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Market Plus: Oct 21, 2005

posted on October 21, 2005


Market Plus: Oct 21, 2005

Pearson: Welcome to the Market Plus site here at our Market to Market Web site. We're glad you've joined us. Make sure you tell your friends and neighbors. I'm Mark Pearson. With me this week, Alan Brugler, one of our regular market analysts. And Alan, a couple of interesting things going on. First of all the soybean market. I asked you on the show because I hear this a lot about whether or not the trade is focusing on South America and you say yeah, a little bit. I mean, it's certainly going to be a factor going forward. You're kind of convinced they're going to plant the acres down there.

Brugler:: Yeah, I think the acreage is there. The Argentines will be up because they didn't plant their corn and actually wheat acreage was off a little bit too. They're going to plant. The Brazilians anywhere from two to five percent less acreage it sounds like. But, again, most people are going to plant because you spent the money, you spent the $500 or whatever an acre to clear it, you've got your fixed investment and a lot of, in the northern areas a lot of those beans are bin run anyway. So, you just go to the bin and get some beans and put them in the planter. The bigger question will be how much fertilizer do you put on it? Do you stick to your spray schedule? Are you as aggressive about spraying for the soybean rust as you should be? Or do you wait until that last second to do it because it's expensive and you don't have the money? So, the yield variability is probably there. Moisture wise they're in pretty good shape going into the season.

Pearson: At this stage of the game you don't want to bet against the crop?

Brugler:: I don't want to bet against the crop and we've got to remember, we do have 250 million bushel carry out plus or minus 100 million depending on where USDA ends up on production. And we've got to make the exports. And right now our export sales out of the U.S. are lagging a year ago and I do have some concerns about Chinese demand. So, those are factors besides what is going on in South America.

Pearson: Two diseases I want you to talk about. This is not an animal health show. One, avian flu. Impact there? I mean, in terms of the poultry herds what could we see?

Brugler:: Well, the poultry flocks, we're liquidating poultry flocks and the scary part about this one is they're finding it so scattered out. We found it recently in Mongolia, we found it in Bulgaria, in Croatia, in Russia and in all those cases it is the H5N1 which is the most virulent and deadly strain. So, there is a problem there in we're going to be fairly aggressive in liquidating flocks that are anywhere in the vicinity of an outbreak. That has a short-term impact in that it will cut previews whether it's soybean meal or corn, some ____ crops in parts of that area. So, the trade in the short-run is hunkering down and assuming less meal demand, the European crushers are basically not wanting to bring in many U.S. beans right now. There is a back lash to that though and that is if we reduce the poultry consumption then people go to substitute meats. You go to your beef, you go to your pork and there may be some opportunities there for some additional export sales of beef or pork within the world. Now, whether the U.S. can crack those particular markets with beef it remains to be seen. But certainly pork would have some additional opportunities if this outbreak continues to spread and we end up with a lot of liquidation. So, taking that one step further if you have more pork exports then you have more hogs that need to be fed here in the U.S. and whatever grain demand we might lose to those countries we pick back up but later. Later is the key.

Pearson: Alright, so that was one disease. The other animal disease is Brazil. I heard a couple of economists talking that some of the major integrators are talking about going down and expanding more into South America. Brazil has foot and mouth disease. How does that play out?

Brugler:: Well, basically it's shutting off a lot of their beef exports right now. There are at least 33 countries that have banned Brazilian beef imports for the moment because of foot and mouth disease. The disease itself doesn't affect humans but it's hard on the herds of livestock in the importing countries. So, it constrains our exports until they eradicate it and it's been a lingering problem particularly in the southern part of the country along the Argentine and Paraguay border. So, I think that is going to be somewhat limiting for Brazilian exports. I can tell you the Brazilian producers really want to get into value added exports, they want to do a lot more beef and pork and poultry exports. They are major exporters of all three of those to other countries. But I think it is a limiting factor for expansion just as the Asian rust was a little bit of a limiting factor for them on the bean side.

Pearson: We ran out of time when we were talking hogs. And just real quick, you mentioned it and that is the big question, why is there, why are we not seeing the expansion? We've had the profit run that we've had in these hogs for the last 13, 14, 15 months. What is ahead for pork? And what would you be doing strategy wise right now?

Brugler:: Well, I think the number one thing to remember is these are profitable prices. If we're getting a sell off you need to have hedge protection. You've got to have short futures, you've got to have long puts, you've got to do whatever you can for contracts, you've got to do things to protect those $64, $63 prices. The average annual trading range in hogs is almost $30 per hundred weight. The high was in the $79 to $80 range so we have risk down at $50 over a twelve month period and we're in the middle of that range right now. So, there is down side risk. We don't want to give up the profits we have. I think the key is probably watching the wholesale market. The lean pork cut out has been dropping. Last year it was as high as $84, now it's trading $63, $64. If that thing starts to turn higher then we can get a little more optimistic on hog prices. But it's been under fairly steady pressure and that makes me defensive until it turns around.

Pearson: Some good points as usual. Great insights. Alan Brugler joining us this week on Market to Market. I'm Mark Pearson. For all of us on Market to Market have a great week.


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