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Market Plus: Alan Brugler

posted on June 27, 2014


Pearson: This is the Friday, June 27, 2014 version of the Market Plus segment. Joining us now is Alan Brugler. Alan, welcome back.

Brugler: Always good to be here.

Pearson: We didn't have a chance to discuss cotton on the show this week. And we did see a bit of a falloff, $2 and change in the cotton markets. What happened? Are we seeing China start to move some?

Brugler: Basically the problem is China has got too much of their own. They're making efforts to restrict imports, not officially. That is WTO illegal. But, basically they have begun to create incentives for the mills to try and use some of their surplus and buy less U.S. cotton or really from anybody. The Chinese, at last estimate, were sitting on approximately 60% of the global surplus stocks in cotton, which is just a huge amount of cotton. But, the point is, if they start using more of their own structurally the U.S. is very dependent on cotton exports and if we don't make the exports we've got a pricing problem.

Pearson: Okay. So, how much can we fall if China does start to consume a lot more of their cotton? What sort of potential are we looking at?

Brugler: Well, it depends on how the mills in the other countries respond, okay. And it also depends on what the size of our crop ultimately ends up being this year. And, of course, we'll get a cotton acreage estimate on Monday.

Pearson: And do you have an idea for what the trade is anticipating --

Brugler: Trade is looking for something a little over 11 million acres I believe.

Pearson: Okay, which would be smaller than last year, correct?

Brugler: Yeah.

Pearson: Okay.

Brugler: But we've got, again, we've got to get rid of the cotton one way or the other. So, A, do we produce it? And then B, the export market. Technically speaking we could go back into the 55, 60 cent range at some point in a glut. I don't think, you won’t' do that with a 3 million bale surplus, it would be more like 5 or 6 million bales and nobody is calling for that at the present time.

Pearson: Okay. Alright. Well, now, while we're talking China I'd like to talk to you about the DDG issue that came to light here two or three weeks ago when China banned all of U.S. DDGs. Have we seen any change on that in the past few weeks?

Brugler: Well, it apparently is not a complete ban, it was a ban on issuing new certificates. And what that means is if you had a sale approved and you had the certificate to ship it you can still ship it. There was a freight fixture for China for the first week of August for U.S. DDGs for 50,000 tons, which tells us it's not a complete ban on bringing the stuff in, unless of course it gets over there and then they turn it away. But, the vessel has been fixed so obviously the seller thinks that they have got a valid contract to ship it. That's good news because it means that at least some of the product is still moving in that direction and China was the biggest buyer back in July when they were still taking it. So, it's important to keep it moving. But I'm very pessimistic about Chinese feed imports right now whether it is DDGs or whole corn. They have a huge, could be extremely huge depending on whose story you're listening to, pile of corn stocks that they need to work through, rotate out of, get out of storage, etc. So, I'm really not anticipating China will take any more U.S. corn during calendar year 2014. They may get a little milo, that seems to still be moving and it's cheap. So, until it is banned I think the buyers will continue to try and bring it in. But I'm not anticipating China is going to be a big factor in corn here for a while.

Pearson: Okay. Well, let's take a look at some of the questions we've got from our Facebook and Twitter followers. And Paul in Columbus is asking a question that I haven't heard raised very much. He is asking, will the excessive rains and floods have any impact on the markets? Part two, he says, if so, perhaps it will be after harvesting. We're going to see a lot of nitrogen loss with a five inch plus rain. Is the trade still anticipating trendline or a little bit higher on corn yield?

Brugler: Definitely expecting trendline or higher. You've got 165 is the USDA number. I've had analysts say 175, if, if, if kind of scenarios. I don't buy into those. I think the crop will accumulate sufficient problems between now and harvest that we don't get that, one of which could be the nitrogen leaching issue, definitely some conversations about that. When you have 11 inches of rain in a month it's going to take some nitrogen out of that soil profile. The other issues, of course, would be shallow root structure. If it turns dry in August does that affect your yield? But right now the market is looking at wet conditions, wet weather and very good crop condition ratings and saying we think we're okay for a trendline or above yield. We have a thing called the Brugler500 Index, which is a crop rating model based on USDA's poor, very poor, good, fair, excellent ratings. The key variable there is what that index is doing in late July and early August. If it's going to be above trendline yield that will be in the 380s. If it's going to be an average year it will be in the 365 area. And if it's a drought year it's in the 280s or 290s. So, don't anticipate the latter, but the difference between trendline or much above trendline is what happens in that late July, August period.

Pearson: Okay. So we've got a little bit of time before we might even begin to see the market take that sort of thing into consideration.

Brugler: That’s correct.

Pearson: Now, we do have a question here, Phil in Ontario, Canada is curious, as we look at this potential smaller corn acreage on Monday, does corn have a better price potential versus beans going into harvest?

Brugler: If you get the smaller corn acreage on Monday, yes. We're not as badly oversold as we were in 2010 but 2010 had some similarities. The market was very comfortable with the acreage, very comfortable with the yield assumptions, thinking it's going to 250 by harvest back then. And then we got a surprise on stocks and acreage and we're up for several months. So the setup is not quite as extreme this time but it is definitely a similar psychology. Beans, on the other hand, need an actual hard number, we're running out of beans kind of scenario to get a big pop here.

Pearson: Okay. And then finally, Maren in western Kansas has a question as we look at all of the efforts that the Federal Reserve has made to increase inflation. She is curious, at what point would you consider the commodity markets changed into having an inflationary bias?

Brugler: Well, there's a lot of pieces to that question. I think you have to look at the U.S. dollar, first of all. If it's an inflationary scenario you would generally expect the U.S. dollar to be weakening. It is at the moment but it has pretty much been in a trading range. So it's hard to say we really have the inflation push on right now. From a commodities perspective you definitely have some markets are acting like it, like the cattle and feeder cattle and hogs. But I would attribute those more at the present time to trend following and the lack of opportunities. The stock market is not really doing much right now. So, when you get a market that is trending all the money wants to get in on the action and that tends to extend the trend. I think that's not necessarily an inflationary indicator by itself. The key to the inflation overall is probably still wages and I know from conversations with the Federal Reserve they are concerned about we had a little bit of whiff of inflation in the most recent data. They want to see the wages go up with it. If they don't, the households get squeezed a little bit. Gasoline prices are up, if you don't have the wages to support it. So, I don't think we can have a big inflation bias where almost all commodities are going up until you see either that wage push or some indication the dollar is weakening because of all the Fed's efforts.

Pearson: So, we're not in it yet.

Brugler: We're not there yet.

Pearson: Alright. Well, Alan, thank you so much for taking the time to talk to us this weekend.

Brugler: You're welcome.

Pearson: And thanks to all of you for sending in your questions via Facebook and Twitter. We really appreciate it. Please continue to do so and tell all your friends to do so. And hope you have a great week and thanks for watching. 


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