Pearson: This is the Friday,
June 27, 2014 version of the
Market Plus segment.
Joining us now is Alan Brugler.
Alan, welcome back.
Brugler: Always good to be here.
Pearson: We didn't have a chance
to discuss cotton on the show
this week.
And we did see a bit of a
falloff, $2 and change in the
cotton markets.
What happened?
Are we seeing China start to
move some?
Brugler: Basically the problem
is China has got too much of
their own.
They're making efforts to
restrict imports, not
officially.
That is WTO illegal.
But, basically they have begun
to create incentives for the
mills to try and use some of
their surplus and buy less U.S.
cotton or really from anybody.
The Chinese, at last estimate,
were sitting on approximately
60% of the global surplus stocks
in cotton, which is just a huge
amount of cotton.
But, the point is, if they start
using more of their own
structurally the U.S.
is very dependent on cotton
exports and if we don't make the
exports we've got a pricing
problem.
Pearson: Okay.
So, how much can we fall if
China does start to consume a
lot more of their cotton?
What sort of potential are we
looking at?
Brugler: Well, it depends on how
the mills in the other countries
respond, okay.
And it also depends on what the
size of our crop ultimately ends
up being this year.
And, of course, we'll get a
cotton acreage estimate on
Monday.
Pearson: And do you have an idea
for what the trade is
anticipating -- Brugler: Trade
is looking for something a
little over 11 million acres I
believe.
Pearson: Okay, which would be
smaller than last year, correct?
Brugler: Yeah.
Pearson: Okay.
Brugler: But we've got, again,
we've got to get rid of the
cotton one way or the other.
So, A, do we produce it?
And then B, the export market.
Technically speaking we could go
back into the 55, 60 cent range
at some point in a glut.
I don't think, you won't' do
that with a 3 million bale
surplus, it would be more like 5
or 6 million bales and nobody is
calling for that at the present
time.
Pearson: Okay.
Alright.
Well, now, while we're talking
China I'd like to talk to you
about the DDG issue that came to
light here two or three weeks
ago when China banned all of
U.S.
DDGs.
Have we seen any change on that
in the past few weeks?
Brugler: Well, it apparently is
not a complete ban, it was a ban
on issuing new certificates.
And what that means is if you
had a sale approved and you had
the certificate to ship it you
can still ship it.
There was a freight fixture for
China for the first week of
August for U.S.
DDGs for 50,000 tons, which
tells us it's not a complete ban
on bringing the stuff in, unless
of course it gets over there and
then they turn it away.
But, the vessel has been fixed
so obviously the seller thinks
that they have got a valid
contract to ship it.
That's good news because it
means that at least some of the
product is still moving in that
direction and China was the
biggest buyer back in July when
they were still taking it.
So, it's important to keep it
moving.
But I'm very pessimistic about
Chinese feed imports right now
whether it is DDGs or whole
corn.
They have a huge, could be
extremely huge depending on
whose story you're listening to,
pile of corn stocks that they
need to work through, rotate out
of, get out of storage, etc. So,
I'm really not anticipating
China will take any more U.S.
corn during calendar year 2014.
They may get a little milo, that
seems to still be moving and
it's cheap.
So, until it is banned I think
the buyers will continue to try
and bring it in.
But I'm not anticipating China
is going to be a big factor in
corn here for a while.
Pearson: Okay.
Well, let's take a look at some
of the questions we've got from
our Facebook and Twitter
followers.
And Paul in Columbus is asking a
question that I haven't heard
raised very much.
He is asking, will the excessive
rains and floods have any impact
on the markets?
Part two, he says, if so,
perhaps it will be after
harvesting.
We're going to see a lot of
nitrogen loss with a five inch
plus rain.
Is the trade still anticipating
trendline or a little bit higher
on corn yield?
Brugler: Definitely expecting
trendline or higher.
You've got 165 is the USDA
number.
I've had analysts say 175, if,
if, if kind of scenarios.
I don't buy into those.
I think the crop will accumulate
sufficient problems between now
and harvest that we don't get
that, one of which could be the
nitrogen leaching issue,
definitely some conversations
about that.
When you have 11 inches of rain
in a month it's going to take
some nitrogen out of that soil
profile.
The other issues, of course,
would be shallow root structure.
If it turns dry in August does
that affect your yield?
But right now the market is
looking at wet conditions, wet
weather and very good crop
condition ratings and saying we
think we're okay for a trendline
or above yield.
We have a thing called the
Brugler500 Index, which is a
crop rating model based on
USDA's poor, very poor, good,
fair, excellent ratings.
The key variable there is what
that index is doing in late July
and early August.
If it's going to be above
trendline yield that will be in
the 380s.
If it's going to be an average
year it will be in the 365 area.
And if it's a drought year it's
in the 280s or 290s.
So, don't anticipate the latter,
but the difference between
trendline or much above
trendline is what happens in
that late July, August period.
Pearson: Okay.
So we've got a little bit of
time before we might even begin
to see the market take that sort
of thing into consideration.
Brugler: That's correct.
Pearson: Now, we do have a
question here, Phil in Ontario,
Canada is curious, as we look at
this potential smaller corn
acreage on Monday, does corn
have a better price potential
versus beans going into harvest?
Brugler: If you get the smaller
corn acreage on Monday, yes.
We're not as badly oversold as
we were in 2010 but 2010 had
some similarities.
The market was very comfortable
with the acreage, very
comfortable with the yield
assumptions, thinking it's going
to 250 by harvest back then.
And then we got a surprise on
stocks and acreage and we're up
for several months.
So the setup is not quite as
extreme this time but it is
definitely a similar psychology.
Beans, on the other hand, need
an actual hard number, we're
running out of beans kind of
scenario to get a big pop here.
Pearson: Okay.
And then finally, Maren in
western Kansas has a question as
we look at all of the efforts
that the Federal Reserve has
made to increase inflation.
She is curious, at what point
would you consider the commodity
markets changed into having an
inflationary bias?
Brugler: Well, there's a lot of
pieces to that question.
I think you have to look at the
U.S.
dollar, first of all.
If it's an inflationary scenario
you would generally expect the
U.S.
dollar to be weakening.
It is at the moment but it has
pretty much been in a trading
range.
So it's hard to say we really
have the inflation push on right
now.
From a commodities perspective
you definitely have some markets
are acting like it, like the
cattle and feeder cattle and
hogs.
But I would attribute those more
at the present time to trend
following and the lack of
opportunities.
The stock market is not really
doing much right now.
So, when you get a market that
is trending all the money wants
to get in on the action and that
tends to extend the trend.
I think that's not necessarily
an inflationary indicator by
itself.
The key to the inflation overall
is probably still wages and I
know from conversations with the
Federal Reserve they are
concerned about we had a little
bit of whiff of inflation in the
most recent data.
They want to see the wages go up
with it.
If they don't, the households
get squeezed a little bit.
Gasoline prices are up, if you
don't have the wages to support
it.
So, I don't think we can have a
big inflation bias where almost
all commodities are going up
until you see either that wage
push or some indication the
dollar is weakening because of
all the Fed's efforts.
Pearson: So, we're not in it
yet.
Brugler: We're not there yet.
Pearson: Alright.
Well, Alan, thank you so much
for taking the time to talk to
us this weekend.
Brugler: You're welcome.
Pearson: And thanks to all of
you for sending in your
questions via Facebook and
Twitter.
We really appreciate it.
Please continue to do so and
tell all your friends to do so.
And hope you have a great week
and thanks for watching.