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Market Plus: Mar 28, 2008: Alan Brugler

posted on March 28, 2008


Market Plus: Mar 28, 2008: Alan Brugler Pearson: This is the Friday, March 28th, 2008 version of Market Plus. We're glad you've joined us at our Market to Market Web site. Don't forget to tell your friends and neighbors. I'm Mark Pearson. With me tonight one of our regular analysts, Alan Brugler. And Alan, a couple of things I want to follow up on. Number one, your corn number down 4 million acres, almost 6 million acres from what we did last year and yet we still have all this ethanol demand out there, still have a lot of, as you mentioned on the show, an awful lot of hogs out there. Prospective plantings will be coming out on Monday and we'll finally get an answer to the first round of this. But correct me if I'm wrong, we changed our planting intentions quite a bit last year from the March report to the June report, did we not?

Brugler: Yeah, we increased the acres between the March and the June report and we even added extra acres from June to final. The net change from March to final was over three million acres. So, the whole purpose of the intentions report is to look around and see if everybody is doing the same thing and maybe you as a producer don't want to be there. Last year that didn't work very well but it was by accident a good thing and I'll explain. We had 90 million acres in the March intentions report give or take a few. The market went down for three months straight saying that's too many corn acres, not enough bean acres, we don't want them. In June we ended up having additional acres as you mentioned and the market's conclusion was it was the crop insurance guarantee, the $4.06 per bushel in revenue insurance that maintained those acres even though the price signal from futures was going lower. The reason I say it ultimately was a good thing was that we vaporized that entire excess production. We had 2.5 million bushels more production, our ending stocks are only up 130 million bushels using current numbers. Now, the implication for next year, I think, is that we can't have a five or six million acre reduction for more than one year. If you look at USDA's outlook data from back in February where they do the ten year forecast they had a one year dip to 88 million acres and then they had it going back to 90 or 91 for the next five years in a row because with this strong ethanol and strong livestock demand there's just not enough corn if you don't have those kind of acres.

Pearson: I guess the thing I was trying to keep in mind and I want you to comment on is that we're making a huge deal out of this March 31 report and we did last year and yet it's not always the way we're going to end up in terms of reality in terms of these acres.

Brugler: Exactly, it's to tell you what everybody else is doing while there's still time to change your mind. Now, the other wild card, of course, is the weather. You can have every intention in the world of planting XYZ acres of corn but if it's May 20th and you haven't got them in you're probably going to switch to beans in much of the country.

Pearson: So, you have that ongoing battle going but the focus is going to be on this. So, depending on what comes out of this acreage report from USDA people are going to need to make some more decisions about whether or not and how much to price of the 2008 crop if they haven't done so.

Brugler: Right. Our approach has been we're about 40% forward contracted, we've got put options against another 30% and we've got our crop insurance that kind of covers the rest of it for the short-term. But, again, if you were to go to new contract highs some of our data says if we get past the previous high we can go to $6.50 or so. Certainly that's going to be an opportunity to sell a little bit more of your remaining old crop or to get another ten or fifteen percent of new crop sold.

Pearson: So, keep that in mind as this report comes out. It's not the end all, be all certainly and we certainly saw some shifts last year and certainly will see some shifts again this year. I want to talk about livestock. The USDA hogs and pigs report. It's so critical, we keep talking about this $6.50 corn as a potential, we talk about the $15 beans that we had and so forth. The flip side of all this and half our audience is gauged in the livestock or poultry production business, the prices have been killing them, killing profitability. These hog guys have been the pig is less able to really take advantage of the DDG's. So, that excitement and that growth really hasn't been a positive for them. I talked to a bunch of dairymen over in Wisconsin this week, this high input costs despite the higher milk costs have put the squeeze on for them. What is your take? Let's talk about this hogs and pigs report. You didn't see expansion in this report?

Brugler: We didn't see the expansion in the sow numbers, well a half of a percent. But we definitely expanded the number of hogs that are out there. The year over year comparisons in all weight classes are 107%, 106.5%, 107% so we've got a lot more hogs currently in the system that we've got to feed to maturity and then turn into pork and get somebody to buy it. We're not seeing -- I didn't get a chance to go very finely into the sow data but I don't think we're seeing any massive sow liquidation here yet. The North American herd may actually be down because Canada appears to have done more liquidation using the most revised data that just came out this week. They've been a little more aggressive about liquidating than what we have been able to prove before. That's a good thing because they have been sending all of their feeder pigs down here and many of their slaughter hogs. But the hogs and pigs report basically doesn't show us much in the way of daylight yet. It says even in the 60 pound weight category we've got 7% more hogs to deal with and it's going to take us several months before they are mature and through the system. Farrowing intentions would be the area you'd like to see drop, the producers are planning on having fewer hogs this summer but we didn't really see that.

Pearson: So, it's going to take more serious red ink for this hog market to shrink and then hopefully get to recovery.

Brugler: Yeah, I think part of the problem is that we had about 35 months of profitability in the hog business on a cash basis and we've only had five or six months of red ink so far. So, the equity situation is encouraging a number of producers to just sit tight, try and work through it, it'll get better eventually. We need a little more panic in the streets here to really solve the problem.

Pearson: I asked you this on the show and I know it's a tough question. But what kind -- are we going to have to have three negative quarters of pork profitability to finally get this thing to get into the serious liquidation phase where we can start to reduce numbers and reduce this supply? You talked about it on the show, this huge supply of protein out there for consumers, beef, pork and poultry for that matter.

Brugler: Yeah, I think you have to have extremely low prices or you have to have an extended period of negative returns. The third thing that could help us is the export market. Typically we're eating 99% of what we produce anyway. If we can make that other 1% leave the country we can kind of clean things up. The problem, of course, at the moment is if you've got 7% more hogs than a year ago that's a lot more production than 1%. You've got to have a much more aggressive export program. The good story there is the dollar is very weak right now, exports to China are excellent right now, Hong Kong, many countries are saying if we can't buy the high priced grain let's buy the less expensive meat.

Pearson: Good points. Alan, as usual some great insights. Appreciate you being with us on Market Plus. And thank you for joining us out there here on the World Wide Web. And from all of us here on Market to Market, I'm Mark Pearson. Have a great week.


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