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Market Analysis: Tomm Pfitzenmaier

posted on April 26, 2013

Grain prices declined this week due, in part, to the stronger dollar and an improving weather outlook.  For the week, July wheat lost 19 cents, while the nearby corn contract moved 13 cents lower.  Soybeans traded sideways as the July contract posted a weekly loss of 2 cents. Nearby meal prices bucked the bearish trend with a gain of 2.20 per ton.  In the softs, cotton prices also declined this week as the July contract posted a weekly loss of $1.10 per hundredweight.  In the dairy market, June Class III milk lost 37 cents while the July contract moved 2 cents higher.  It was a big week in livestock, where June cattle contract rallied 1.10. August feeders advanced by more than $5. And the June lean hog contract gained $2.32.In the financials, the Euro lost 33 basis points against the dollar. Crude oil gained $1.71 per barrel. Comex Gold declined by $47.80 per ounce. And the Goldman Sachs Commodity Index gained more than 10 points to settle at 621.50.

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: We mentioned at the top there stronger dollar, we've been seeing it happen, oh, for the past three or four months, it is continuing to strengthen.  Where do you see the dollar headed?

Pfitzenmaier: I think it is going to continue -- I think we're in an upward trend, it's going to obviously have corrections along the way but the -- the Japanese government or the Bank of Japan has pretty much told everybody that they're going to have a policy of more QE and have worked hard to try and depress the Yen so I think that strength against the Yen is going to continue.  In Europe they continue to have problems, their GDP is struggling, some of the indicators out of Germany aren't all that great.  I just think there's a lot of people concerned about U.S. economy and all that but relative to everybody else it looks to me like the dollar is going to continue to work higher and if it does it's going to be a problem for all of our commodities.

Pearson: Now, is there anything out there, in your opinion, that could cause us to experience a correction in the short-term?  Or how high do you see the dollar going?

Pfitzenmaier: I guess I don't have an upward number to give you.  I just think the trend is going to be higher and it's going to be a problem I guess.  That's all I can say about it.

Pearson: It's going to depend on worldwide events that right now --

Pfitzenmaier: That's right.  I mean, they're starting -- the Europeans are starting to kind of balk at all this austerity that is being asked of them saying austerity without any stimulus is just going to lead to more unemployment and so that, that whole thing is sort of festering and I think eventually is going to be a problem for the Euro and a benefit to the dollar if you want, if you want to put it that way.  So I just think all those factors over time are going to contribute to that dollar working higher. 

Pearson: Certainly.  And a benefit to the dollar could be a concern for our exporters, primarily in the grains.  Let's talk wheat a little bit.  American wheat producers have had a rough spring, rough winter and spring and just pounded by more freezes and late germination and yet we don't see the market going any higher, it just continues to slip lower.  What is happening?

Pfitzenmaier: That's all domestic supply stuff and production stuff and I think the wheat market is way bigger than that.  The world supplies -- when you have high grain prices like we've had in corn and wheat that incentivizes everybody else in the world to grow wheat and there's a lot of people who can.  So I understand if you're a domestic producer there's a lot of head scratching and I'm having all these wheat problems with my wheat and yet wheat prices keep going down but I'm afraid that's probably going to be a trend that's going to continue in both the corn and the wheat market.

Pearson: For producers who didn't have much hedging in place, what is the best way to work with this type of falling wheat amid potentially falling yield situation that they're dealing with?

Pfitzenmaier: Well, the old adage is in a downtrending market the faster you can sell the better off you are.  So sitting here horsing around griping and complaining about declining prices probably isn't going to do you a lot of good.  There's going to be little up-pops and I think you need to use those as selling opportunities.  But certainly sitting on a bunch of wheat in your bin I don't see is going to do you a whole lot of good.

Pearson: It's not going to turn around any time soon.

Pfitzenmaier: I don’t' believe it will, no.

Pearson: Let's take a look at soybeans.  We've seen soybeans be the bright spot all winter long and it is more or less continuing.  Where do you think beans are headed?

Pfitzenmaier: Well, you've got two situations here.  I think old crop beans are going to be well supported.  They're having a devil of a time buying any beans from the farmer, number one.  Number two, exports are going to, we had negative exports this week mainly because of Chinese cancellation, so exports are going to be a problem.  On the positive side for old crop beans is our mill exports have been very, very good.  So we need to crush a lot of beans to produce the meal to be able to export it and that is the question is where are these processors going to get those beans to do that.  I mean, there's areas in Iowa where the processors are bidding $1.00 to $1.10 over the board, July board, just to get their hands on some beans that aren't all that available.  And I don't think they're going to be available until you get close to $15.00.  So if you assume that kind of basis that means $14.20 to maybe $14.50 on old crop beans is probably going to be the upper limit assuming those kind of basis and assuming the farmer sells at $15.00 plus.

Pearson: Certainly, if that's the trigger --

Pfitzenmaier: -- on the cash side.  On the other hand you've got the new crop which is fighting a big South American crop.  The logistics down there are gradually getting sort of worked out.  We're probably going to see decent acreage.  The moisture we're getting here is going to mean, give us a better chance for decent yields.  So I think upside potential on November beans is limited to probably $12.00 to $12.20 and you get up in those levels I think you probably need to turn into a seller of some sort.

Pearson: Take advantage of those rallies.

Pfitzenmaier: Exactly.

Pearson: And how much would you be looking to sell as summer goes on when we get into that $12.00, $12.20 rally?

Pfitzenmaier: Yeah, this time of the year I'm inclined to not go beyond 30 to maybe 45%.  If you get the crop up and going and it looks good then I think you can bump that up pretty good.

Pearson: Take additionals.

Pfitzenmaier: Yeah.

Pearson: Well, let's take a look at corn.  The corn market, again, poor export news is continuing to happen.  Where do you see old crop corn headed?

Pfitzenmaier: Exports are, I mean, exports are terrible.  They're going to stay terrible.  Everybody is assuming they're going to be terrible.  The USDA may even adjust that down a little bit again in the next WASDE report.  The real driver here I think is probably going to be the ethanol industry and how they respond.  I mean, ethanol margins are good.  The production is above what we needed to have on a weekly basis to meet the USDA's projections.  I would not be a bit surprised in that next supply-demand report to see some bushels move from exports and added on to the ethanol side.  So I think that is going to be the driver.  The question is, is that corn that the USDA or the stocks report said we had, did we have it?  And maybe more, another step beyond that is the farmer that owns it going to be willing to sell it?  Because if it's there but they won't sell it, it doesn't really mean a whole lot. And I think there's a fairly large number of people that are sitting on corn just waiting to see how the spring planting goes, we have all this wet weather, that delays that decision and I think if you get past, you know, May, June, July, they start to see that they're going to get a good crop then maybe we'll see some corn move.  The basis has been continually strong.  The basis has been a fooler for people.  We've watched that all winter long thinking, well, the basis is high, they're not buying corn, there must not be any and that has deceived people.  If you step back 20 feet from a corn chart and look at it we've been in a downtrend in that since September, a major downtrend and I don't see anything that is happening that's going to stop that.  We've got a big crop probably coming on in the fall, everybody looks ahead and sees that.  The funds have bailed out of all of these commodities.  They have no interest in owning them and they're part of, a big part of the reason why we went up.  As long as they're bailing out, the equity markets are strong, they're looking at it and saying, why do I want to own commodities, look what gold did, another example.  And we're going to be fighting that and it's going to be a problem.

Pearson: Alright.  Now, as we look at that chart from 20 feet away where do you see a potential floor being for new crop corn?

Pfitzenmaier: I think new crop corn is going to be fairly well supported initially in that $4.80 to $5.00 range so we didn't get too far from that this week.  Over time I think you're going to see it work down to $4.50, $4.30, somewhere more like a $4.00 cash price or maybe even under if the crop really looks good.

Pearson: Alright, well let's talk a little bit about cotton.  We've seen a downtrend in cotton similar to corn over the past, oh, three, four weeks, it's been dropping.  What are your thoughts there?  Going to continue to fall?

Pfitzenmaier: Well, that is due primarily to China and India dumping some of their domestic stocks.  I think that has been the driving force behind that.  We've dropped cotton from $94 down to the mid 80s, I think you're probably going to see fairly good support show up in that $82 range and then we'll have to see where we can go from there I guess.

Pearson: Certainly.  And we're probably still going to see yields, or not yields, but acres continuing to be bought by --

Pfitzenmaier: Yeah, I think there's a trend away from cotton and toward probably soybeans in those production areas although down in the Delta and the southern Corn Belt they have been having a lot, their forecasts are a little wetter than ours up here in the northern Corn Belt are.  So that may be a problem for everybody.

Pearson: Alright.  Now, taking a look at livestock, because we've watched this corn continue to fall, we saw feeder cattle this week get a pretty good spike.  We saw a $5.00 spike in prices this week.  What are your thoughts there?

Pfitzenmaier: Again, we have a perception of grains going lower and then we've had a nice little bounce in the live market this week and I think the combination of those has given some pretty good support to the feeder market.  Now that market has been depressed fairly well because I think finally feeder producers have said, you know, we're not going to pay up for these feeder cattle, we're tired of losing money and we're not doing it.  Well, the numbers are going to dictate that there's probably a fairly good support somewhere down in current levels or maybe a little under.  And then if we get cheaper corn and we can get some strength in the fat market there's probably an upward draft to that market although I wouldn't get wildly bullish on it for a while I guess.

Pearson: Okay, probably just some stability --

Pfitzenmaier: Right, exactly.

Pearson: -- in the feeder market.  Now, taking a look at live cattle we did see a nice run-up, $1.10 on June and live cattle so it's up around $1.20, $1.21 and we've heard calls from $1.28 in Kansas and other places.  What does that tell you about the live market?  How high can it go do you think?

Pfitzenmaier: We've been talking about it for a year now.  The numbers are bullish to cattle.  They've been bullish for a year.  The problem is you can't sell the expensive beef to anybody.  That is what we continue to fight and everybody gets all revved up every time you've got these little pops up in the market but you -- and part of that is aggravated by the fact that the funds are heavily, heavily, heavily short cattle.  So they get spooked a little and decide to take profits, pop up you go, then you run into the fact that nobody wants to buy the beef on that pop up and then it stalls out again.  October cattle are up around $126.  There are some people think that price could move up to $128, certainly is possible.  The June contract at $123, $122 plus this week, could move up into $124, $124.5, that wouldn't surprise me just on the fact that it got oversold, the funds cover a little and up you go.  But that market, along with the pork market, are going to be fighting this dollar issue also.  The one benefit that may come along is I think we're probably going to see cheaper gas prices through the summer into Labor Day and that’s going to put a little more money in the consumer's pocket and maybe a little helpful on the demand side.  We're also going to have to see if the, you know, May is beef month, we'll have to see if that stimulates any extra demand.  The grilling season has been terrible up to this point.  It's cold, it's wet, nobody wants to go out and do it.  If the weather changes that might help a little bit too and that may have been part of what is behind the market's pop up this week a little bit.

Pearson: Getting a little bit of that weather change because we did see a pop in lean hogs as well.  Being just carried on that sentiment, is that sort of the same technicals we've got going on in the hog market?

Pfitzenmaier: Yeah, again, I don't think the upside is very great from here, maybe another two or three more dollars but, again, you're going to be fighting demand, fighting that stronger dollar and that's probably going to be it for the hog market.  I think you use those rallies as selling opportunities.

Pearson: Now, as we look at the demand picture as a whole, hopefully like you say we're going to see grilling season pick up, and as we look at this stronger dollar, how much is that going to affect pork prices over the summer if we continue this strengthening trend?

Pfitzenmaier: Well, it's not going to be good because we export a lot, particularly to Asia.  I don't know, maybe -- maybe they struck a deal on this, on this trip you just talked about earlier in the show.  But all -- all -- all that does help.  But um, I just think it's going to be a headwind.  I don't know that it's, you can say it's going to limit it by $2.00 or whatever but it's just going to be a headwind for the market.

Pearson: It's one of the things that is going to weigh on people's minds as they're looking to the future.

Pfitzenmaier: We just really need some consumer confidence, the consumer to feel better about spending a little money and, like I said, maybe lower gas prices is going to contribute to that.

Pearson: Certainly.  People are saving cash on gas, they'll upgrade from a hot dog to a pork chop.

Pfitzenmaier: And everybody thought things were going to be better and then we have this disappointing GDP number on Friday so then everybody says, well, maybe things aren't quite as -- is the sequester really hurting us, all that kind of stuff figures in.

Pearson: Thank you so much, Tomm, appreciate you being here today.  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 impact of the government's latest figures on unemployment. And until next time, thanks for watching.  I'm Mike Pearson.  Have a great week.

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