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Market Plus: Nov 12, 2010: Alan Brugler, Market Analyst

posted on November 12, 2010

Market Plus: Nov 12, 2010: Alan Brugler, Market Analyst Analyst Alan Brugler and Mark Pearson discuss this weeks markets.

Pearson: Welcome, this is the Friday, November 12, 2010 version of Market Plus. Thanks for joining us here at our Market to Market website.

I've been saying that now from the 15th of September 2006. I mean it's been -- it's been a wild run. It seems to calm down and then it becomes very wild again. It got wild this year when the Russians drought out their wheat crop, stopped exports. The U.S. kept raining in the Corn Belt, raining in the Corn Belt, raining in the Corn Belt, and we shrunk the crop and USDA confirmed that shrinkage on Tuesday, tightened up carry out on everything, increased demand.

Cotton which has been a commodity we frankly haven't talked very much about on this program. It's exploded. It's a 150 years highs in cotton. It's unbelievable.

Alan Brugler is with us this week and Alan, I want to talk about a lot of these things because we really want to think and I think what a lot of farmers are doing right now the corn crop went in quickly, the bean crop went in quickly, the wheat crop went in relatively fast, the cotton market relatively fast, people now are thinking about 2011 what it is they're going to do.

We thought we were going to see a huge acreage battle for corn where prices would stay up and then prices collapsed Friday. The acreage battle, it's sweet corn, beans, cotton are all included and farmers come out with some numbers calling for sharply increased corn acreage and yet the market has sold off a lot. Where do you stay ahead with this acreage battle?

Brugler: Well, some folks were blaming the Informa number for the -- because they were saying hey, they think we're going to get 93 million corn acres and frankly our number is 92 million but you have to call into question whether corn can get 92 million which would be about a 4 million acre increase this year. Over this year if you have corn prices weakening substantially and initially Tuesday and Wednesday you saw the nearby corn dropping but you saw those new crop bids staying up. They were only down a penny or two per day.

Friday of course you sold everything but I think the key point is yes, we have a war between corn and soybeans, cotton, and wheat and unlike in the past couple of years nobody surrendering. In '07/'08 the beans were able to give up some acres. In '09 wheat gave up the acreage because we had surpluses but now you want more wheat acreage because the Russians were short on their crop. Soybeans don't really want to give up much because the Chinese are buying 59% of all the beans that leave a ship or leave a port on a ship, and the corn supply is extremely tight here in the United States.

Pearson: And cotton is record high. So-

Brugler: And cotton stocks are less than 2 million bails and that's extremely tight. Global cotton supplies are down about 42 million and that's a very low number historically. So, the bottom line is cotton doesn't have to stay as high as it is but it has to stay pretty high because we just flat out don't have enough cotton and to the degree the global economy is recovering we're going to need more cotton for textile use than what we've used the last year or two.

Pearson: Ok, so that being the case we've got what 25 million acres of pasture. Are we going to tear up some more fences in 2011?

Brugler: You'll see a little bit of that but it's -- there's reasons that is pasture in most cases. It's highly erodible and so forth.

Pearson: Or not well drained.

Brugler: Or well -- not well drained. What you're going to see, I think, is a combination. You're going to see a little more wheat acreage this fall probably 1 to 3 million more acres. If it's closer to 3 that actually helps us because there will be more double crop soybeans next year. that's one of the wild cards here is that in the big boom market back in '07/'08 we actually had about 8 million acres of double crop beans.

Last year we only had four. So, but to get the double crop you have to have the first crop and that in most cases is wheat. Corn can get to 92 million acres but it is going to have be pulling some from hay, pulling some from some of the other crops like sorghum crops or barely or oats. It's not going to get it from cotton, I don't think, and you know it will be tough.

You might get a little bit of CRP ground that came out. We had 4.4 million acres that was expiring the end of September but most of it was renewed.

Pearson: Yeah, the CRP was another issue but really there you are and so corn can't give that much with - and beans can't give that much and wheat can't give that much.

Brugler: Beans would be the wild card I think. If South American production is large enough and if China does enough to slow down their economy, slow down their demand bubble a little bit, then you might be able to give up a couple million of beans and of course that's what Informa was projecting.

The wild card would be if something catastrophic were to happen to say the Chinese hog herd. They've had several disease outbreaks of blue ear and so forth over the past years that has really screwed up their soybean meal demand. they're not having any of those problems at the moment but if something like that were to come in it screws up the centralized planning when you have that type of event, but for right now I think we have to assume the Brazilians expand their production and we try and get more double crop, we try and form some of the marginal acres that maybe in a low price year just don't get farmed.

Pearson: Alright and you mentioned $2.00 a pound cotton in China. Soybeans are also are at a premium in China and corn too correct?

Brugler: Yeah. The September soybean contract, the one for next fall, was over $18.00 a bushel. The nearbys were in the $15.00 or $15.50 range which meant that when we got over $13.00 we're just now breaking even on shipping to China by the time you throw in ocean freight and tariffs and everything.

But that $18.00 figure for next fall was basically -- basically -- yeah, wait awhile there's still room to bring more in. Now again they were limit down on Friday also, the Chinese Market. So, that comes into question but that was very high, strong signal that they still wanted more soybeans and more cotton and there's a big debate of course if they want more U.S. corn. There's a big difference between USDA's numbers for Chinese corn production and the private estimates out of JCI, and some of the other entities that collect data over there.

Pearson: Alright cotton market - highest since Civil War. Producers are sure going to take advantage of this. Are we seeing a lot of producers selling cotton. Obviously that's going to attract huge acres. You mentioned on the show that it's already attracted acres down in South America. What should American cotton producers be doing right now?

Brugler: I think that they need to get some forward contracts on the books or if they can't get them, get them -- get some hedges on probably options. It's real dangerous to be short futures in cotton right now. Go ahead and lock in at selling prices so that you know that you can go ahead and make the expansion next spring, you know, on your acreage. The worst thing you can do is buy all your inputs thinking hey we got this great cotton market and not lock in that price because again depending on what happens in China that price may not hold up.

Pearson: Last time, you know, we talked about truisms. All the truisms out there, I'll ask you one more, short crop/long tail is that going to be the case in cotton? Could we see this thing spike up and then see a substantial break for that matter all of our commodities?

Brugler: I think that's a valid concept. Some people kind of pooh-pooh it but I think you do get two things that happen on a high price. On a short crop rally you get demand destruction and you attract more production and those are not immutable but pretty close to it. So, yes I think you're going to see the high cotton prices kill the cotton market and typically once that happens it takes a least two or three years to work that pop off and get supply and demand back in balance.

In corn we had the big run up in '08. It took us basically the rest of '08 and '09 and the first part of this year up through June really to work those prices down and then we found out we weren't getting the production that we needed.

Pearson: And then Katy bar the door away we went. Alan Brugler right on time. Alan Brugler joined us this week on Market to Market right here on Market Plus. Thank you for joining us. We'll be back with more from our analysts next week. For all of us from Market to Market have a great one!

Tags: agriculture commodity prices markets news sorghum