Brugler: Yes, I think we underestimate how much impact the energy plays directly into corn. We look at the dollar thing and we look at the inflation thing but when you're using four billion bushels of corn for ethanol out of a thirteen billion bushel total consumption it does mean that corn follows energy to a degree. If you start affecting the amount of corn that is going through those plants it does change the supply and demand equation. What we're seeing is, as you mentioned, profitability has turned around, some of these plants are making 30, 40, 50 cents a gallon on this stuff at current corn prices even with corn being up from what it was earlier. So, I think we can be optimistic as long as these margins continue more and more of these mothball plants will be brought back online. We're still waiting on some of the EPA decisions and so forth and we want to cement the relationship but, again, at the moment we've still got margin and discretionary blending which means every fuel manufacturer or fuel distributor wants to go ahead and insert oil and that cheaper ethanol into his gas blend because it helps his margin.
Pearson: Absolutely, so, of course, it's also coming at a time when we're having a hard time getting corn out of the field.
Brugler: Right and you're getting ethanol plants that are having trouble buying enough dry corn. We've heard a couple of places this week where they are willing to take wet corn, normally the mills and so forth like a nice 15%, 14% moisture corn but are willing to take 20% or 22% corn and they lose some ethanol yield out of it because of the complications with the machinery but they just flat out need to get the corn into the plant.
Pearson: Just to keep it moving they'll take a little bit wetter. That's some good news for a producer out there with this late crop that they're trying to get in so that's truly a bright spot out there. How far is this going to go?
Brugler: The price?
Pearson: Looking at corn prices you're pretty optimistic.
Brugler: I think that we've got, particularly if we get the livestock sector to start to turn around in 2010, the ethanol margins hold you're going to see a need for three million more acres of corn next year. And if soybeans are anywhere close to current prices the ratio doesn't suggest giving them those extra three million acres. So, corn may have to pull up a little bit more to get that done. Again, the ethanol margins don't have to stay good, crude oil certainly doesn't have to stay at $78 or $80 a barrel but if you continue to have those relationships I think it's almost an acreage worst scenario again for this next year except the wheat won't be playing.
Pearson: But an acreage war could set things up to give us some opportunities to sell the 2010 crop which you're not in a big hurry to sell that December contract over $4.10, $4.20 or so.
Brugler: Right, I understand the rationale for selling at the 20, 30, 40 cent, about 40 cent now, carry to the old crop but I think the flat price is not where it could be if we see some of these other fundamental developments.
Pearson: All right, so in light of that the other item that you wanted to follow up on, this is one that has been in the news and is one that could impact price, it really has no relationship to fundamentals ... some of these big index commodity funds have to liquidate, they're too big on particularly their grain positions, correct?
Brugler: Basically what happened was two of the funds, and Deutsche Bank is one of them, two of the major sponsors lost their hedge exemption letters which they had been given a notice from the government that it was okay to go above speculative position levels because they were effectively hedging against swap contracts, paper contracts for the commodities. They lost those exemptions, the government decided they were, in fact, speculating with the money for the restriction of it, they had to get down to the speculative limits which in corn is about 22,000 contracts and they own a lot more than that. So, that particular firm said that by the end of October they would come down in compliance and the best math we have been able to do they have got to sell 15,000 or 20,000 contracts a week, 15,000 or 20,000 contracts of corn and at the same time the have also announced they're going to diversify their holdings, one of the two Deutsche Bank funds only has six commodities in it and the only two ags are corn and wheat. They have announced they are going to spread out into a few more things, they're going to be buying some cattle and some hogs which has kind of been overlooked and I think could be a supportive factor for those markets. If you suddenly have an index fund coming in there buying 10,000 contracts that is an unusually large chunk of business for a cattle or hog futures market.
Pearson: Could that have accounted for any of the action this week in the hog market?
Brugler: It could if we've got people that are jumping the gun, it's not front running but trying to do a little more before this buying hits the market and maybe it could be able to sell to them at a higher price.
Pearson: All right, interesting, we'll see how that develops. Are there other changes that are going to be occurring on that front with that regulatory change?
Brugler: Well, again, some of it is still being discussed. One of the obvious questions is why hasn't Goldman Sachs lost their exemption letter. They are a bigger player than Deutsche Bank. At this point they are still able to keep their larger possessions so there's an aspect of when is the other shoe going to fall here.
Pearson: We'll see what happens. All right, Alan, appreciate it. Alan Brugler, with us this week, our regular market analyst. Thank you for being with us, we appreciate your insights very much. And thank you for joining us here at our Market to Market Web site. For all of us here on Market to Market, I'm Mark Pearson, we will see you the 22nd, Thursday of this week, we will be in Shenandoah, Iowa for our special Rural Economic Summit, hope you can join us there. Have a great week.