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Market Plus: Nov 25, 2005

posted on November 25, 2005


Market Plus: Nov 25, 2005

Pearson: Welcome to the Market Plus segment here at our Market to Market Web site. Glad you've joined us, glad you've found us and hope you join us here every week. With us this week Alan Brugler, one of our regular market analysts. And Alan talked about a lot of things on the show. But we also wanted to talk a little bit about what is going on specifically in this soy complex. You mentioned a couple of times the two keys going forward are going to be the South American crop but also you mentioned exports are going to be critical. You also mentioned there is a lot of product meal and oil, I assume, down in South America. So, what is a soybean producer to do?

Brugler: Well, I think we've got to look at the demand side. That is where we're at right now. We've already produced our crop, it's a 3 billion bushel crop. We've got, according to the census report this week, we've got 1.8 billion pounds of bean oil that we've got to move. That is a very comfortable level after being down to a billion pounds last year. Soybean meal evidentially is not moving as quickly as it had been and that is to be expected as we get into the peak of crush. We had record large soybean crush during the month of October. We're putting out a lot of product. But in order for beans to go up we have to have the meal and oil go up. You can -- the value of beans is pretty much the value of the meal plus the value of the oil plus a small processing margin. And right now we've got a problem with a little bit too much meal and too much oil. I think we're going to see an improvement in Chinese imports but we've got to get past their harvest, get rid of their domestic supply and we've got to see some kind of a resolution on the Avian Flu. And we saw a slowdown in the European imports of soybean meal but that has now come back. We're starting to see some fill-in business there. South America is the long-term because that is essentially our competition for the supply that we've got left. If we don't sell it between now and March or April we're competing with their supply. So, if they do have crop problems they've got a reduced supply available, that is good for our prices. But at this point we don't have any real weather problems we can hang our hats on down there. We're looking at spray and wondering if they've got the money to spray for Asian rust three or four times.

Pearson: Brazilian farmers didn't make any money last year they said.

Brugler: They had a terrible time and actually in many cases two years in a row they've had very poor financial results. There are farms for sale down there. There are, unfortunately, American farmers that have farms for sale down there. So, yeah, a third bad year in a row would really hammer them. And I think it's proving that it's not the glamorous make money every year kind of environment that some people thought. But having said that we're in a situation where we've got surplus production here, that 350 million bushel ending stocks could easily be 400 million bushels if we don't get our export sales up. And the key to getting out of that hole as it was last year is the size of the South American crop and how much is available in the world market.

Pearson: Alright, so those will be the two keys. I had a good friend of mine, a good sized farmer over in Illinois call me this morning, he was saying, you know, I don't know how we justify these current soybean prices with the amount of carry out that we have plus what we have down in South America. And he was making the point that you needed to make sales.

Brugler: Well, and actually as I mentioned on the show we have covered all of the unsold beans with long puts to give us a down side protection. We think that the combination of that, of those puts and basis improvement will allow us to get a final selling price that is higher than what we had at harvest. But I would agree with your friend that 350 or 400 million bushel carry out does not justify these price levels. We were much lower a year ago with very similar inventory. The one big difference is the funds were heavily net short soybeans a year ago, they're holding very close to even money this year because they got caught last year when the South American problem developed, they were on the wrong side of the market and it took off and bled them pretty hard. So, that is probably the main reason prices aren't as low as they were last year. But we could easily still go there.

Pearson: I want to talk about hogs. We didn't talk about them very much on the show. And, again, most of the hogs that were sold today are under some kind of a marketing contract. But the impact that they have on all the other proteins and you mentioned the poultry situation with China, the pork business could become, we could see some demand driven there for U.S. pork. So, the Avian Influenza on that end of it could be good news for U.S. producers.

Brugler: Yeah, I think there is some hope there that there will be some fill-in business. We haven't really seen it yet. Pork exports have been excellent all year, don't get me wrong, but we haven't seen that extra surge since the Avian Flu outbreaks have become headline news. I think the market is trying to price in that possibility but we're still about almost 20 dollars below the peak in the lean cutout value. A year ago at the top we were $84, those cutouts have been trading $64, $65, $66. Historically that is still not a bad price for the value of a hog but it's not as good as it was. And to get another leg up we've got to see some improvement in exports because we're not likely to see a cutback in production in the U.S. We're seeing slow growth but we're not likely to see a cutback because hogs are still profitable.

Pearson: Have we so vertically integrated the hog business that it has become more like poultry where production on pork is really tempered more to what consumer demand is? We're going to see more of this kind of price stability?

Brugler: Well, I think we have more institutionalized hog production than we did. We don't have the seasonal flux of in and out. Now, we still see a seasonal rise in numbers in the fall and in the spring again. And that is part of the problem with hogs right now is we're killing over 2.1 million head a week and the market has trouble dealing with that much pork output. But yes, I think it's probably stabilized a little bit. My biggest concern is because there are larger entities though, if all those larger entities suddenly do decide to expand they may not be able to move that product in the market and we get a 1990's type crash, not necessarily the disaster we had in '98 but certainly it's still possible to over expand and it could even be worse than other times if all the big guys all decided to do it at the same time.

Pearson: As usual some great insights. Alan Brugler with us this week. Thanks for being with us on Market Plus and thanks for watching Market to Market. From all of us here on Market to Market have a great week.


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