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Market Plus: Jun 23, 2006

posted on June 23, 2006

Market Plus: Jun 23, 2006

Swalwell: Hi and welcome to Market Plus, part of the Market to Market Web page. I'm Rick Swalwell sitting in for Mark Pearson. And joining me this week is our analyst and expert Alan Brugler. Alan, thanks for being with us.

Brugler: Good to be here.

Swalwell: And let's begin the discussion by talking about something a little bit different and talk about gold prices versus grain prices or the implication of gold prices on the grain market. It's kind of an interesting discussion we had earlier.

Brugler: Yeah, I've had a couple of questions recently about gold. Gold hit the highest price since 1981 here within the last two, three weeks and then it sold off rather abruptly. And corn had been fairly strong up through the spring and people were asking, well is there a correlation between gold prices and what goes on in the grains. And so we looked back at 1980 and '81 and looked at the price behavior in the corn and soybeans versus the gold. What we found was there really wasn't a lot of correlation back in the 80's. They, over the long period, over a ten year period the correlation coefficient is almost zero which means they are unrelated. However, within the last 180 days we've seen a much stronger correlation between the grains and the gold and that suggests to me the impact of these index funds. We've talked about those on the show a couple of times, they can buy a basket of commodities expecting the group to go up, not necessarily the individual components. Well, that would explain why when there had not been a good correlation or good relationship between corn and gold that suddenly there was a little bit of a correlation because the same buyers are buying both. Unfortunately it's not a very strong relationship and it won't overpower the fundamental pictures in corn here. The weather, the ending stocks, the long-term demand through ethanol are going to still be the main drivers in the corn market I think.

Swalwell: Alright, so an interesting little factoid but not a big driver in the market.

Brugler: We could hope to get excited for the big gold rally but it doesn't look like it has to drag corn along with it.

Swalwell: Alright, switching gears a bit then, a lot of activity going on with biodiesel, alternative fuel and plants popping up everywhere. What kind of an impact is that having on the markets tied in with this latest census report that came out?

Brugler: Well, the census crush report this week, of course, gives us stocks levels for soybean oil and soybean meal. The soybean oil stocks at 2.88 billion pounds are getting about as big as they ever get. I think we've been over 3 billion pounds once. This was actually the largest number since 2002. Normally that would really knock the soybean oil price down, we'd be down trading at eighteen cents or nineteen cents a pound instead of twenty-four cents. I think the reason we're holding in there is because of the biodiesel argument. We don't really have that many biodiesel plants processing yet. But we've got a number of them under construction. We know that once they're all running we're going to be using a billion pounds or a billion and a half pounds a year of oil over time and that that big pile is going to disappear. So, we're maintaining a little bit of a price premium based on the premise that we're going to have biodiesel down the road. And, of course, to the degree that heating oil/diesel fuel prices are high that just makes that soy oil all that more valuable down the road.

Swalwell: Now, if the strength continues and even more plants are in development and come online what long-term impact do you see happening?

Brugler: Well, the long-term impact is we need to have soy oil production as we -- we can only live off of that surplus for a finite period of time and if we get in a situation where the ethanol plants are causing need for more corn acres and the soybean oil consumption through biodiesel is calling for more bean oil then it would get into a situation of bidding for acreage. And that is one of the farmer's favorite scenarios where both markets are going higher trying to make sure he grows that commodity.

Swalwell: Alright, thanks Alan. I'm Rick Swalwell, that's Market Plus for this week. Thanks for tuning into Market to Market Web page. I'm Rick Swalwell sitting in for Mark Pearson. On behalf of Mark and the entire crew here at Market to Market, thanks for watching and we enjoy you to come back again next week.


Tags: agriculture commodity prices gold markets news