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Market Plus: Alan Brugler

posted on January 17, 2014

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Pearson: This is the Friday, January 17, 2014 version of the Market Plus segment.  Joining us now is Alan Brugler.  Alan, welcome back.

Brugler: It's great to be here.

Pearson: We're glad to have you.  During the show we didn't get a chance to talk about the cotton market, which did see a nice little rally this week.  Talk to us what happened there?

Brugler: Well, it's one of those that makes you scratch your head a little bit because if you look at the world numbers we've got over 97 million bales projected to be leftover at the end of the marketing year.  That's a ten month supply globally.  And would suggest you ought to be going down every week kind of like you see in some of the other markets.  Instead we have got a nice rounded bottom and the funds have been adding long positions every week.  It sort of smells like one of my colleagues says the markets can remain illogical longer than you can remain solvent.  But there is a fundamental piece of that and that is that much of that global supply is tied up in China and the rest of the world still has to go out and buy cotton on the open market.  Turkey has been a major buyer in recent weeks and a few other countries.  So U.S. carryout is not burdensome at 3 million bales.  So you've got kind of this window where farmer selling to the merchant, the merchant is hedging with short futures, the funds are buying against the selling and the price usually follows the funds.  So right now we've got a little bit of a rally going and not necessarily done yet.  I think we go another 2 or 3 cents yet.

Pearson: Alright.  So the funds are basically buying on the bet that China is going to continue to hold their massive stockpile.

Brugler: Yeah, yeah and that will be the thing that will kill us is if China really works actively to reduce it and basically they're not likely to export cotton but if they just quit importing cotton because they're trying to use it up that will force a lot of cotton to find another home.

Pearson: Certainly.  And it'll find other homes at cheaper prices.

Brugler: Most cases.

Pearson: Alright.  Now we do have a couple of questions from our Facebook followers and Twitter followers.  Gayle in Remsen, Iowa, after we've been talking about the January 10th reports, he is curious, how does the government crop report get generated?  And do they consider carryover in the crop reports?

Brugler: Yeah, there's a couple of different pieces to that.  Let's talk about the production report first because there’s two different divisions working on this.  First of all, NAS does the grain stocks and the crop production.  The ERS division and the World Outlook Board does the projections about carryover and consumption.  So let's look at NAS's stuff first.  To do the crop production there's two pieces.  There are objective yield plots which are random plots that are measured out of farmer's fields and they are measured by USDA employees at various times throughout the year.  They do crop ear counts and they do measure ear weights.  When it gets time to harvest they actually pull samples and send them to the lab.  And then they supplement that, expand that with farmer surveys.  So you've got this physical data layer and then you've got the survey layer.  There were some holes in that back in October during the government shutdown because the field people were taking samples of nice 25% moisture corn, sticking it in a plastic bag, mailing it to St. Louis and nobody was opening it.  After a couple of weeks that sample had to be thrown out.  And if you look at Friday's crop report you'll see that the farmer surveys were used to square up the data, particularly in the states that were actively harvesting during that 19 day shutdown.  Most of the yield reductions were in the western Corn Belt, in the areas that were most actively harvesting during that time. 

Brugler: The second part of that, of course, is the grain stocks report.  That is a very, it's an all company survey for the commercial side and then the farmer survey.  They did over 82,000 farmer surveys in December so that's a pretty big number.  And switching to the carryover stocks then, you have to allocate that grain over four months, or four quarters.  The December 1 report that we just got told us there was less corn there than they had anticipated.  Working backward on the math we fed more corn prior to November 1 than had been anticipated and less wheat.  USDA had what is called a negative residual in wheat.  They found back, if you will, 163 million bushels of wheat that they thought had been fed but it turns out we fed corn instead.  So the corn number was bigger and the stocks number, of course, for December was smaller.  So yes, they do consider carryover.  They're very religious about what was old crop and what was new crop and you didn't use new crop in the old crop slot, etc.  So I think the numbers are pretty solid.  The big question going forward because there was probably some July and August corn feeding in this number is how much we're going to slow down the apparent rate of consumption as we go into the next three quarters.

Pearson: Okay.  Alright.  Now, coming off of that, as you mentioned, the world supply and demand, Phil in Ontario has a question.  We're looking at corn at at least a five year high in demand.  At these prices is that going to continue?

Brugler: Well, low prices cure low prices.  That is a famous saying in the commodities market and we are seeing that.  The export demand is the most elastic, it's going to respond the quickest to a price change.  It took the worst hit when prices were $7 and $8.  We had a multi-decade low in corn exports last year.  But they're responding quickly to this $4 corn.  It turns out $4 corn works in a lot of rations where $6 and $7 doesn't.  So I think you can continue to see export growth at this price level.  Particularly because Brazil's crop is going to be smaller, they planted less acreage.  As long as we don't get too big of a rally to encourage their second crop planting, the Safrinha crop, we should continue to see more market share for exports.  Ethanol consumption, of course, is somewhat limited by the RFS and adoption of more E15 stations and so forth.  Feed use is going to be a slow thing to grow because we don't have the cattle, we talked about that on the show, and the hog industry is being held back by the PED issues.

Pearson: Right.  And that brings us to our next question.  Bill in Spirit Lake is curious, what is the impact of PED on pork supply and prices as we look out through the first quarter?

Brugler: Well, the problem is we don't know how many pigs we're losing.  We're losing pigs.  I've seen estimates anywhere from 2 million to 6 million head.  That's a wide range and has some price implication depending on where we're actually at.  What we know is that we're not, we have been holding back sows, we've been holding back gilts, we have been trying to expand but because of the death loss in the pigs we're not getting the level of expansion you would expect.  Farrowing intentions are still up for 2014.  So guys are still thinking they're going to expand and they should with the hog prices where they are.  Margins are pretty good.  But it has definitely reduced the pork supply for the first quarter and second quarter from what we would have otherwise expected.  And when you combine it with the tightness in beef it's pretty supportive to hog prices.

Pearson: We'll see some support there.  Now, before we let you go, Bob in Nebraska is curious, two months from now is it likely or unlikely that we'll see corn or soybean cash sales 40 cents higher than they are today?

Brugler: Two months from now, that would be just ahead of the crop, or the March 31st reports.  At the moment I would say soybeans likely to be lower by that point just because -- old crop soybeans -- because we'll be into the South American flow at that point and it's just hard to maintain that rally.  New crop has a little different price mechanics, more conditional on what's going on in the U.S.  The corn market is a little harder to see.  My statistical models do have us going a little bit higher by then but not, I don't think 40 cents is going to do it.  It will be difficult to have that big of a rally.

Pearson: It's probably unlikely.  Alright.  Well thank you so much, Alan, appreciate you being with us tonight.

Brugler: You're welcome.

Pearson: Thanks to all of you for your questions via Facebook and Twitter.  Please continue to send them in and we'll continue to get expert analysis right for you.  Thanks for watching and 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