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Market Plus: Alan Brugler

posted on March 28, 2014


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Pearson: This is the Friday, March 28, 2014 version of the Market Plus segment.  Joining us now is Alan Brugler.  Alan, welcome back.

Brugler: Hey, great to be here.

Pearson: We've got a lot of questions from producers, not surprisingly, as we head into this weekend about what to do before the report comes out on Monday.  How do we prepare corn and soybean growers before, and wheat growers, before we get those numbers out Monday? What are your thoughts?

Brugler: Well, number one rule is don't put all your eggs in one basket.  I know there's a tendency for some people, it's either the right decision or it's the wrong decision.  But the reality is the market is a continuum and you've got this year, you've got next year, you've got -- you don't need to take that much risk.  So we think you have to look at your situation and say, okay, how much cash commitment have I already made, old crop and new crop?  And I undersold?  Am I behind? We've had a pretty nice rally since January.  We've had two months rally since the last grain stocks report.  Now we have another grain stocks report.  What's the odds of getting a similar rally after this grain stocks report?  Probably not that high.  So that says maybe reward the market with some cash sales, if you haven't.  We did a little bit in the last week here just to capture some of the gains that we've had.  But we've still got 20% of our old crop left and quite a bit of new crop.  The other thing, of course, is put options.  This report is a very, has a reputation for being a big mover, a lot of limit moves out of the March report, particularly in corn's side.  So you do have some downside risk that you ought to protect.  It has been pretty popular to use the short-dated new crop options.  Those expire -- they're May options, they expire the end of April, so that would provide you new crop protection through both this report and the April USDA WASDA report for a lot less money than buying a December option would.  They also are higher gamma, which means if the market goes down they will increase faster, they'll make more money than the Decembers will.  Now, the flip side of that is if the market rallies they'll go to zero very quickly.  But we think that's a key part of it is having some kind of a price floor and you can do a minimum price contract with an elevator to accomplish the same thing. 

Brugler: Soybeans very similar situation, we've had a nice run up from where we were, they probably have more upside if we don't have the acreage or don't have the stocks just because we're alreaytight S&D wise on them.  But, again, we're short November futures on only 10% and then we've got some short calls above the market at $12.40 thinking that any rally is not going to be a huge one but bottom line is looking at your own situation.  Do you have enough coverage?  What is your ability to sleep on Sunday night?  If you're tossing and turning maybe you need to do a little more than you've done.

Pearson: Time to get up and make some phone calls.

Brugler: Yeah.

Pearson: Alright.  Now, one of the topics we didn't get a chance to discuss on the show, it's been a rally the past three, three to four weeks, is the cotton market.  We're up again this week.  What is driving us?

Brugler: Well, it's kind of puzzling in a way. This is the market that has the worst supply and demand situation globally and we keep going up.  And it's a hopeful sign if you're a corn, bean or wheat guy that maybe there's more to go yet because if they can do it in cotton with all that cotton sitting around why can't we?  Essentially what has happened is U.S. stocks are tight, we have been fairly successful exporting the cotton that we have and then the USDA came out with their annual Jennings report and showed that we actually had less production last year, this was the final report, than what USDA had been using in their balance sheet.  So that tightens up the ending stocks even further for the April crop report.  And so that is adding more fuel to the fire and got cotton up.  The wild card is China.  China is the one that is holding over half of the world ending stocks in cotton.  They know they've got a problem.  They're doing various things to try and change that situation.  The rumor this week is that they were going to only issue import permits if you agreed to buy three times as much out of the reserve.  Again, I don't have the specifics on this, the idea is okay you've got to buy three cargos worth of domestic stuff in order to be allowed to buy one cheap one out of the U.S.

Pearson: Right.

Brugler: So, if that happens, of course, our exports to China are going to go down.

Pearson: Yeah.  And now there doesn't seem to be a whole lot of concern about the Chinese economy slowing.  As we have seen in copper and some of the other primary purchases made from China, cotton has really been unaffected. 

Brugler: Well, you have to remember though most of the Chinese cotton use is for export.  You're bringing it in, you run it through the mills, you're making clothing, you're sending it to Europe or the U.S. and other items.  So yeah there is domestic, obviously domestic consumption for 1.3 billion people, but it is very heavily export dependent.  So in terms of Chinese cotton consumption it tends to be more a function of the U.S. and EU economies than the Chinese.

Pearson: Alright.  Now, one of the topics when we ended the show, you left the comment as hogs limit down Monday morning. Would you like to expand on that a little bit? Talk to us a little bit more about what you see in that report and what to expect as we head into this next week.

Brugler: I think I said maybe limit down. 

Pearson: Right, maybe.

Brugler: Or perhaps. But the key point is it was a surprise.  We have rallied based on a perception of very tight hog supplies.  The USDA numbers say that they're not as tight as the trade was anticipating.  Now, there will be some people that will insist USDA miscounted.  But technically we had rallied to an extreme level, several standard deviations above where they ought to have been.  We had a corrective selloff, some of the longs took money out and then the shorts took their money off the table before the report and we ended up near the contract highs.  So the market was very vulnerable to a sell the factory action and I think we're probably going to get one here.  I will point out that one of the reasons for the high prices is to ration exports to try and get the pork exports down.  And they have been running 20-30% below their four week average for the last four weeks.  So that part has been accomplished and, of course, that has an implication too.  So if you suddenly have more pork production and you have killed some of the demand off that is a bearish factor. 

Pearson: Corn market 2012 into 2013.

Brugler: Yeah, exactly.  So I think you have to be a little bearish here on the hogs.  The long made a lot of money.  They may try and defend it but if I was a bull that had money I'd see if it dropped $3 to $4 first then try to buy it.

Pearson: Okay.  Now, do you see any sort of spillover effect as we look at the other protein markets, if we go limit down over this next week in hogs?

Brugler: Yeah, if hogs start to take a hit -- again, it's future and cash both -- we have seen an interplay between the box beef prices in the hogs.  Beef rallied first, it corrected thinking the retailers are going to feature pork and then pork started to get really pricey and the retail has backed off of that and that gave us a secondary spike in the cattle.  So a packer can only pay what he can get for the meat and, again, we're probably going to get into some bigger cattle numbers here.  So if the hog thing starts to come down it will pull the beef down and you'll see those cash prices start to pull back, which is what the futures in cattle are already anticipating.

Pearson: Alright.  Now, we've got one final question.  As we're talking about soybeans and our demand as we go forward, John in Columbia, Missouri is curious, as we build demand for diesel, in America, will biodiesel become more widely available?  That's one of those things that we heard a lot talked about when the RFS was, the rule change was proposed.  Is that going to be a major impact on soybeans?  Or what would soybean prices do to the availability of biodiesel?

Brugler: Well, I think obviously if you produce more biodiesel it will have to find an outlet, it will have to find a place to go and there will be money to be made.  The problem right now is we can't afford to produce the biodiesel without the subsidy, which expired last December.  So more of the biodiesel right now is being made from animal fats and other waste rather than from soy oil, than what we could be doing.  So yeah, it's kind of a catch there.  We need diesel prices to be higher or soybean oil prices to be lower to make it work without the subsidy, the credit.

Pearson: And we don't see either of those things happening any time soon?

Brugler: No, there's been some action in terms of some of these tax bills to try and get the credit reinstated but I'm not aware of anything that is in the works immediately.

Pearson: Alright.  Well thanks for taking the time to be with us this weekend, Alan, really appreciate it.

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'll continue to get expert analysis right to 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