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Market Plus: Alan Brugler

posted on September 13, 2013

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Pearson: This is the Friday, September 13, 2013 version of the Market Plus segment.  Joining us now is Alan Brugler.  Alan, welcome back.

Brugler: Great to be here.

Pearson: Well, we've got a bunch of great questions from our viewers submitted via Facebook and Twitter.  One of them here, Rodney in Edgar, Wisconsin wants us to take a look at the bigger picture looking around the world.  He has got two questions for you.  How much will Brazil's corn crop affect our prices?  And will China buy corn and beans from some other country before they buy from us?

Brugler: Well, those are great questions.  Let's talk about the safrinha corn crop, that's what the second crop corn is called, Brazil did have a record crop.  They've got some logistical issues getting it out of the interior and out to the coast and so that has slowed the impact in terms of hitting the world market. But to show you how bad it has come there were reports this week that in the interior of Mato Grosso, which is the furthest away from the ports, cash corn was going for $1.79 a bushel, alright, which is considerably below the U.S. price.  Now, the government actually has the support program that is in the $2.30 to $2.50 per bushel range so you wouldn't see anything quite that cheap hit the world market.  But just illustrates that there is an over supply of corn in Brazil, it's going to want to leave the country.  You know, as you know, some South American corn was coming into the U.S. this year because of our drought and just our tight stocks.  That's going to stop because we've got a big enough crop and the logistics just don't work.  But they are going to be competing with us, some of our traditional buyers are going to say, oh, you're practically giving away this Brazilian corn, we'll take some.  So what we think is that's going to slow our first quarter exports, our Sept-Oct-Nov exports from what they would otherwise be.  We do have a tremendous forward book for both corn and soybeans for 2013-2014 crop year in terms of exports.  But the South American leftovers, if you will, are going to eat into the sales at the beginning of the year.

Pearson: Now, looking again at, I was talking to a guy in a meeting and he had been over in Korea and he said there were a number of mills over there adding the necessary equipment to process the coarser South American corn.  Is that a change happening in a lot of places, making the adaptions necessary to handle both U.S. and South American grain?

Brugler: I think if they know that the cheaper product is going to continue to be available and they think that it works well in their products, yeah, they're going to make the investment.  You won't do it for a one time scenario and that is kind of the key here for the U.S. is we need to get competitive before too many of those end users have made the equipment investment because once they have the investment, yeah, we've got to use it.  So I think prices is ultimately the leveler here.  The South American guys can't make any money at $3.00 corn and neither can we so somebody needs to be discouraged.  I would argue the rally in beans this week and the sell off in corn is basically telling the South American guys, yes, switch a few more acres to beans, pull back a little bit on the first crop corn and then they'll look around later and decide what to double crop.

Pearson: Okay. And the follow up question, looking if prices are relatively comparable, will China prefer to buy corn and beans from some other country before us?  Or all they're looking at is the price tag?

Brugler: Well, they're looking at price, they're also looking at logistics, okay.  It was pretty well advertised this spring that you had a 45 to 60 day vessel wait coming out of Brazil.

Pearson: And is that going to be the same here looking at the second crop corn?

Brugler: They are maxed out now.  They've got fewer beans to ship now.  Most of the bulk of those were shipped out over the last four months so there's some birthing capacity that will be available for corn that wasn't before.  But, yeah, China is looking at the logistics of needing to bring in, in soybean case the USDA has got them forecast at 69 million tons for this coming year.  That's over 5 million metric tons per month that have to come into the country.  That's a big sucking sound in the global market.  And if they can't source it out of country A they're going to source it out of country B.  Now, there are other considerations.  There's political issues, there's currency translation issues, how far does their wand go against one country other the other?  What is their current account balance?  Do they want to spend dollars or do they want to spend reals or pesos? 

Pearson: Certainly, so those are all going to be taken into account.

Brugler: They're all pieces of that equation.

Pearson: Okay.  Now, another question looking at the big picture, James in Kremlin, Oklahoma is saying, with wheat $1.00 a bushel under the world market should we give up on seeing a rally?

Brugler: I think we are actually not under the world market, we're over the world market.  We're not competitive in Egypt, for example, by about 50 cents a bushel.  It's pretty incredible that we're making as many export sales as we are when certain key buyers like Egypt aren't really taking any.  But we've actually had a pretty successful program of making export sales to Brazil, for example, hard red winter wheat to Brazil to replace some freeze damage that they had down there.  Soft red wheat to China, to going to their feeding program or into their reserves.  So I think we're looking at a four year low in global ending stocks for wheat due to a fairly aggressive feeding program around the world.  We're looking at a five year low potentially in U.S. ending stocks.  Eventually that is going to result in a rally because we're discounting it, we're getting the product moved.  Once it has all got a home then you start to see a little bit of a comeback around the price.

Pearson: See people kind of come back, start looking at America a little more closely to go from there.  Now, before we let you go, the other big piece of news in the ag market this week was something everybody ahs talked about but we'd like to get your final thoughts.  The Shung-Way purchase of Smithfield was approved this week, the first level of approval so it looks like it's going to happen.  Is there any other news or story to come out of that purchase?  What do you expect as we look down the future of this?

Brugler: Well, there's still a little bit of resistance there.  They haven’t had the official shareholder vote.  They've just gotten the regulatory groups in line.  My understanding is there is at least one major shareholder who is trying to organize a buyout that would generate more money buying the pieces than Shung-Way is paying for the whole.

Pearson: So it might not happen at all.

Brugler: It might not happen although it is a very tight time window for this outfit to organize their troops, so to speak.  If it goes through, obviously Shung-Way has a more direct pipeline to ship U.S. pork into China should the economics dictate.  There's been all kinds of discussions over the last couple of months about the technology and who learns what from who.  But it certainly makes it easier politically to ship pork in when one of the major players is a Chinese company.  And my understanding is the principal of that company is also a member of the National People's Congress in China so he's got connections.

Pearson: An inside man.

Brugler: So yeah.  So I don't see it as a real negative as long as you're across the ocean, you still have to live by U.S. food safety rules and EPA rules and everything else so let's just find buyers for that pork.

Pearson: Alright.  Thank you so much, Alan, appreciate you being with us today.

Brugler: My pleasure.

Pearson: And thanks to all of you for sending in your questions via Facebook and Twitter.  Please continue to do so and we will get expert analysis for you.  Thanks for watching.  Have a great week.

Tags: acreage agriculture Alan Brugler analysis basis commodity prices corn economy markets midwest new crop grain soybeans USDA weather wheat