Iowa Public Television

 

Market Plus: Aug 15, 2003

posted on August 15, 2003


Market Plus: Aug 15, 2003

Pearson: WELCOME TO MARKET PLUS HERE ON OUR MARKET TO MARKET WEB SITE. WE'RE INTRODUCING A WHOLE NEW ANALYST TONIGHT, VERY EXCITING, ALAN BRUGLER JOINS US AND HE'S AN OHIO STATE BUCKEYE SO HE BRINGS SOME REAL DIVERSITY TO OUR MARKET TO MARKET LINEUP. ALAN, WELCOME ABOARD. I WANT TO TALK ABOUT SOMETHING WE DIDN'T GET TO DURING THE SHOW BECAUSE OF OUR USUAL TIME CONSTRAINTS AND THIS IS GOING TO TAKE A LITTLE BIT OF TIME. BUT THERE'S FOLKS OUT THERE WHO ARE LOOKING AT CROP PROSPECTS BEING DIMINISHED AT THIS STAGE OF THE GAME. YOU'RE LOOKING AT LOSING OUT ON THAT COUNTER CYCLICAL PAYMENT, YOU'RE LOOKING AT LOSING OUT ON LDP BECAUSE YOU SIMPLY DON'T HAVE THE BUSHELS IF YOUR PRODUCTION IS DOWN. GIVE US A STRATEGY THERE.

 

Brugler: WELL, I THINK, AGAIN, THE POINT IS THAT YOU'VE GOT REVENUE THAT THEORETICALLY IS THERE NOW THAT WON'T BE THERE AT HARVEST IF YOU'RE THE UNLUCKY ONE WHO IS HELPING TO DRIVE THE NATIONAL PRICE HIGHER. SO, WHAT WE'VE LOOKED AT THERE IS SOMETHING LIKE A CALL SPREAD, A VERTICAL CALL SPREAD, BASICALLY BUYING A CALL, ANTICIPATING THE MARKET TO GO UP. IF THAT CALL IS FAIRLY EXPENSIVE BECAUSE OF THE VOLATILITY IN THE MARKET YOU CAN EITHER MAKE IT A VERTICAL SPREAD, SELL SAY A SIX DOLLAR CALL AGAINST AN AT THE MONEY CALL THAT YOU'VE PURCHASED OR WE HAVE WHAT IS CALLED A THREE WAY OPTIONS SPREAD AS WELL WHERE YOU'D SELL THE CALL BUT ALSO SELL A PUT DOWN BELOW THE MARKET. THEY KEY IS THAT IF YOU DON'T HAVE THE BUSHELS YOU'RE LOSING THE REVENUE, YOU'LL MAKE UP SOME OF IT ON THE CASH MARKET WITH YOUR REMAINING BUSHELS BUT YOU REALLY HAVE AN OPPORTUNITY COST THERE FROM THE MISSING CCP AND LDP THAT YOU'RE TRYING TO HEDGE.

Pearson: EXACTLY, SO THIS IS A WAY TO STEP IN THERE, UTILIZE OPTIONS AND HOPEFULLY, IF THINGS GO OR CONTINUE TO DETERIORATE IN TERMS OF CROP CONDITION AND PRICES CONTINUE TO IMPROVE, SO YOU'RE GOING TO SHARE AT IT.

Brugler: RIGHT, THE THING YOU DON'T WANT TO HAVE HAPPEN IS THE MARKET DOESN'T GO UP. YOU'RE THE ONLY ONE THAT HAS THE CROP PROBLEM BECAUSE IN THAT CASE THE HEDGE WON'T WORK OR THE REPLACEMENT HEDGE WON'T WORK BECAUSE YOU DON'T HAVE THE MARKET ACTION THAT YOU NEED TO MAKE IT GO.

Pearson: EXCELLENT, NOW YOU HAVE CLIENTS WHO WERE LOOKING AT THIS ON COTTON?

Brugler: YES, WE'VE GOT SEVERAL IN COTTON IN WEST TEXAS THAT ALREADY KNOW THEIR CROP WAS NOT GOING TO BE VERY GOOD. THEY'RE GETTING A LOT OF FEEDBACK PARTICULARLY WITHIN TEXAS THAT THAT'S GOING TO DRIVE THE US MARKET HIGHER AND THEY KNOW THAT THEIR CCP ON THE LINE AND LDP FAIRLY SUBSTANTIAL IN COTTON BUT THEY'RE GOING TO LOSE IF THEY DON'T DO SOME KIND OF ACTION TO PROTECT IT.

Pearson: ALRIGHT, LET'S TALK ABOUT THE LIVESTOCK MARKET AND PARTICULARLY FEEDER CATTLE. YOU MENTIONED WE HAVE AN INTERESTING SITUATION GOING ON RIGHT NOW IN TERMS OF THE CASH MARKET WHICH HAPPENED ON THE FEEDER MARKET AND THE INDEX AND THE FUTURES AND PRODUCERS NEED TO BE AWARE THAT THESE CATTLE ARE GETTING PRETTY PRICEY.

Brugler: YEAH, THERE'S ALWAYS A TENDENCY WHEN WE HAVE A RUN OF HIGH FAT CATTLE PRICES TO BID THAT MONEY INTO THE FEEDERS AND IF YOU LOOK AT THE CME FEEDER CATTLE INDEX THE LAST COUPLE OF DAYS, DAILY AVERAGE HAVE BEEN RUNNING $93, $94 WITH GUSTS OF UP TO $100 FOR CERTAIN TYPES OF CATTLE. YOU KNOW, SO THE FIRST STATEMENT IS, YOU'VE GOT TO BE CAREFUL NOT TO OVERPAY HERE. I DON'T SEE THE SITUATION BEING JUICY ENOUGH THAT YOU CAN BUY THEM ON THE COME AND BET THAT YOU CAN HEDGE THEM FIVE DOLLARS HIGHER LATER. THE OTHER POINT IS THAT THE CASH INDEX, WHICH IS WHAT EVERYBODY IS ACTUALLY PAYING, HAS GOTTEN AHEAD OF THE BOARD OF TRADE, EXCUSE ME, THE MERCANTILE EXCHANGE AND THAT'S PROBABLY TENDING TO PULL UP THE AUGUST FEEDER CATTLE CONTRACT A LITTLE BIT HERE.

Pearson: AND AGAIN, YOU DON'T WANT TO BE PAYING TOO MUCH FOR FEEDER CATTLE AND BANKING ON THE FACT THAT CORN PRICES ARE GOING TO BE SOFT BECAUSE YOU REALLY CAN'T BANK ON THAT BIG OF A CROP AT LEAST CURRENT TO USDA.

Brugler: AND A LOT OF OUR CATTLE ARE FED IN THE WESTERN CORNBELT WHICH IS THE AREA THAT'S GOT THE MOST CONCERN ABOUT DRYNESS RIGHT NOW.

Pearson: SO, A COUPLE OF CAUTIONARY, A COUPLE OF YELLOW FLAGS GOING UP IN THE CATTLE FEEDING BUSINESS RIGHT NOW. ALAN, APPRECIATE YOUR POINTING THEM OUT TO THEM, INTERESTING STRATEGY TOO ON PICKING UP MAYBE SOME OF THOSE GHOST BUSHELS THAT WE MAY BE LOSING ON THE LDP AND CCP PAYMENTS IF OUR CROP IS DOWN, WE DON'T HAVE THAT PRODUCTION. WE'LL FIND OUT FROM THE WEATHERMAN WHAT'S GOING TO HAPPEN NEXT. ALAN, THANKS SO MUCH, WE APPRECIATE IT. ALAN BRUGLER JOINING US FOR THE FIRST TIME ON MARKET PLUS. THANKS FOR JOINING US HERE AT THE MARKET TO MARKET WEB SITE. I'M MARK PEARSON, FOR ALL OF US ON MARKET TO MARKET, HAVE A GREAT WEEK.


Tags: agriculture commodity prices markets news