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Market Plus: May 11, 2007: Alan Brugler

posted on May 11, 2007


Market Plus: May 11, 2007: Alan Brugler Pearson This is our Friday, May 11th, 2007 version of our Market Plus segment here at our Market to Market Website. I'm Mark Pearson, glad you could join us. With us this week is Alan Brugler, one of our regular market analysts. And, Alan, big USDA report was out on Friday, we chewed through the numbers on the show, you talked about a number of them on the market analysis segment. Here at Market Plus let's go a little bit deeper. You were kind of surprised or thought some people were surprised by what overall world corn production looks like.

Brugler: Yeah, I think, Mark, that the trade was looking at the U.S. numbers fairly closely expecting a 12.4 billion bushel crop and knowing that the ethanol expansion is there and we're cutting back livestock use a little bit but there wasn't a lot of focus on the world estimates because USDA had not done them previous, this is the first go around for 2007. That number showed that we're actually expanding production tremendously, 60-70 million tons for this coming year but we're going to show a drawdown in corn stocks. We're actually expanding world consumption even faster than we're expanding the production and that's saying something because the stocks usage ration was already the tightest since 1973. So, I think this is a huge background factor for corn, it's got the potential to keep our exports running at a higher level than we would otherwise expect given the prices. And it makes it even more important that we have a big crop this year here in the U.S.

Pearson We've told everybody we need to get a big crop to keep this ethanol machine going. Talk about energy -- talk about this oil market where people are paying $3 for gas, they're saying gee, we've got more ethanol. What's going on in this whole sector of the commodity markets, this energy sector?

Brugler: Well, I think the crude oil story is fairly well documented. We've got pretty decent inventories here, EIA inventories but there is that ever present headline risk of a Nigerian problem or an Iranian problem or a Saudi problem so you're going to keep some risk premium in the crude oil. The bigger problem at the moment is the gasoline production. It seems like the refineries have had a series of outages due to either planned maintenance or little fires and explosions and things of that nature. That's keeping gasoline fairly tight at a time of year when consumer demand starts to go up in the summer driving season. That's good from an ethanol standpoint, it keeps the demand up, it keeps the price of the ethanol up, keeps profitability up for those ethanol plants. So, I don't see any major issues from the, in terms of threatening corn consumption or biodiesel for that matter but certainly at some point the consumer spends too much money on the fuel and energy needs for their house and their cars and so forth and historically that has tended to cut over the long hauls has tended to cut into meat demand or other discretionary spending.

Pearson Okay, so ethanol demand, we know, through August of next year anyway is going to grow dramatically, we talked about it on the show, ethanol demand outstripping exports or at least equaling them. That's a huge factor and a huge change and like you say oil prices as strong as they are it looks like the ethanol juggernaut is going to keep going so this is real demand going forward which means for '08, Alan, how many corn acres are we going to have shift in '08? What do you think is going to happen?

Brugler: Well, I think based on the supply and demand as we know it today you're going to need another five to six million acres next year of corn over and above the 88-90 million that we're getting this year. And that becomes a real question mark, where do we pull those from? Can we get them out of dry land? Can we get them out of wheat? It would be helpful if the wheat crop was a little extra large this year because that might lend us another million or two acres. That's certainly going to play into USDA's scenario which is that corn stocks stay below a billion bushels each year for the next ten years, they don't see how we can expand acreage enough given the ethanol demand to really build up stocks and have the type of situation where you have to have $2 prices to move it.

Pearson Alright, well we're going to find out before much longer but the market is going to start focusing on '08 here before we know it and that shift won't they?

Brugler: Yeah, the '08 futures prices are actually holding on very well. They haven't succumbed to the sell-offs like we had in the old crop here over the last six weeks. They basically said we know we've got a problem somewhere out here and we're just going to maintain the incentives.

Pearson Alright, well we'll see what happens, of course, in the 2007 growing season too, we don't want to get too far ahead of ourselves but something I think producers need to be keeping in mind. Alan Brugler, as usual some great insights. I want to thank you so much for being with us and from all of us here at Market to Market, I'm Mark Pearson. Have a great Mother's Day weekend.


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