Pearson: This is the Friday, June 1, 2012 version of Market Plus. Thanks for joining us here at our Market to Market website. We're into June already. I don't know what happened. The spring has just zipped by. We are in a June dairy month already and Alan Brugler is on the show this week and with us here on Market Plus. A lot of great insights on the show, Alan, I appreciate that. Wanted to go a little bit deeper on a couple of items and we have got some great comments from our viewers we want to pass along as well. But I guess the big thing continues to be what is happening over in Europe and the dollar strengthening and you're not that concerned about the strengthening dollar being too much of a headwind for agriculture at this point.
Brugler: No, it tends to be a factor when we don't have a lot of other things going on fundamentally. And in the wintertime when we don't have crop to worry about yes, that tends to be a big factor. When you are in the middle of the growing season these fundamental changes have more of an impact on price. Typically the price movement for any dollar movement, the price movement is bigger in a percentage term. So, the dollar goes up one percent and the commodity goes down four percent, for example. It is not a direct relationship. I grant you that there is some contagion issues and what if the whole world goes into a synchronized recession, and that, I think is in the back of some people's head. But I think it is also possible that you got all these people crowding into T-Bonds that are really going to regret they did it because we're actually at record lows on the ten year notes, I believe. And when interest rates start to unravel, you loose money on those positions.
Pearson: I think what 1.3, 1.4, 5 or so 1.43 it finished up?
Brugler: Getting pretty low.
Pearson: Ten year treasury?
Brugler: The point is -
Pearson: They can't print enough of them.
Brugler: Yeah, you loose - but you loose principle when rates start to go back up.
Pearson: They teeter totter.
Brugler: At some point money is going to say there is no yield here. We're going to go back in the stock market. We're going to go back into real-estate. We're going to go back into something and people are going to get burned on that investment. So, it has this feeling of flight to safety, definitely. But we also know that it non-sustainable if you get down to where there is almost no yields.
Pearson: Absolutely and inflation should rear its ugly head and again you at some point you got to make some money. Ok. So the commodity world. Here is a question. I want to thank Jim G. and I want to thank Martin over in Carroll, Iowa and Matt out in Bow Valley, Nebraska and Dalson out in Plainview, Nebraska and Brianne here in Iowa, and they all had pretty much the same question. If this thing gets under pressure, if we do produce this, what 14.5 billion bushel corn crop, we do end up with 2 billion bushels of carry out, should we be looking at pricing some 2013 corn and soybeans right now?
Brugler: Yeah. If that is the scenario that we are going to develop, it is a multiyear decline. I mean history would tell us that. Ok, we're going to over produce and we're going to take a couple years of low prices to work it off. Yes. So, if that - we get into the middle of summer and it looks like we're going to have big of supply, you probably should be looking at some 2013 type hedges as well as your 2012. What I am hearing right now is very few producers have enough 2012 coverage on let alone 2013.
Pearson: 2013. That seems to be a recurring theme too is we have a lot of un-priced product out there.
Pearson: That is not a good thing right now at the rate we're going. I mean there is just a lot of bearishness out there right now and we do have some weather issues. Doug over in Lincoln, Nebraska sent us a note; a little dry over there, probably got a little bit of rain, they got a one inch in some of the dry land areas in Nebraska, Western Iowa. A good portion of Iowa, a good portion of Illinois, all seeing some stress maybe a little bit of a bigger impact on some of these later planted soybeans.
Brugler: Yeah, we hear a lot of stories about the later plant in soybeans struggling. Either the dry dirt situation or just getting out and then just not having enough water to support them. But we have to remember it is May, you typically can't, or June now, you really can't kill a corn or bean crop this early in the season typically. It is more of what happens in late June and July for the corn. It is what happens in August for the beans where you really drive the yield development. The thing I would caution people on is in weather, Mark. is there is always multiple time frames to focus on. Did it rain this week versus the 6 to 10 or 8 to 14 day forecast? The trade will jump back and forth quickly and if you - the old saying says “if you trade the news, you loose” and it is very easy to get crossways over a weather market. `
Pearson: Absolutely. Unless you can take advantage of it and make sales and not try, like you say, play it both ways. Ryan in Indiana also wanted to know about hog futures targets and what you are looking for there going forward on hogs.
Brugler: Well, we've got some targets in the mid-90s. The thing there is to look at your weekly/monthly charts. You have got some nice buy signals on the daily charts, the Junes, the August. The cutout typically rallies into late July or August. It looks like that move was slow to begin this year but it does look like it is underway right now. Basically we're long in the market. We have got short puts essentially that are a part of other strategies that we had and we're basically letting it work high right now. We don't have a concrete target in mind at this point.
Pearson: All right. Well, take that for what it is worth Ryan. Buresh sends in a question. I think it is Tim. His question is with the stronger dollar are we going to go back to four dollars like we did in 2010?
Brugler: Well, everybody wants to know that of course.
Pearson: I want to know it from you, Alan, right now.
Brugler: I think the new era, if you will, the new era pricing, would suggest that 350 would be the lowest you could go. And that would be an extended period of the surplus of supplies. But you have got to remember that as you get lower prices you do get more in demand.
Pearson: A musty old lecture is coming into my head from some old professor that told me that exact same thing.
Brugler: Somewhere in that Ag Econ Class, I think.
Pearson: Yeah, you will eventually pick up more demand as the price drops.
Brugler: Yeah, that is a common error is to factor in the bigger production and forget that consumption will respond to any change in price along that curve. So, you don't just take the existing demand estimates and say ok, we added all this production and now we have a surplus. You have to assume consumption is going to grow. Of course USDA does have that in their equation. They're looking for a big jump in livestock feed consumption this year.
Pearson: That's right and you mentioned wheat early and kind of taken itself out of the feed ration for awhile.
Brugler: Right which would tend to mean a little more corn will be fed this summer than what was probably in the balance sheets back in March and April and May.
Pearson: Final question. You talked about crude oil falling to the floor maybe what 77, the next stop technically, next stop there 71, what is that going to do to an ethanol plant? What is that going to do to and you mentioned lower gasoline usage, like you say over five percent reduction from year ago levels. What is this going to do to ethanol? I know we have got the mandate still, but what is it going to do to a plant profitability?
Brugler: Well, it is all in the function of the price of the ethanol and the price of the corn. All right? Ethanol is still a fairly big discount to gasoline even though energy futures have been dropping. So, we're able to move the product. In fact blending rates actually went up this past week. All right? Where we're running into a little bit of a problem is we were bleeding off the surplus ethanol through the export market. That has kind of slowed down. Brazil for the time being has got its sugar cane crop. They have got their own production.
Pearson: And that was pretty significant last year.
Brugler: Yeah. They had a big shortfall last year. They still don't have a very good crop this year. Our sources in the ethanol industry say that we will still export ethanol into Brazil but not in the immediate future.
Pearson: All right. Another demand factor there. Alan Brugler, as usual appreciate your insights. Thank you for being with us on Market to Market and of course here on Market Plus as well. And thank you for joining us on Market Plus. Glad you joined us. Make sure to tell your friends and neighbors if they haven't called their local public television programmer, if it is not available in their community, they need to contact that local public television programmer and say "Hey, you need to carry Market to Market on your PBS station." Otherwise joining us here again at Market Plus next week and on Market to Market on TV. On behalf of all of us here on Market to Market, I'm Mark Pearson, thanks for being with us. Have a great week.