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 had a big week on Capitol Hill this week. We saw Ben Bernanke testify to Congress about what his plans are for continued quantitative easing. Can you talk to us a little bit about what Fed President Secretary Bernanke said and what that means for the markets?
Pfitzenmaier: He - you have to kind of parse his words because he was pretty careful that - there have been a lot of positive economic news out lately and the fed has been signaling that if the economy started to turn around that they would begin pulling back on their Quantitative Easing Stimulus Program. Every time that kind of starts to happen and you have these good reports the market responds positive particularly the equity markets. Very strong. It has been supportive to the dollar because the perception is if that happens then interest rates go up. Stronger interest rates in the United States make the dollar more attractive relative to Europe which is probably going to continue - forced to continue with their stimulus program for awhile. Probably up to a year or more. So, the trade is watching very closely to see if in fact that pull back is going to happen. The problem is that the recovery we have had isn’t' all that strong and the fear is if they start pulling back on quantitative easing then all those positive economic factors there or indicators start to turn south again. The consumer and the people trying to make things happen in the country pull back and then all of the sudden you don't have the recovery and you can't stimulate. You have got to stimulate again. So that is the fine line that is being watched here. The perception is that pull back is going to start to take place in September/October time period. I think that is why you have seen mainly seen the stock market continue to make highs because they are viewing that as a positive for the general economy.
Pearson: They understand it is going to continue until we get enough concrete positive economic movement to cause the fed to pull back.
Pfitzenmaier: The problem is as soon as the people find out that oh, we are going to pull back. We are not going to stimulate, then the stock market drops because money is not being pumped in to help support that flow of money that is supporting the stock market. So, it is a really tricky job he has got and he is probably fairly happy that he is retiring soon.
Pearson: I would imagine.
Pfitzenmaier: Which is the other issue. Who replaces him? What is their attitude going to be about this? So that will be a whole another level of things to be concerned about.
Pearson: In regard to that we have three or four names that have been floated as rather serious contenders. When is that expected to take place? When would he step down?
Pfitzenmaier: To my understanding toward the end of the year. It is also my understanding that most of the contenders are a little more likely to be - to be stimulators than he has been. So, that's the other thing that is going to have to be watched.
Pearson: We will continue to see sort of the tug of war particularly in the equity markets which have been the biggest benefactor of the quantitative easing.
Pearson: Well, let's take at the grain market. As we look at wheat this week we did see a little bit of a sell off this week. A little bit of a move downward. What has been prompting that in the wheat market?
Pfitzenmaier: Well, the big driver in the wheat market is the world's supply. World supplies are adequate. They are little tight in the U.S. North Dakota's crop is by all reports all this dry weather has hurt their crop trying to finish up. So, the U.S. crop is not that spiffy. The problem is plenty of crop in the world and plenty of corn. So maybe you can see rally in the wheat market September/December wheat up towards seven bucks. If that happens that is where I will be an aggressive seller of wheat.
Pearson: But you don't see that happening any time soon? If you have got wheat plan on holding?
Pfitzenmaier: Well, I think if we don't get the moisture that everybody is expecting for the Central Corn Belt next week then you are probably going to see corn and beans go up. Probably drag wheat along with them and that's going to be your best opportunity to get some wheat sold, I think.
Pearson: All right. So again just like everything else just pay attention to the weather as it is coming up. Now let's take a look at the corn market. We are still seeing really tight supplies out there. Old crop corn, what are you hearing from your customers out in the fields? How are things shaping up for producers looking at these relatively large basis - historically large basis?
Pfitzenmaier: In terms of old crop prices?
Pfitzenmaier: Most everybody I talk to is fairly well sold out of old crop corn. There is still a few people that think that there is a chance for a squeeze here. The problem is their squeeze time is starting to run out because the end users can - are probably bought out, I don't know two, three, four, five weeks depending on who you talk to. And then if they take a week or two of vacation, down time maintenance, whatever you want to call it, all of the sudden you are into the first part of September. So then everybody counters and says well, we got this late crop. The first of September doesn't mean what it did and I counter at that with number one southern crop - there is going to be southern corn available by the end of August. Now that doesn't help the northern end users but it does provide some corn that could go to export. The other thing is we don't need to have 100 percent of the corn ready. All we need is one or two percent and there are - there was corn that was planted in a timely manner that is going to pollinate and be early. So, again if you are holding hoping for that big run up you have got maybe a couple weeks here based on weather concerns for the new crop that might give you your chance. I think you are going to start to see those opportunities erode and once you go off the cliff it is an awful long ways down.
Pearson: Yes, it is.
Pfitzenmaier: To where new crop sets. So, there is a risk of overstaying that.
Pearson: So take advantage of the basis in your neighborhood if it is still available. Pfitzenmaier: Absolutely.
Pearson: Well now let's take a look at the new crop. We have had some export news coming with regard to new crop. We do have a weather market in effect as we look ahead to this next week. As you mentioned these rain storms. Where do you see new crop trending? We have held that five dollar mark reasonably well. Closed below it earlier this week, at it yesterday and today, is that a pretty good line in the sand for us?
Pfitzenmaier: I think so. This next two weeks is critical. Everybody is expecting rain - a rain event to come through Sunday, again Tuesday and maybe Thursday. And so if that happens you get the one or two inches of rain, general coverage across the Corn Belt, it is going to be hard to make the case for keeping corn prices high. If that doesn't happen there is a lot of vulnerable crop that really needs a rain and I think that you are going to see the crop go backwards. I guess the crop condition rating this Monday afternoon is probably going to show another one or two percent decline. It kind of does anyway this time of the year, but still it is kind of a critical time. We are heading into pollination. It really is important to have some moisture there. We saw a six percent drop in the Nebraska crop just last week. So, it is starting to creep in from the West and it has - I think at some point it is going to get the market a little excited and maybe, I am not talking shooting to the moon, but you could see new crop back up in that retesting that 528 resistance that we - that high we posted here three weeks ago.
Pearson: Right. We have been below it since then and it would take a pretty sustained weather event or lack of weather events perhaps is a better way to put it to retest that high.
Pfitzenmaier: Now you alluded to some demand and the weather has been fairly good to Chinese demand. Now we have penciled in pretty good demand number one. Number two the Black Sea area is offering corn at 50 to 60 cents under where we are. The South Americans are offering corn at 30 to 35 cents under. So except for those kind of unique situation with China demand is going to be a problem there. USDA has plugged in a big increase in livestock numbers and I am not sure they are going to be - they are off a little bit but they are not off that much. So, you know I think decreases from the USDA on the supply side maybe met with some offsetting reductions in the demand to keep that carryout in that 1.8 to 2.1 billion bushel carryout which too much corn.
Pearson: Right and if we start seeing those reductions in demand imagine those reductions in supply. Where could this Dec corn go?
Pfitzenmaier: I think it will get you down at 4.25 to 4.50 range assuming we have a carryout up in that level. Now that is not going to happen right away and it is probably going to take 60 days to get down there but I think by the time fall rolls around that is probably where we are going to end up.
Pearson: It is certainly in the cards. Pfitzenmaier: Yes.
Pearson: Well now let's take a look at soybeans. Again we are seeing very strong fundamental issues still taking place in soybeans. We just saw a nice little rise both in several contracts this week. Where do you see the soybeans headed?
Pfitzenmaier: Well, August soybeans are actually up 61 cents this week. So - of course July went off the board. August becomes a front month. The delivery period is coming up in August here in a couple weeks. So, again that crop is short. We don't know what the acres are. There is a lot up in the air. They are demand actually didn't held up fairly well but we got the same situation domestic processors are starting to make that calculation. Ok. I have got three weeks supply, take a little down time, all the sudden new crop is available. Do I really need to pay a buck or 80 to a dollar over the August board? When new crop if I wait around, new crop beans are 75 cents under the November contract. So again, a big cliff to fall over. I don't really think there are very many beans left in the country. I think they have pretty much pulled everything out. So, if that is the case why bid up? If bidding up isn't going to do you any good why do it? So, it is going to be interesting to see how that works out. As far as new crop beans go, like I said a lot up in the air that we don't know. August weather is critical. We don't even have very good forecasts out into August yet. August 12th, I think is going to be critical. That is when that next supply/demand report comes in. They are supposedly going to have the resurvey of the acres in that. Probably tweak the yield a little bit. By that time we are going to have forecasts that are fairly good out into the, you know 20th/22nd of August, the big chunk of August. So, I expect to see beans kind of chop around in here and not do much unless again it is dry next week. Then I think you got a chance of those November beans popping up over 13 dollars again.
Pearson: All right. So it is treading water unless we get a weather even one way or another.
Pfitzenmaier: That is the way it looks to me.
Pearson: Now the other big news we had come out today and it might not have been such big news. We had the Cattle on Feed Report come out. Tomm what were your impressions having taken a look at it this afternoon?
Pfitzenmaier: It came out almost exactly dead on with trade expectations. So, I really don't see that changing too much. We are going to be back to how the numbers shape up. We have had all this heat the last couple weeks so that has been not great for demand. You know we had a wet spring which hurt the growing season. Then all of the sudden it gets hot. So then nobody wants to grow again. So, the demand side of the beef has kind of been a problem. Again for a couple years supply has been pretty supportive and there is some expectations that those October/December cattle could get kind of fancy here before the summer gets at least another five to seven bucks. I don't buy that because I don't think the demand is going to support that, but there are those who do. I would say a couple three dollar rally in the cattle market and you probably better start being a seller again.
Pearson: Push that 125/126 in October cattle you are thinking?
Pearson: Ok. Begin to look at selling. Now as we look at the feeder market, what are your thoughts there?
Pfitzenmaier: If in fact we are going to have cheaper corn and if in fact we are going to have well supported fat market, I would guess that the feeder market is going to be fairly well supported in here. I am not sure it justifies. I am not sure you can buy feeders at those prices and make money but cattlemen seem inclined to want to do it anyway. So, I guess they are going to be fairly well supported.
Pearson: Now what have you seen on the international demand front? We know domestic demand has been suffering for the reasons you mentioned earlier. Internationally are we seeing any demand pick up?
Pfitzenmaier: That is off into our export demand hasn't been all that great in beef or pork the last couple weeks. So that is also been - it hasn't been just a domestic demand that has been soft. It has also been that export business. So, that is the problem. The numbers are good in - really pretty good in all the meats, just selling the stuff is the problem.
Pearson: Now keeping in mind the softening international demand as we hear reports of China slowing their growth down to 7/7.25 percent is that just another bearish factor on the meats in particular?
Pfitzenmaier: Absolutely. I think it could be bearish in corn and beans too in terms how much they will ultimately will buy. Yes, I think that's a bit of a problem also.
Pearson: All right. Well now let's take a look at the hog market. We have had a nice run up in the hog market the last couple weeks. Is that going to continue?
Pfitzenmaier: Again, the numbers are probably going to pick up a little bit. This heat is probably hurt the gains. We haven't had the gains we would normally hope to have at this time of year because of this heat. We got softer demand. A dollar or two more rally on that and I guess you would want to be a seller there also.
Pearson: So what sort of price range should you be looking at?
Pfitzenmaier: Oh, I guess up in - just up under a hundred on the front months there. I guess.
Pearson: And as we look out through the fall is there any hope of that staying near 100 or as supply kicks up we will begin -
Pfitzenmaier: Actually if supply picks up I think you are going to start to see - that is already anticipated to some extent but I think you are going to see some continued pressure back there.
Pearson: All right. Now before we let you go Tomm -
Pfitzenmaier: The other thing I think that you might want to talk about is this fact that crude oil is up to 108 and if that has the effect of pulling - and you have seen two or three refineries pull back, so you are starting to see gasoline prices creep up and it seems to me that any time you have those energy costs start to go up that almost directly goes to the consumer particularly on the meat side. So, that is another one that I think we kind of need to keep in our peripheral vision here on the affect it might have on the meats.
Pearson: Keep it in mind. It is all about dividing those consumers’ dollars. Thank you so much Tomm. We appreciate you being with us. That wraps up this addition of Market to Market.