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Market Plus: Market Analyst Alan Brugler

posted on August 3, 2012

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Pearson: This is the Friday, August 3, 2012 version of the Market Plus segment. Joining us now is Alan Brugler.

Brugler: It is always a pleasure.

Pearson: Well, thanks for being here. Let's talk a little bit. Phil in Canada has a question. How will the early harvest start of corn affect the traditional USDA Reports in September, October, and on into January?

Brugler: Well, I think the real question here is are we going to use a bunch of new crop corn in the old crop slot, that is in August, and the answer is yes. Old crop supplies are fairly tight. We are going to pull some bushels ahead with the early harvest there is theoretically more of those bushels available. And what it will tend to do is result in fourth quarter use on paper being smaller. Ok? You will see apparently less feed use for the fourth quarter. So you will tend to have a larger September 1 grain stocks report which comes out at the end of September of course. And then you - what ends up happening is because you use that new crop corn it is going to result in a big first quarter use which comes out in January. So, we have seen this pattern for the last several years. It can vary 200 million bushels year to year depending on how badly you needed to pull the bushels ahead and how much corn was available. But if you look at a quarterly stocks break down and a quarterly stocks use table you can see this pattern. The first quarter is always the biggest, fourth quarter is always the smallest, and part of it is just bleed over.

Pearson: And so the market already has that priced in. That is not going to have any affect pretty much on prices?

Brugler: Except that the market tends to confuse the issues and think that USDA miscounted the bushels because what are all these bushels doing here. It is an ongoing phenomenon. It happens every year. It just varies a little bit in the intensity and we are hearing excellent yields out of Mississippi, for example, with some of this early corn. So the bushels are there and so it will probably be a little bigger this year than usual.

Pearson: All right. Agrivisor is asking what will the corn harvest acreage number be as well as yield expectations.

Brugler: Well, obviously we don't know the real answer to that but I think what they are really asking is will we see some increased demand in that? And abandonment in corn is the difference between the planted acreage and the harvested acreage and harvest is the acreage - is only for grain. So, there is a silage component that is usually about 6 to 6.5 million acres in a normal year. It could be a little larger this year because of two things. One, forced harvest where there is just not enough grain there to make it be good corn for grain. Secondly, as it has been pointed out, when you have a drought you tend to have less tonnage per acre. So, it takes more acreage to result in the same amount in your silo. So, I think we will see a bigger silage component this year. A bigger abandonment total overall. Right now I am thinking 1.5 to 2 million acres over and above what we would normally expect. That does have some impact on USDA's yield estimate though because it is typically the lower average yield grain fields that are being converted to silage. So, it will tend to bump up the average yield. If we get a bigger abandonment we will tend to have a little higher average yield.

Pearson: Sure and that makes sense. The sacrificing the weak and you are reaping the strong there. Let's go a little bit under the equator. What are your thoughts on South America? What kind of affect is all the action going on down there going to have on us in the future?

Brugler: They are getting the price signal loud and clear. The world is saying grow as much as you can on this stuff for next year. The U.S. didn't hold up their end of the six month rotation here. You guys have got to double up or at least expand rapidly. And they are - of course they are off seasonally from us. They are just wrapping up in Argentina. Just wrapping up their winter wheat planting right now. They have got - the interesting thing to me is you are seeing these expectations for 80 or 85 million ton type crops in Brazil versus a normal 65 to 70 million tons. So a big increase and you have seen the Brazilian farmer already, according to Solaris at least, has already sold 41 percent of his new crop beans and he hasn't planted them yet. To me that is prescription for disaster or at least for a good scare.

Pearson: Sure.

Brugler: We will see how that develops. But what it has done is to the degree that we are relying on that big South American crop, it basically compresses what the U.S. has to do. We only have to have enough beans to get us to March or April and then enough to meet logistical needs after that. We will still be exporting even assuming that big crop comes on in South America because they don't have the port capacity to ship it all out. There will have to be some origination for the U.S. in the second half of the year. But it does concentrate the demand for the U.S. beans in the first half unless there is some kind of a problem. Now weather wise with La Nina ending, El Nino returning, that tends to be favorable to South American production in the number two and number three states in Brazil. Over in Argentina there is a drier than normal association with the northern frontier areas of Brazil but they are much small acres.

Pearson: Is the 20 million new tons of soybeans; is that all from new acreage or repurposing? Where is it coming from?

Brugler: There is very little new acreage involved there. That is still happening but it has slowed down because they put some foreign capital constraints on it for awhile that slowed down that process. There is still some being done but a lot of it is acreage shifting. You will see a little less cotton acreage down there this year. The cotton price just isn't as attractive as corn and beans at these prices and part of it is yield assumptions as well particularly in Argentina. If you don't have the drought, you had higher average yield. So you get more production.

Pearson: And kind of building on that you talked about if they get the crop that they are expecting down there what kind of prices if they get a decent crop, decent weather, we get decent weather early part of next year, what are you seeing for a 2013 crop for U.S. producers?

Brugler: Well, you could easily pull - pull prices if you get, you are hitting on all cylinders, you could easily pull prices down three to four dollars a bushels of corn and five to six in soybeans. We have got some models out that basically anticipate what the low end of that range would be. But again, you have to hit on all the cylinders. You are seeing - the market is discounting that already if you look at new 2013 corn it is trading at six and six and a half versus you know over eight for the nearby. So we are anticipating some improvement in the supply and demand situation. Historically we have had what you call a short crop/long tail. You run prices up high early with the short crop, with the small crop, and then between demand destruction and additional production you have a long tail of traditionally two to three years where prices are declining or stable.

Pearson: Ok.

Brugler: That was suppose to be happening in 2012 because we had the eight dollar corn last year but obviously the weather has changed that pattern.

Pearson: Sure. And with all that in mind are you advising anybody to make 2013 sales at all? Are you looking into that?

Brugler: We have looked at it pretty extensively. We're not wanting to do it yet. One reason is we did a little study of selling lean year versus selling the year after closer to harvest. For example, in corn the post year or the year right ahead of harvest, if you hit the high which of course is a big if between July and August, there were only two years since 1988 where you failed to make money. In other words the market almost always drops to a harvest low in October. To beat it a year ahead was more of a 60 percent proposition versus 80 or 90. So, there are big home runs 2009 - selling 2008 for 2009 was a home run. But there has been three other years out of the last five where it was a mistake to sell that far ahead. So, we are going cautious with it particularly since we don't have a concrete top in the old crop. I think if I start to see chart sell signals that are of the major writing, you know the monthly charts, the longer term charts, I will take a little harder look at that 2013.

Pearson: Ok. All right. Any thing else you would like to add for this week for folks out there in the field?

Brugler: I think just keep perspective. These are high prices historically speaking. Don't sell stuff you are not sure you have, obviously, and look really hard at the insured bushels and your harvest price option. That is based on an average price at a time of the year that is usually low. So, you may need to do some hedging to protect that harvest price option.

Pearson: All right. Well thanks so much for being here Alan. We really appreciate it and thank you all so much for watching.

Tags: agriculture Alan Brugler commodity prices economy markets Mike Pearson news