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Market Plus: Apr 28, 2006

posted on April 28, 2006

Market Plus: Apr 28, 2006

Pearson: Thanks for joining us here at our Market Plus Website here on Market to Market. I'm Mark Pearson. Alan Brugler with us this week. Always has some great perspectives on what is going on in the commodities markets. And, I want to talk to Alan about a couple of different things. And we alluded to it briefly on the show and it's not the kind of thing we could really get into in depth on the show. The money is pouring into Chicago. Now, I thought it would kind of come in, in January, about 100 billion dollars of, I don't know, what do you call it? Investor money? Or long-term institutions putting money in Chicago? But they all just kind of showed up and markets went up and, I mean, it's been my experience and I could be wrong, but usually those Chicago guys there in the pits, when they see that new money coming it's always a matter of time until they, you know, cut their legs off. What is your take on this and is that money still rolling in?

Brugler: We're still seeing some money roll in from outside. In fact, part of the reality on Friday was anticipation that as the calendar turned to May that there might be some additional outside money coming in. The bottom line is commodities have been going up. The DBC, which was the exchange trading fund that was rolled out in February, has now recovered from its initial sell off and is showing a gain for the year. That is telling some of the Wall Street types that maybe they could continue to put some more money in. We had the oil futures index fund, the USO has started trading, silver and gold are buoyant as I'll get out. And so bottom line is that these guys are not getting much of a signal to quit investing. Now, we've got some pretty good examples, cotton and cattle being two where all of a sudden the trend turns negative and then it gets really ugly because everyone wants out at the same time.

Pearson: Right, everybody is heading for the door.

Brugler: And that definitely could happen at some point in corn or soybeans, particularly if the hedge funds and the manage futures guys all decide to sell at the same time. The index investors, the ones that are buying whole baskets of commodities, they're pretty much in there for the long haul. They'll ride it out because they can't get out of individual parts of the index at one time. But, again, the story is there is outside money coming in that values these commodities or at least the energy components of these commodities as something that they want to own and control for the long haul. In many cases, they are buying December of 2008 corn with the assumption being that sometime between here and 2008 we'll have so much ethanol demand or a crop problem that $3 December '08 corn will be worth $3.50 or $4. I had one Chicago based broker say $5. I haven't gotten used to that yet myself but, again, they are willing to own it that far out because they're just convinced this is a long-term change in the supply/demand picture.

Pearson: Literally a structural change in how we think about commodities.

Brugler: Where it really gets interesting is if we were to have some type of a crop problem, a shortfall in production then it becomes a question of who is bidding on the grain. The ethanol production industry with the current profit margins in ethanol, cost of production versus the retail price, can afford to pay over $4 for corn and still be profitable. So, the exporter becomes the vulnerable player there. He's got a higher freight cost than the ethanol plant. What happens if China or Japan or one of our other major customers decides they don't want to allow the ethanol plant to have the corn, that they need it? We could get a little bidding war going. That is, again, this is long-term. It doesn't have to happen even this year. But that is what some of the logic is with these folks that are wanting to put money in.

Pearson: Well, you mentioned on the show that soybean oil was leading the rally. And then we were talking about energy prices. Is that what's driving -- I mean, I didn't see a particular increase in mayonnaise demand. So, if the food side of this issue didn't drive anything was that just people watching crude oil going up?

Brugler: Crude oil and particularly diesel fuel, heating oil. The heating oil market is where that biodiesel blends in, into diesel and soybean oil was up 300 points this week which is a huge move. I'm sorry, not this week but over the three week period. And, again, it tracks closely on the chart with what has been going on in the heating oil. There is a very speculative market there. It's not one that has a lot of sellers right now. Again, the seller in the soybean oil is going to be the domestic crusher and it's to his advantage typically for that market to rise before he sells it. So, he's kind of playing along and letting it go up. But, again, there is an inflation component to this and then there is this energy component to it. And the offset, of course, would be if everybody wants out it could get ugly going the other way. But for now the market is very buoyant.

Pearson: The market is very buoyant right now. Alan, you've been around a long time, a lot of people respect your opinion, they get your newsletter, they track you. Is this thing overheated yet? Have we seen all the people on board that could get on board in the commodities?

Brugler: I don't think they're all in yet. But it does have some similarities to the 1970's. It has some similarities to the stock market bubble in '99 and 2000. You're seeing this proliferation of new investment products that are commodity based. Just like we had text stocks that didn't have much of a basis to them. You're seeing that a lot of products mainly created to capture that money flow.

Pearson: Excellent, Alan Brugler, some great insights as usual. Appreciate your being with us on Market Plus. I'm Mark Pearson. For all of us on Market to Market, have a great wee

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