If we have lousy weather and we don't get all the corn planted or we don't get the winter wheat off in order to have the double crop beans then we probably won't end up with as many acres as the government just showed.

Pearson: Alright, but it's the intentions, that's what we’re reporting there --

Brugler: Exactly.

Pearson: -- with the planting intentions report.  Alright, well let's take a look.  Phil in Ontario is asking us, how do we rationalize the burdensome corn stocks from the March 28 report versus the April stocks report?  2 weeks apart.  How do we deal with that?  How does the market handle that?

Brugler: Well, the first thing we have to remember is that it was the market's error in the March 28th report.  The World Outlook Board, the people that do the supply and demand, and those in the private industry who are basically trying to guess what the world outlook board is going to say, basically were wrong for three months in a row.  At least that is what the grain stocks report is saying.  It is saying, you thought we were using all this stuff and it's still here.  Alright.  Now, the grain stocks report has gotten all the criticism but in my view that is really backwards.  It is the most scientific survey, the broadest sample that we have during that time period.  It's more likely it is the perceptions of the demand that were wrong.  Now, having said that, USDA basically said we dropped corn prices $1, we dropped bean prices, we dropped wheat prices, we're going to attract more consumption in the second half of the year so it's a self-leveling situation.  If we have more corn and we know we have more corn, the price reflects we're going to have more corn we'll use more corn.  And so as we look at the quarterly breakdown, in Brugler Marketing we break it down to, you know, what is the feed use in the third quarter, feed use in the fourth quarter, how is USDA coming up with their annual number. You can see that they just raised their ethanol estimate for this next quarter, probably back to 1.6 billion bushels of corn consumption.  And they're showing modest increases in exports and modest increase, probably modest decrease in feed use but it always goes down in the third quarter versus second quarter.  So the bottom line is they're basically saying lower prices are allowing us to use a little bit more and you're starting to see that already in ethanol.  The weekly ethanol grind last week went up 40 -- the production went up 40 million or 40,000 barrels a day.  So price was cheaper, the margins were better, they went out and bought the corn from the farmer and bam, more ethanol.

Pearson: And we're going to see that continue as long as the price stays and we've got profitable margins there in the ethanol industry.

Brugler: Yeah, now somewhere probably in July or August some of those plants are going to take down time because there's no more corn left in the local neighborhood and it's too expensive to rail it in.  But right now there's still corn there.  There's still 5.4 billion bushels as of March 1 and you're going to -- now you're getting the response to the lower prices.

Pearson: Now, with the selloff between March 28th and the report on Wednesday what have we seen happen in the cash market?  How has basis been performing versus the futures?

Brugler: Basis has held up fairly well.  It has actually improved a little bit, not as much in corn as I had anticipated that it would.  Soybeans we've seen a pretty good bounce in the basis.  The bids in beans are 50 to 60 cents above the three year average now.  So that is the cash market saying maybe the board got a little too far down in corn and beans but more so in the beans and now we're starting to see the mechanism work.  The old crop futures, the nearby futures are starting -- that have to be, that have to realize the cash market price when we go into deliveries are starting to rally now to try and balance out that, what the basis is doing.  So, yeah, the mechanism works.

Pearson: Okay.  And we expect this strong basis to continue, as you said, when we get to June and July and we're running out of corn, you know, for the ethanol plants we should continue to see basis stay strong.

Brugler: Yeah, we'll see the basis remain strong unless we get a large rally in the futures.  Typically if that happens the merchants will back off the basis as quickly as they can.

Pearson: Let the futures carry the weight, we can pull back on basis.  We do have a question here from Tim in Crookston, Minnesota and we touched on it a little bit on the show but I think maybe you can go into a little bit more detail.  Looking at the wet weather we've had this past week and the upcoming six to ten day cold spell we're expected to see across the Midwest, we're not seeing soil temperatures climb, are we going to see a delay in planting?  And if so, at what point is the market going to get concerned about us pollinating there in the heat of the summer?

Brugler: Well, it's difficult to have a major weather rally this early in the year.  There's just too much time where things can still happen.  You know, you can still plant corn up to May 15th, May 20th in most of the country with a minimal yield drag.  In fact, we have a tendency to want to think that planting progress in April is faster than it is statistically.  As I mentioned on the show 4% is the normal planted percentage for this week, alright, and then you go to about 10 or 12% next week but people are thinking, oh, we ought to be 25, 30, 40, somewhere like that.  It doesn't happen as quickly in April as you think.  That said, we have the equipment to plant 40% of the crop in a week if the weather conditions are very good.  As I allude to on the show my concern is if you end up planting most of the crop after May 1 it may still be in time for a normal growing season and a full yield but if you get into unusually high summer temperatures, and that is still the NOAA forecast for the summer is above normal temps, having planted a month later than last year will impact your yield potential.  It will be more like two years ago where we had most of the country had decent moisture two years ago but we still only had a national corn yield about a 147, 148 because of the temperature impacts.

Pearson: Alright, so the way to interpret this is even if we get, if we get a little bit later planting, if we get around that between March -- May 1st, May 10th planting we're not going to see a rally now but it would be fuel for a weather premium if we see temps start to heat up come June, July, August.

Brugler: Exactly, it would be the first -- it would be the necessary pre-condition for a summer rally based on the temperature.

Pearson: Alright, alright, something to definitely keep an eye on.  Another thing we talked about just briefly on the show was the tumble we saw on Friday in the gold.  Can you talk to us a little bit about what drove that, why we saw this $60 fall in gold prices on Friday?

Brugler: Basically you've got some people that are just plain getting out of gold, some fairly large investors, some fairly large hedge funds.  We've seen a pattern most Fridays this year, one or two exceptions where there's been some major selling in gold where it has dropped even, if it wasn't for the whole day it dropped $20 or $30 because somebody unloaded a big slug of it all at once.  So this is not -- the drop this week, $74, is a big drop, don't get me wrong but it's something that has been ongoing.  It's basically people saying that's maybe not the right asset class to have my money in.  It doesn't pay interest, okay.  Depreciation is only based on someone else saying it's worth more than you paid for it and the Europeans I think were parking a lot of money, of their money in gold last year.  Now many of those countries are feeling a little better about things.

Pearson: A little safer.

Brugler: They're still in recession but they're not feeling the imminent demise of their economic system so they're moving the money to other places.  The dollar hasn't really devalued as quickly as what the, what the gold bugs were looking for, the $2000 an ounce guys were basically saying, well, we're going to have high inflation because of the fed easing.  That I think is still a possibility if the fed is too slow to take their foot off the gas but that's six, eight, ten months out or a year out, not now.

Pearson: Right, and they've been talking for four years about imminent inflation, imminent inflation and we haven't seen it materialize yet.

Brugler: Right.  And in fact if you look at retail sales and everything else we really don't have an inflation issue right now.  So, you know, the gold bugs are basically getting tired of waiting and so they're unloading part of their inventory and it will be interesting to see where that money goes to.  I think the hedge funds, they're looking at the stock market and saying, I need to be in the stock market.  I can't justify all these alternate investments earning me two percent when the stock market is going up eight percent or ten percent.  So right now there's kind of a push to put more money that direction, probably getting in too late, in my opinion, for the time of year that we're looking at but that's definitely going into the equation.

Pearson: Sure.  It's an attractive alternate investment, we'll just put it right back in the stock market, it's the place to go.

Brugler: Right.

Pearson: Well, Alan, really appreciate you being here with us today.

Brugler: My pleasure.

Pearson: Great to have your thoughts.  And thanks to all of you for sending your questions via Twitter and Facebook.  We certainly appreciate it.  Please continue to do so and we'll continue to have experts give you qualified answers.  Thanks for watching.  Take care.

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