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Pearson: This is the Friday,
January 17, 2014 version of the
Market Plus segment.
Joining us now is Alan Brugler.
Alan, welcome back.
Brugler: It's great to be here.
Pearson: We're glad to have you.
During the show we didn't get a
chance to talk about the cotton
market, which did see a nice
little rally this week.
Talk to us what happened there?
Brugler: Well, it's one of those
that makes you scratch your head
a little bit because if you look
at the world numbers we've got
over 97 million bales projected
to be leftover at the end of the
marketing year.
That's a ten month supply
globally.
And would suggest you ought to
be going down every week kind of
like you see in some of the
other markets.
Instead we have got a nice
rounded bottom and the funds
have been adding long positions
every week.
It sort of smells like one of my
colleagues says the markets can
remain illogical longer than you
can remain solvent.
But there is a fundamental piece
of that and that is that much of
that global supply is tied up in
China and the rest of the world
still has to go out and buy
cotton on the open market.
Turkey has been a major buyer in
recent weeks and a few other
countries.
So U.S.
carryout is not burdensome at 3
million bales.
So you've got kind of this
window where farmer selling to
the merchant, the merchant is
hedging with short futures, the
funds are buying against the
selling and the price usually
follows the funds.
So right now we've got a little
bit of a rally going and not
necessarily done yet.
I think we go another 2 or 3
cents yet.
Pearson: Alright.
So the funds are basically
buying on the bet that China is
going to continue to hold their
massive stockpile.
Brugler: Yeah, yeah and that
will be the thing that will kill
us is if China really works
actively to reduce it and
basically they're not likely to
export cotton but if they just
quit importing cotton because
they're trying to use it up that
will force a lot of cotton to
find another home.
Pearson: Certainly.
And it'll find other homes at
cheaper prices.
Brugler: Most cases.
Pearson: Alright.
Now we do have a couple of
questions from our Facebook
followers and Twitter followers.
Gayle in Remsen, Iowa, after
we've been talking about the
January 10th reports, he is
curious, how does the government
crop report get generated?
And do they consider carryover
in the crop reports?
Brugler: Yeah, there's a couple
of different pieces to that.
Let's talk about the production
report first because there's two
different divisions working on
this.
First of all, NAS does the grain
stocks and the crop production.
The ERS division and the World
Outlook Board does the
projections about carryover and
consumption.
So let's look at NAS's stuff
first.
To do the crop production
there's two pieces.
There are objective yield plots
which are random plots that are
measured out of farmer's fields
and they are measured by USDA
employees at various times
throughout the year.
They do crop ear counts and they
do measure ear weights.
When it gets time to harvest
they actually pull samples and
send them to the lab.
And then they supplement that,
expand that with farmer surveys.
So you've got this physical data
layer and then you've got the
survey layer.
There were some holes in that
back in October during the
government shutdown because the
field people were taking samples
of nice 25% moisture corn,
sticking it in a plastic bag,
mailing it to St. Louis and
nobody was opening it.
After a couple of weeks that
sample had to be thrown out.
And if you look at Friday's crop
report you'll see that the
farmer surveys were used to
square up the data, particularly
in the states that were actively
harvesting during that 19 day
shutdown.
Most of the yield reductions
were in the western Corn Belt,
in the areas that were most
actively harvesting during that
time.
Brugler: The second part of
that, of course, is the grain
stocks report.
That is a very, it's an all
company survey for the
commercial side and then the
farmer survey.
They did over 82,000 farmer
surveys in December so that's a
pretty big number.
And switching to the carryover
stocks then, you have to
allocate that grain over four
months, or four quarters.
The December 1 report that we
just got told us there was less
corn there than they had
anticipated.
Working backward on the math we
fed more corn prior to November
1 than had been anticipated and
less wheat.
USDA had what is called a
negative residual in wheat.
They found back, if you will,
163 million bushels of wheat
that they thought had been fed
but it turns out we fed corn
instead.
So the corn number was bigger
and the stocks number, of
course, for December was
smaller.
So yes, they do consider
carryover.
They're very religious about
what was old crop and what was
new crop and you didn't use new
crop in the old crop slot, etc.
So I think the numbers are
pretty solid.
The big question going forward
because there was probably some
July and August corn feeding in
this number is how much we're
going to slow down the apparent
rate of consumption as we go
into the next three quarters.
Pearson: Okay.
Alright.
Now, coming off of that, as you
mentioned, the world supply and
demand, Phil in Ontario has a
question.
We're looking at corn at at
least a five year high in
demand.
At these prices is that going to
continue?
Brugler: Well, low prices cure
low prices.
That is a famous saying in the
commodities market and we are
seeing that.
The export demand is the most
elastic, it's going to respond
the quickest to a price change.
It took the worst hit when
prices were $7 and $8.
We had a multi-decade low in
corn exports last year.
But they're responding quickly
to this $4 corn.
It turns out $4 corn works in a
lot of rations where $6 and $7
doesn't.
So I think you can continue to
see export growth at this price
level.
Particularly because Brazil's
crop is going to be smaller,
they planted less acreage.
As long as we don't get too big
of a rally to encourage their
second crop planting, the
Safrinha crop, we should
continue to see more market
share for exports.
Ethanol consumption, of course,
is somewhat limited by the RFS
and adoption of more E15
stations and so forth.
Feed use is going to be a slow
thing to grow because we don't
have the cattle, we talked about
that on the show, and the hog
industry is being held back by
the PED issues.
Pearson: Right.
And that brings us to our next
question.
Bill in Spirit Lake is curious,
what is the impact of PED on
pork supply and prices as we
look out through the first
quarter?
Brugler: Well, the problem is we
don't know how many pigs we're
losing.
We're losing pigs.
I've seen estimates anywhere
from 2 million to 6 million
head.
That's a wide range and has some
price implication depending on
where we're actually at.
What we know is that we're not,
we have been holding back sows,
we've been holding back gilts,
we have been trying to expand
but because of the death loss in
the pigs we're not getting the
level of expansion you would
expect.
Farrowing intentions are still
up for 2014.
So guys are still thinking
they're going to expand and they
should with the hog prices where
they are.
Margins are pretty good.
But it has definitely reduced
the pork supply for the first
quarter and second quarter from
what we would have otherwise
expected.
And when you combine it with the
tightness in beef it's pretty
supportive to hog prices.
Pearson: We'll see some support
there.
Now, before we let you go, Bob
in Nebraska is curious, two
months from now is it likely or
unlikely that we'll see corn or
soybean cash sales 40 cents
higher than they are today?
Brugler: Two months from now,
that would be just ahead of the
crop, or the March 31st reports.
At the moment I would say
soybeans likely to be lower by
that point just because -- old
crop soybeans -- because we'll
be into the South American flow
at that point and it's just hard
to maintain that rally.
New crop has a little different
price mechanics, more
conditional on what's going on
in the U.S.
The corn market is a little
harder to see.
My statistical models do have us
going a little bit higher by
then but not, I don't think 40
cents is going to do it.
It will be difficult to have
that big of a rally.
Pearson: It's probably unlikely.
Alright.
Well thank you so much, Alan,
appreciate you being with us
tonight.
Brugler: You're welcome.
Pearson: Thanks to all of you
for your questions via Facebook
and Twitter.
Please continue to send them in
and we'll continue to get expert
analysis right for you.
Thanks for watching and have a
great week.