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Market Analysis: Tomm Pfitzenmaier

posted on January 25, 2013

When the Agriculture Department released its final crop production estimates two weeks ago, corn prices rallied to contract highs.  The upward trend continued in subsequent trading sessions but this week the upward trend stalled.  During the holiday shortened trading week, March wheat lost 15 cents, while the nearby corn contract moved 7 cents lower.  Soybeans bucked the bearish trend as the March contract posted a weekly gain of 12 cents.  Nearby meal prices advanced by $2 per ton.  In the softs, cotton continued its move higher as the March contract gained nearly $2 per hundred weight.  In the dairy market, February Class III milk lost 36 cents, while the deferred contract moved 31 cents lower.  Over in livestock, after a brutal couple of weeks, February cattle gained $1.35, nearby feeders advanced by $1.60 and the February lean hog contract posted a weekly gain of $1.47.  In the financials, the Euro gained 77 basis points against the dollar.  Crude oil lost 15 cents per barrel.  Comex Gold declined by $30 per ounce.  And the Goldman Sachs Commodity Index lost nearly 3 points to settle at 664.20.

Market Analysis: Tomm Pfitzenmaier

Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Tomm Pfitzenmaier.  Tomm, welcome back.

Pfitzenmaier: Thanks, Mike.

Pearson: Let's talk worldwide economy.  As you look to see where the rest of the globe is going, what indicators do you use and how are they looking?

Pfitzenmaier: I think one of the things that a lot of people like to look at as an indicator of world economic health is probably crude oil.  And you've seen crude oil continue to climb here, to climb up.  A lot of the indicators out of China are showing fairly good economic health there.  I think that is contributing to the strength in the crude oil market.  Europe seems to have sort of gotten straightened out.  That is helping.  The U.S., the S&P 500 made new highs this week so there's some sort of good news there.  All that has kind of contributed, there's been some supply issues too with Saudi Arabia saying they're going to cut back a little bit and that has been supportive.  Certainly there's some supply issues involved too.  But I think overall that's one of the indicators to watch.

Pearson: So things are looking relatively bullish around the world going through this next year.

Pfitzenmaier: Economically, yeah.  And I think that is a bit of a surprise.  With all the problems Europe had, the U.S. debt ceiling and all that mess I think people were a little pessimistic at the end of the year last year and it is turning out to be maybe not quite as bad as they thought it was going to be, or at least we're starting off well anyway.

Pearson: Maybe a little bit of good news in 2013.

Pfitzenmaier: Yeah.

Pearson: Talk to me about the dollar.  Where do you see the dollar trending?

Pfitzenmaier: You know, the dollar is one of the things in the grains and livestock we like to watch.  There's a tendency to put more importance on that than we probably should, particularly in corn, because the dollar index itself is made up primarily of European currencies and nobody in Europe buys any U.S. corn so that doesn't matter.  I think the more important thing really to watch is the dollar-Yen.  Japan has always been a big buyer of our grain and our meat products.  The Japanese have got a new government.  They are committed to a lower Yen.  They have said that, that is one of the things they want to do, help stimulate their manufacturing, their exports, get things going.  But it's not so good for us trying to export grain to them and export pork and beef.  So I think that's one of the things we need to keep a close eye on and I'm otherwise pretty optimistic about moving some pork and beef into Japan in the coming year.  But that dollar rallying versus the Yen is going to be some head wind on that.

Pearson: It's going to be something to watch.

Pfitzenmaier: Yes.

Pearson: Well, let's talk wheat.  We've seen a little bit of pressure put on this week.  What is driving that?

Pfitzenmaier: There's plenty of wheat around the world.  The Ukraine is taking -- everybody keeps thinking they're going to come to the U.S. and they haven't.  The buyers have been going to the Ukraine.  They continue to have the product.  So there's been some downward pressure.  We've got the wheat market kind of overdone, has had a nice correction, went down to that $7.40 area, found good support.  All of a sudden now wheat is competitive in a lot of feed rations, both domestically and overseas.  So I think you're going to start to see some pretty good support.  Certainly that $7.40 support area is going to be fairly solid I think and something we can build on.  Now, you get up over $8, $8.20 then you kind of probably run out of steam again.  But I think it should be wells supported on the down side anyway.

Pearson: You see us right in that range.

Pfitzenmaier: Yes.

Pearson: Let's talk corn.  We saw the rally after the report.  Now we're seeing a little bit more pressure.  Is this just a sign of things being overbought, a little correction?  Or what's going on?

Pfitzenmaier: Well, the problem is everybody is running around, we're going to run out of corn, 602 million bushel carry out is too tight and how are we ever going to get by?  Well, they whacked exports on corn in that report in January pretty hard and we still even look at today's exports we're terrible, we can't even meet those reduced export expectations.  So that is one area that's got a problem.  Feed usage you probably aren’t going to change too much although, like I said, if wheat is cheaper there's a lot of people looking at substituting wheat.  So that's not going to help the corn market.  Thirdly, you've got ethanol producers, if we rally corn very much all of a sudden they're not profitable.  So there's adjustments getting made when you get up in that $7.35 area is really where the March corn has stalled out.  We ran up to it several times and couldn't take it out and then everybody, it got a little overbought and down we went again.  I don't see us falling apart by any means.  Could maybe go back and test $7.  But we're going to be in that trading range until something changes.  Now, everybody thinks we have to make huge adjustments and we don't.  All we have to do is scale back the ethanol industry 200, 300 million bushels.  We don't have to demolish it or tear it apart or anything.  But a few plants, marginal plants are probably going to have to close down, go for maintenance, whatever, shut them until cheaper, new crop corn comes in and then we're good again.  So I think the ethanol portion of demand is the best place, most likely place you're going to see some adjustments made to make sure we've got enough corn.  You've also got a South American crop that is going to come available to us.  Last year everybody thought July corn was going to go through the roof and it didn't because that South American crop came on in late June, early July and satisfied world needs and I'd -- their crop size is somewhat similar to last year so I'd expect the same sort of issues this summer.

Pearson: See the same sort of results coming as that comes off the combine.

Pfitzenmaier: Exactly.

Pearson: Well, let's jump into soybeans real quick.  Where do you see beans going?  We've seen a pretty decent run this week building on impressive runs throughout all winter.  Where do you see it going from here?

Pfitzenmaier: Export demand has been unbelievable.  The question in the bean market is what is going to happen when the South American crop becomes available, are our exports going to fall?  Well, they are going to fall off cliff.  Whether some of those optional origin, U.S. origin beans are going to get shifted to South America and we're going to see some negative exports?  Probably.  The way prices have rallied partially the last few days has been because of concerns about some dry weather in southern Brazil, most of Argentina and they're expected to get a little rain in the short run, out through the end of the month not so much.  So I think that is tending to support beans a little better.  I think you saw that is why beans, in your little report just before, they were better supported than corn and wheat was.

Pearson: So before we see those South American beans, can you give us some price targets?  What should producers be looking for?

Pfitzenmaier: We were up close to $14.50 on the March contract.  Certainly if you get $14.50 to $15, $15 is about the top that I would expect.  If you can get some kind of a decent basis on that, maybe you can get $15 to $15 plus for cash beans.  I wouldn't horse around too long here because, like I said, when the South American crop comes available we're going to really struggle.  So you're kind of playing chicken here with that and I guess I'd have some kind of a scale up program between those, using those price parameters to get stuff moved.

Pearson: Things to keep in mind.  Let's look at livestock.  We had the cattle on feed report come out today.  What do you see that meaning for the fat cattle market?

Pfitzenmaier: The cattle on feed report today was friendly in just about every category.  Cattle on feed was two, three percent better than expected.  Placements were lower.  Marketings were better.  So we had this big debacle in the cattle market after the Cargill Plainview, Texas plant closing and everybody was running around saying that that was a big sign that the sky was falling in the cattle market and personally I kept thinking, they only closed that plant because there weren't enough cattle around and that to me wasn't bearish.  Now, the market was overbought, it got ahead of itself, probably needed to correct and that all played into that correction.  And we've had heavy weight cattle.  The tonnage has minimized the effect of lower numbers.  Going forward that is probably going to continue, we're probably going to continue to have the weight.  But going into April we're going to have quite a few lower numbers.  This cattle on feed report was another indicator of what is coming on here.  So I think you can see February cattle bounce back up around the $130 range.  I think you can see the April cattle back up in the $132 to $134 or maybe higher going into April.  So I guess I'm not as down in the dumps as the market has been the last two weeks on cattle prices.  Now, demand, if this economic stuff we talked about earlier in the show is true, then maybe demand is going to be pretty decent for beef too.  Certainly pork is more competitive and poultry at the retail level.  But I think you've broken beef enough that maybe some of that is going to start to come on here.

Pearson: We'll see if consumers are willing to pay more and then we'll see it reflected on from there.

Pfitzenmaier: Right, exactly.

Pearson: Where do you see feeders going?

Pfitzenmaier: That is going to be highly dependent on what corn prices do.  I think we're going to have relatively high corn prices in the short run but looking ahead we've got huge numbers of corn coming on and I think that is going to tend to be pretty supportive of feeder cattle.  So I think longer term they're going to be well supported on breaks.

Pearson: Just make it through this winter, pay those prices and then hopefully we'll see the support come summertime or late spring.

Pfitzenmaier: Exactly.

Pearson: Let's talk hogs.  We saw another bump this week in the hog market.  Where do you see hogs going?

Pfitzenmaier: Nice turn around in hogs.  I think you're going to see those February hogs move back up in to the 90 cent range. They kind of bottomed out, reversed, should be well supported.  The weakness in the end I guess maybe concerns me a little bit because a lot of that pork does move into Japan.  But I think that you're going to see that -- like I said, its position, pork is positioned fairly well at the retail level in the U.S. and I think you're going to see it hold up fairly well.  And like I said, we had a reversal this week, probably going to move higher along with the cattle market.

Pearson: And, again, we're going to be dependent on corn prices as we roll through the summer.

Pfitzenmaier: Sure.  Everybody, again, all last summer, all last fall, we're going to demolish the pork industry because of the high prices of corn and we hardly liquidated hogs at all.  There were some sows that went to market but the efficiencies have gone up.  The number of pigs saved per litter continues to work higher.  So there really wasn't that much liquidation.  There's buildings being built.  I think that pork industry is fairly solid.

Pearson: All right.  Tomm Pfitzenmaier, thank you so much for being with us this week.  That wraps up this edition of Market to Market.  But if you'd like more information from Tomm on where these markets just may be headed visit the Market Plus page at our website.  You'll find expanded market analysis, audio podcasts and streaming video of our program as well as links to our Twitter feed and Facebook account all free at the Market to Market website.  Be sure to join us next week when we'll examine the outlook for agricultural prices in the months ahead.  Until then, thanks for watching.  I'm Mike Pearson.  Have a great week.

Tags: agriculture cattle commodity prices corn drought economy hogs markets Mike Pearson soybeans Tomm Pfitzenmaier