Pearson: This is the Friday, December 23, 2011 version of Market Plus. Thanks for joining us here at our Market to Market website. Our analyst this week our old friends Alan Brugler and lots of ground to cover. I want to cover some more ground here in the Market Plus segment. Had a questions from a young man up in north country, up in Canada, named Phil and Alan he wants to know what the January 9th USDA Report could mean to the market and I like the way he put it. He said will it move the goal post for 2012?
Brugler: I think that is a good analogy, certainly could. One of the assumptions the market has is that USDA still has problems with the Grain Stocks Report or at least - let me - I don't think there is a problem with the Grain Stocks Report. I think there is a problem with the S and Ds that try to explain the Grain Stocks Report. So that one could be a game changer. We have had limit moves after each of the last four Grain Stocks Report. So that tells you that the market was surprised by them.
Brugler: I think for corn then obviously that is the one that has got the most variability. There is potential that there is problems with the ethanol estimate. There is problems with the feeding of or utilization prior to September 1st and also just the amount of DDG used versus corn use in some of these feed rations.
Pearson: All right. Well, we will be watching those with much interest because that's really going to be our next big catalyst short of weather in South America. I mentioned on the show you have got good contacts down in South America. I know that you talk to them often and try to get a feel for what is happening on the ground down there, and the hot temperatures, it looks like it is mirroring a lot of conditions we had in July in the Corn Belt.
Brugler: There are some similarities and we know that affected our corn yields part curly the high temperatures at night has become much better known as a yield factor over the last two years. And certainly they are going to get some of that. Now it is a little early for that. Again Argentina is just starting forty percent tasseling or pollination right now. So it is just starting to get into that period. But yes, they have had some 103 degree temps in Santa Fe. They have had high 90s in Southern Brazil and so there is some stress on the corn. Soybeans, as you know, it is early and they tend to kind of hunker down and wait until our equivalent of August and we are not quite there yet. So, it is more of a building in a weather premium than it is a hard forecast of losses at this point.
Pearson: I am taking everybody about ethanol because contrary to all the presidential candidates wandering around the Corn Belt talking about the ethanol subsidy, it ends at the end of this year, and so the blender's credit is going away and a lot of people are thinking what is that going to mean? Well, we still have a mandate out there now who knows what they are going to do with that in Congress going forward but for this year we still have that mandate in place. Do you anticipate still roughly five billion bushels of corn going into ethanol?
Brugler: I do for 2012, again as you mentioned, they are - the protective tariff as well as the blend credit. A factory down at theUniversity of Missouri has assigned a dollar value to each of those but they said the really big impact would be if we lost the mandate the RFS 2. I am told however the EPA is three weeks late now on announcing the RFS 2 levels for the coming year and the blend of advanced versus conventional ethanol and so forth. So that is a concern to me. I think the industry willingly gave up the blend credit saying we think we have a mature industry and we know we have got a home for the product. The concerns that I have, have to do with gasoline consumption being down as I mentioned. And also the fact that we have got some - certificates floating around like similar to the old PIK certificates in grain that can be used in lieu in actual ethanol to meet those EPA requirements. So if ethanol prices get out of line because corn got too high, for example, you might suddenly find yourself with people not using ethanol because they have got this paper they can use. That would put plants into a negative margin situation. But everything is kind of inter-related. You find that there were rumors that a couple Texas plants are going to shut down here because they are having to import corn at very high basis levels. The DDG prices immediately firmed up and soybean prices or soybean meal prices firmed up because if those plants go offline that means less production of the byproducts. It would also mean less production of corn oil which is becoming a major sideline for some of these plants. So it is not just an issue of making the ethanol.
Pearson: Absolutely but a mature industry, one that the oil industry has braced itself for, and developed itself for so and we have got to have an oxygenate is what they, the folks, down in the refining country tell me. So they are going to still use the product. So, hopefully that is going to continue as long as the mandate is there and the oxygenate requirement is there. Let's talk about livestock. You mentioned the Hog's Pick Report on Friday. Good report as far as the industry is concerned. Not nearly as bearish as what people thought. I asked on the show about whether or not we had some bigger numbers because we had some pretty big kill weeks in that seasonal time of October where maybe we - these genetics in swine have continued to improve where we are getting bigger litters.
Brugler: They are. In fact for the September and October period we had a record pig saved count again 10.02 pigs per litter. Before that the records was like 9.8 or 9.89. So, it is s small incremental change but it continues to go up. We know that there is more that can be done. I believe it is inDenmarkit is over 16 pigs per litter.
Pearson: Over thirty pigs per sow per year.
Brugler: Yes, there is more that can be done genetically and the industry is going that way. And that means basically you need fewer sows, smaller breeding herd to get the same amount of output. The trick is sizing your output to your market and the industry has actually done fairly well at that with a little assistance from the chickens. Ok. We didn't talk about chickens on the air.
Pearson: We didn't get into that but what are broiler sells doing?
Brugler: Well, they are still going down. Broiler placements and egg sets are both still running three, four, five percent per week below the equivalent week the year before. We are starting to see chicken prices go up, the breast meat prices and particularly the leg meat and wings always go up this time of year because of the bowl games and so forth. But the poultry industry thus far is resisting expanding and the result has been they are helping force their price back up but there is also a shortage of product. The Cold Storage Report that came out on Thursday said that the total meat in cold storage, that would be all species, was the tightest since 2003.
Pearson: That is extremely tight numbers and with the U.S.economy picking up and globally poultry is still in pretty good demand.
Brugler: Yes. We are seeing pretty good demand. It can be erratic. Russia takes it and then they say no and then they take it. But yes, globally it is still pretty good - in pretty good demand and the U.S.is down a little bit now because basically the industry lost a lot of money in 2011.
Pearson: Yes, loss some producers too in the last couple of years. So, as we go forward with overall protein outlook and this demand from overseas and coming back to pork again, you know, they have got a half trillion head of hogs in China. They have got a lot of them over there. They are using a lot of our feed but when it comes to picking up on those new genetics it has taken some time over there. So that is going to continue to be a strong market for us. Correct?
Brugler: They are going to expand. I think it is a niche market for us. It is going to be a price driver because they are going to say ok, pork prices are going up too fast right now because we had a little disease problem or some little mismatch in demand. So they will import a big chunk of U.S.pork and then all of the sudden three months down the road you have got more pigs coming on and they are out of the U.S.market. We used to see that in the grain market a lot with the Russians. They would be big surge buyers and then they - when they became the market, they got out of the market. China is going to be that way, I think. So, I am positive about export demand in general. There's weeks this year where forty percent of the U.S. production was export, but we - twenty percent is closer to an average and I think we are now gearing up to have that be a regular feature of the market.
Pearson: That is going to be interesting to follow this global economy as it impacts farms and farmers and ranchers across theUnited Statesand of course we pause this week to wish everyone the absolute best this holiday season. Alan certainly of you and your family and from all of us here on Market to Market happiest holidays to all of you. Thanks for joining us and more Market Plus next week. Have a great week.