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Market Plus: Alan Brugler

posted on November 22, 2013


Pearson: This is the Friday, November 22, 2013 version of the Market Plus segment.  Joining us now is Alan Brugler.  Alan, welcome back.

Brugler: Great to be here.

Pearson: We didn't get a chance to talk about a couple of issues on the show. The first one being we saw a record high in the Dow Jones this week, another one, but the number this time was 16,000.  Is that pulling money away from the commodity market in your opinion?

Brugler: Yeah, there's no question that that's happening.  If you look at some of the fund flows that Barclay's and some of the other firms track the new money is all chasing the stock market, just like it was in the late 90s into 2000 and ahead of 2008.  It's hard to tell which year in that cycle we're on but there's definitely, a definite tendency for the new money to be going into equities, not so much into bonds, not so much into commodities.  Actually most of the commodity funds have shown some kind of a net withdrawal over the last six months.  To a degree that makes sense because the whole basis for the index funds, the swaps dealers getting into commodities was that they perform negatively correlated to stocks.  In other words, if stocks are going down then commodities go up.  Well, if you think you've got a bull market in stocks there's no real incentive yet to put it into commodities.  I think if we start to see some commodity flows that might be telling us that people are getting nervous about a stock market top.

Pearson: Right.  And we haven’t seen that yet so that's going to be something to keep an eye on going forward.  Is this lack of in flow in the commodities, is that just shorting our rallies and lessening the selloffs?  Is that kind of what we're seeing, we're just seeing less momentum trades?  Is that the impact we're seeing?

Brugler: Well, the investment people, the buy and hold people, some research shows no impact at all for them having been there.  I tend to be of the opinion that if you just buy and hold and roll it for a year or two that is net buying, it's going to move the price from where it would have been otherwise.  But the hedge funds that are more likely to be in and out, if they're not there it does reduce your volatility, we are looking extremely low volatility ratings for this time of the year in the options market and in the historical movement of the prices.  So we have slowed things down a bit.

Pearson: Okay.  One of the other markets we didn't get a chance to talk about was the cotton market.  We mentioned we did see a pretty good selloff this week.  How does the cotton market look going forward?

Brugler: Well, globally it is a mess.  We're looking at 95 million bales of cotton, surplus cotton, end of the year stocks.  That is over a nine month inventory going on a ten month inventory for the world.  Now, more than half of that is in China because they basically were buying all their cotton from the farmers and then they were importing cotton and ended up with quite a bit of cotton.  It may all work out for them if they have a global shortage sometime and they can dump it all into a rising market.  But the fear is that they're going to have to do something to reduce that stocks accumulation and that is probably going to mean using up the stocks at the expense of importing cotton.  And our U.S. cotton market is extremely dependent on exports.  We only use three million bales domestically, three to four, everything else is exported.  So if China makes that switch it will hurt our exports and we just flat out won't need as much cotton here.

Pearson: And if that is the case how low could the cotton price fall?

Brugler: Well, the old loan rate is 51 cents I think.  We haven't looked at that for a while but, yeah, there's risk there because we're still in the 70s right now.

Pearson: Yeah, could be a big drop off.  Alright.  Now, we do have a lot of questions from viewers.  I'd like to start, we've got a question from Bill in Spirit Lake and he is curious, with the record harvest we've seen out east there is a record amount of on-the-ground storage in the eastern Corn Belt.  Are there any market ramifications to all of that corn being stored on the ground?

Brugler: Well, obviously that corn has to move first.  And it is, weather has a big impact there.  If you get really wet conditions and then maybe a little warm up period you're going to put a crust on it and then it's going to start to be a mold problem and you're going to want to move those piles or you're going to shrink your inventory.  I mean, you're going to have to throw some of it out.  So I think they're going to have some incentives to move it.  That's not a historically dry area in the wintertime, unlike say out in the Plains somewhere, less likely to get away with it for long periods of time.  But the point I would make is that the eastern Corn Belt also is a major feeder for the export market, particularly southern Ohio, southern Illinois in the wintertime feeding through Cincinnati along the Ohio River.  So some of those piles they get picked up and just moved that way.  Others will be railed out to the East Coast to the southeast broiler market and so forth.  And just a reminder we've also had several ethanol plants in that area that have been shuttered for as long as three years that are now opening back up.

Pearson: Alright.  So we're going to find a way to use that corn on the ground out there, hopefully before it starts to cook.

Brugler: Exactly.

Pearson: Alright.  Now, we also have a couple of question, as we're looking as basis, we've talked to a lot of producers who are concerned, we've seen this selloff in corn, the down trend since the highs of the drought year and they're getting concerned about what should we be planning for in 2015.  Matt in Michigan is asking, should we be marketing 2015 crops yet?

Brugler: Well, there's a couple of layers to that question.  On the basis side of things what you'll see is if the board rallies, the basis will slack off a little bit because we do have supply and as long as the flat price is going up you'll start to see some movement.  If the board sells off, if it breaks the $4.19 support that I identified on the show then you'll have to see that basis firm up and that will give producers who are hedged a better selling opportunity.  As far as 2015 or even heavy sales of 2014 I think the argument is we're at still historically high prices, $4.00 versus $2.50.  There's some argument that we don't go to $2.50, with all the ethanol plants, with the Chinese soybean demand we've had a demand shift and any given level of tightness is reflected in higher prices now than it was ten years ago.  I kind of believe that argument.  But the other thing that bothers me is there seems to be an attitude that we had some problems with the crop this year and we still had a record crop and we're still going to plant all that acreage next year and probably the weather will be good and we'll have an even bigger record crop next year.  If that happens, yes, you should be selling '15 now.  But there are several ifs there and the weather guys will tell you we're in a more volatile pattern, there's not that assurance that we're going to have two or three back-to-back good years.  That is probably prudent to have some contingency plans there but we're a long way from that grain being planted, harvested and in the bin.

Pearson: Alright.  So keep an eye on the weather and wait a little bit.  There's no rush to run out and start pricing '14, '15 today.

Brugler: Yeah, the brokers are going to tell you, hey, let's get a few hedges on and try to make some money on the downside, we can always lift them if the crop gets small.  If you've got the capital, the risk capital I don't see a problem with doing a little of that just for risk management.  But as far as forward sales at $4.00, $4.50 I'm not as excited about that.

Pearson: Alright.  Now, you touched on basis a little bit.  We've got a couple of folks that are curious where the direction basis could head.  Quentin is asking, which is going to occur first, 25 cent positive corn basis or farmers panic selling sub $4.00?  There's no bull market until farmers sell, right?

Brugler: You're right about the latter.  The commitment traders data would suggest that you can't really get a fund led rally until commercial short positions increase, meaning the funds buy against the sell paper from the elevator.  The elevator only hedges if he has got grain bought from the farmer.  So to have a big rally you have to have that combination.  In the near term we've got a different problem, though, which is the funds are heavily short against commercial longs.  The end users have been absorbing a lot of corn on the board at these low prices because they haven't been able to buy enough cash corn.  As they buy the cash corn they'll lift those hedges, the funds will lift their shorts and we'll get some sort of a rally mechanically that way.  I think in that particular scenario the basis won't have a particular, it will weaken a little bit.  The board will go up, the basis will slip.

Pearson: Alright.  That's probably first scenario then.  Now, before we let you go, Phil in Ontario has got a hypothetical for you, kind of a crystal ball type question.  Is there any blue sky for corn?  Is there any scenario out there where ending stocks could be threatened in the next 18 months?

Brugler: I think you can build that scenario.  We talked about it on the show a little bit.  Exports are at the current time growing faster than USDA's forecast.  If we can kind of keep that ball rolling a little bit then you get a tighter stocks number, livestock consumption goes up, ethanol may be a little higher.  Probably the biggest swing factor right now is South American production because if that crop has less acreage, which does appear to be the case, and has some kind of El Nino related weather problem then our exports in the second half of the year will be even larger than is currently assumed.  Then you have to pile on top of that some kind of U.S. weather problem for 2014 and that is how you make that number shrink.

Pearson: Alright.  So there is a patch of blue sky out there for folks looking at a 2 billion bushel --

Brugler: You have to have several things fall in place but it can happen.

Pearson: You bet.  You bet.  Well thank you so much for being with us tonight, Alan, really appreciate it.  And hope you have a Happy Thanksgiving.

Brugler: Well, thank you and same to you.

Pearson: Alright.  And thanks to all of you for watching. We hope you have a Happy Thanksgiving as well and be sure to continue sending in your questions via Facebook and Twitter and we'll continue to get expert analysis right to you.  Thanks for watching.  Have a great week.


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