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Market Plus: Dec 23, 2005

posted on December 23, 2005

Market Plus: Dec 23, 2005

Pearson: Welcome to the Market Plus page here at our Market to Market Web site, glad you've joined us. Hope you have a great holiday. Alan Brugler is with us this week, one of our regular market analysts. And Alan, it's been a wild year in 2005 across the spectrum of commodities from the soybean rally to the fear of drought to Katrina and oil prices exploding. Everyone seems to be interested again in the commodity markets including Wall Street. And they're starting to package a lot of funds and we're hearing that a lot of dollars could be in the market starting in January that are new to the market, people thinking they need some exposure for their portfolios in the commodity world. What is that going to mean for producers?

Brugler: Well, it means that you've got almost, it's not a non-financial buyer because clearly they are financial buyers but it is a non-commodity buyer. It is someone who is saying that commodities as an asset class may be undervalued, that they're looking for that market to go up. And typically these, particularly the index funds are only on the buy side. So, it's net buying pressure in the market. And therefore it could mean higher prices. Certainly part of the price action that we saw in December was the shorts, the sellers in the corn, beans and wheat getting out of those short positions because they were afraid of this new buying that might be coming in after the first of the year.

Brugler: One of the main factors that everyone is looking at is the Dow Jones AIG index which re-allocates the percentages of each commodity that are in it once a year and it's already published that they are going to increase the allocation of corn by almost a percentage point, same thing for wheat. And when you apply that to the number of dollars that are tracking that particular index it has the potential for anywhere from thirty to a hundred thousand contracts of corn to be bought after the first of the year. This is new buying, new money coming in and in the corn market certainly that could push prices up. I'm enough of a cynic to think that there are current participants in the market who would love to sell it right after that and relieve those new guys of their wallets. But I think there is a potential there for a little bit of a price surge just because this money isn't that price sensitive about a particular commodity. It's looking at a basket of commodities.

Pearson: Not unlike the changing of a stock inside like the S&P 500 where you might see some increased activity for a period of time in that new stock that is going into that index fund.

Brugler: Very good analogy, Mark.

Pearson: Alright, so we need to be on top of that. It also introduces a lot more liquidity into the market and a lot more folks in commodities which typically that has been a benefit to producers.

Brugler: That's a benefit, it narrows the bid spreads, it allows you as a trader or a hedger to get a better fill. It's a two edged sword because volatility pushes prices up and volatility pushes prices down. But if you're good at tracking those it gives you some opportunities perhaps to sell the commodity for a little more than your normal buyer would think it was worth.

Pearson: I want to talk about energy prices. In western Nebraska I've talked to producers around Lexington and Elwood, I mean, they are concerned about what diesel costs are going to be and what irrigation expenses are going to be and they're talking about raising more soybeans, less energy intensive corn. Are you picking up on that? Is that going to be significant?

Brugler: I'm hearing a lot of that, Texas producers saying the same things down around Lubbock and Amarillo basically wanting to go to more wheat because it's less irrigation intensive. Now, down there they use natural gas to drive the irrigation but it's the same issue. Energy costs are too high and of course the energy also passes through as higher fertilizer costs. So, I think there is some pressure to switch crops but at the moment we can't quantify that as being more than one or two million acres going out of corn into soybeans or into wheat. We think wheat acreage is up, the winter wheat is up about three percent. That was a switch from corn and soybean ground because of energy for the most part. But the wild card of course is what is my fuel going to cost this spring and what is my fertilizer going to cost. And because of the cushion that we've got in ending stocks in corn and soybeans I think the market is going to be very cautious about assuming that it has to bid up prices to get acreage.

Brugler: We have to remember the market doesn't care if an individual producer shows a profit or not, it just cares if the production is there, if the supply is there to meet the demand. They don't care what your input cost is. We have to, in order to have a serious acreage rally based on the energy costs or a price rally based on energy costs we have to see some viable threat that one of those crops isn't going to be planted.

Pearson: What is your best guess on energy prices for 2006?

Brugler: I'm still in the camp that the Katrina probably put in the high on the crude oil market. I think we're certainly vulnerable to shocks. We saw a little spike this week when the Nigerians dynamited one of their pipelines. But I think we had that panic there that kind of set the bar where the high price level is. Now, that is not saying it's going down tremendously. My technical tools say $54 on crude oil is probably good support.

Pearson: Okay, alright we'll keep that number in mind. Thank you so much Alan. Alan Brugler joining us this week on Market Plus. I want to thank him and from all of us here at Market to Market wish you all the best this holiday season. I'm Mark Pearson.


Tags: agriculture commodity prices markets news oil