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Market Plus: Apr 01, 2011: Mark Brugler, market analyst

posted on April 1, 2011

Market Plus: Apr 01, 2011: Mark Brugler, market analyst Pearson: This is the Friday, April 1, 2011 version of Market Plus. Thanks for joining us here at our Market to Market website. Be sure to tell you friends and neighbors about this place on the web. They'll get some unique insights from our long term market analysts who have a great track record. No exception this week Alan Brugler joins us and Alan I'll be honest with you there is all this talk about a bubble economy. That we're in a bubble economy, we had a housing bubble, we had a tech bubble back in the end of the millennium. We've got a stock bubble, debt bubble, and then people keep asking me is this an agricultural bubble? Are the commodity markets in a bubble? And my response has been a) you can never see the bubble that you're in first of all. But secondly, we look at these markets and we had a relatively shorter crop than what was expected last year. We've got strong demand ethanol with China, pick your spot, we seem to have people coming readily to buy our commodities. What's your response? What are you telling people?

Brugler: Well, I think there are some bubble aspects to this. The money supply has been pumped up not only by the U.S. Central Bank but in Europe and in several other places. China initially and they're trying to slow theirs down now. So you do have quite a bit of money chasing a limited number of goods. Definition of inflation is too much money chasing too few goods. That said I think part of the issue is that money was suppose to be restarting all sectors of the economy but it is going into the most liquid sectors. That is commodities and equities, stock market, it does not want to be in real-estate yet, particularly in the United States because housing prices are still under pressure. And so you do have a little bit of a crowd effect of too much investment money concentrated in just a couple of sectors. I think it would be a mistake if you're agricultural producer to assume that the good times are just going to continue.

Pearson: Or that we're in a new plateau.

Brugler: Now there are some interesting work from the University of Illinois that suggests that we in fact have had a demand shift that is similar to the one from the sixties to the seventies. That corn shouldn't go below three dollars from now on, for example, if that's the case, and after four years it is still holding up that new plateau but again the struggle is that global demand is absorbing all the surplus production. Producers are expanding production to try and respond to these higher prices but the demand is so good China is pulling off equivalent of about twenty million acres of soybeans that might have historically shifted back to meet the corn squeeze that we've had. We can do that because the demand is so good for soybeans and soybean oil is in demand for bio-diesel because of the high prices of crude oil and so you've got this at the moment a virtuous circle if you're a producer that likes these high prices where the demand is sufficient in enough commodities at one time that none of them could really relax. At some point I think genetics or weather will allow us to have a year where we overburden the market with supply. But it could be a couple years before all these commodities get to that point.

Pearson: We've had strong corn prices, strong bean prices since September of 2006 when this rally started about the 15th of September 2006 in the charts. This is a long period of time. You talked about some fatigue in the cotton market. Are we sensing any fatigue in the corn and the bean markets yet?

Brugler: I don't think we're seeing it yet because we know we have in corn in particularly we have a price rationing function that has to be accomplished that has not been accomplished. Alright when you get tired is when the market realizes hey, we've got enough production to get the new crop. In corn we know there is a pretty good effort in the South to get some corn planted early or short season varieties to try and fill in the Illinois corn plantings. Trying to hit that old crop hole in August to the degree that you've got new crop available in August then that makes that supply and demand balance sheet look a little looser. The market is not going to be comfortable until it says ok, we can see the bushels that we need coming in to fill in for what we don't have in old crop. But again you throw a weather scare on top of it you could be talking nine bucks. It's that tight in the short run.

Pearson: Ok and the flip side is livestock sector where all of the sudden inputs rose dramatically. Their prices did not until now. You mentioned on the show really strong export demand. Relatively short supplies particularly in fed cattle and these are some phenomenal prices in the fed cattle business, phenomenal hog prices right now, again same story are we bubbling there? The packers seem to be moving product.

Brugler: Yes, I think there are a couple things going on there. First of all producers do have a little bit of leverage because the numbers are not that excessive. That is the hog production is down several years in a row now. Poultry was down because of the Pilgrims Pride bankruptcy in 2008 and it has turned around but not back to the same level of supply. Cattle and feed are actually up from a year ago but the overall cattle numbers are down. The cattle herd is still shrinking year over year since the 1950s. Alright so you've got a little leverage because you just don't have the production. The thing that we're probably over looking is a global GDP growth has been better than the United States. They've actually got more money to spend and they've developed some demand, some need for beef and pork and poultry and what will probably stop it is when the U.S. consumer won't hold up their end of the bargain anymore. When you walk into the meat as and you just say that's too high. I'm not going to pay it. But initially those foreign consumers are taking that supply and we also are, in beef's case, we've got a lot less imports of beef than usual because the Australian and New Zealand beef is going elsewhere.

Pearson: All right. We've got to wrap but on tonight's show you were friendly with the corn prices. Going forward you are still - you're holding off on new crop sales, you may just - twenty/thirty percent new crop and new crop bean sales same thing?

Brugler: Twenty percent on new crop.

Pearson: And wheat?

Brugler: We're twenty to thirty percent depending on which class.

Pearson: All right. And fed cattle you're friendly going forward?

Brugler: We really don't have any hedges other than a few puts against the June.

Pearson: And the hog market as well?

Brugler: Same situation in the hogs.

Pearson: It's a rare time, Alan, for you to be that friendly on everything. So we will see what happens.

Brugler: Well, it may change but for today we're there.

Pearson: All right. Alan Brugler thank you so much. That's going to wrap up Market Plus. Thank you for joining us here at our Market to Market website and for Alan Brugler and all of us here on Market to Market I'm Mark Pearson thanks for joining us.

Tags: agriculture commodity prices markets news