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Market Plus: Aug 26, 2005

posted on August 26, 2005

Market Plus: Aug 26, 2005

Pearson: Welcome to the Market Plus segment here at our Market to Market Web site, I'm Mark Pearson. With me this week one of our regular analysts, Alan Brugler. And Alan, you've had a couple of interesting experiences this week. Everybody is wondering, let's face it,the soybean world now was Brazil and Argentina. I mean, we're a secondary supplier in the United States. You've had a chance to work with some folks from down in Brazil involved in soybean production and agricultural production down there. What are you picking up? We're hearing all kinds of stories what might happen down there.

Brugler: Well, they clearly have taken a financial beating over the last 12 months. They're victimized by the high input costs, the same thing that we're seeing with the fuel and the fertilizer, very heavy on imports of those goods. The Brazilian Real has gone up and that has caused them some problems on the currency translation. And, of course, they've got the little matter of twenty percent interest rates to deal with. And right now there is negotiations to try and work out a financing scheme with the government down there. But what I'm picking up from my sources in the economic community down there is that most of the producers are going to find a way to plant the crop. Certainly the existing acreage is going to find something to be put on. They may skimp on inputs but they'll find a way to plant beans, they'll find a way to plant corn and cotton and so forth. One of the interesting things I heard was stated by Anderson Val Gomez, who is the head of Solaris, one of the forecasting firms, he said that every Brazilian soybean farmer desires to be a cotton farmer. That is their dream is to get out of soybeans and get into cotton. I think that is not a perception that most American producers have, that if they had the financing and they had the management skills those guys would be switching to cotton. It does take about five years after the land has been opened up before they can go to cotton. But maybe in the long run this Brazilian soybean expansion turns out to be less of a problem. The other thing that I picked up though is the real pecking order down there is the cattle ranchers are the guys that have the land and no money. So, the bean farmers get some money after a couple of good years of growing beans, then they go and buy the ranchers ground and turn it into soybean ground and then eventually a few years later the cotton comes in. Now, that is why they have the big WTO case on cotton though because they want an unfettered market so that they can sell more cotton.

Pearson: And they're paving the way. So, next year we're going to see more beans, more acres down in Brazil? Do you have a clear feeling on that yet?

Brugler: What we're thinking right now is at most a one percent increase in soybean acres down there and that is mostly because of expansion that was done six or eight months ago on new lands. The yield is a bigger question market because of the input issue but it looks like they're probably going to plant as much as one percent more and you'll hear stories anywhere from five percent less to five percent more. But we're thinking a very modest expansion. The big question will be if the yields recover from the drought that they've had the last two years. That can account for ten million tons right there.

Pearson: And, of course, that accounts for our rally in 2005 in the U.S. soybean market. It really was the South American crop.

Brugler: Exactly, and what we don't want to see is a 2.85 billion bushel crop here coupled with a 60 million ton crop in Brazil and a 40 million in Argentina because even the Chinese growing as fast as they are can't absorb that many beans.

Pearson: Alright, bean outlook domestically some basis issues here in this country. Get through those but what are we going to do this year for beans?

Brugler: Well, I think the ending stocks should be somewhere in the 150, 175 million category depending on how the crop size turns out. But if we're in that category you shouldn't see the nearby bean futures go below $5.50, I'm really looking for $5.73, $5.75 right at the moment. And then you look at the average annual trading range which is over 2 dollars a bushel. So, there is potential to go up into the sevens again next year if there is any threat to the acreage here in the U.S. or if the Brazilians have another problem. Lacking that threat, $6.50, $6.75 is probably all we can do.

Pearson: Alright, about thirty seconds or so, we didn't talk a lot on livestock and I just want to mention quickly, we were in a little bit of a rush tonight on the show but I wanted you to talk a little bit about the fed cattle market. You're not unfriendly there?

Brugler: I'm not unfriendly in the short run. I think we've got typically the third quarter has got the lowest cash prices so I can see a little bit of a pick up in the fourth quarter. We do have one big problem and that is we've got too much meat in general, we've got too much chicken, too much pork, too much poultry. All three categories are up year over year by two, three, four percent. Actually broiler slaughter has been up more than that. And we need the export market to take some of the steam off there. And if we're unsuccessful in growing that quickly enough I think there could be some pressure yet across the entire meat industry but not specifically cattle.

Pearson: As usual some great insights, Alan Brugler, thank you so much. That will wrap up Market Plus for this week. From all of us here on Market to Market, I'm Mark Pearson. Have a great week.


Tags: agriculture commodity prices markets news