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Market Analysis: Tomm Pfitzenmaier

posted on October 4, 2013

By week's end, wheat had recovered all of Monday's loss and then some while corn continued to struggle.  For the week, December wheat gained 4 cents while the nearby corn contract moved 11 cents lower. Soybeans tumbled on Monday's quarterly stocks report and settled Friday with a weekly loss of 25 cents.  Nearby meal prices, however, eked out a gain of 10 cents per ton.  In the softs, cotton continued its recent rally as the December contract added 55 cents per hundred weight.  In the dairy market, October Class III milk gained 19 cents while the November contract moved 22 cents higher.  Over in livestock, December cattle gained 35 cents, nearby feeders advanced by more than $1.00 and the December lean hog contract posted a weekly loss of 50 cents.  In the financials the Euro gained 37 basis points against the dollar.  Crude oil rallied nearly $1.00 on news of progress on the southern portion of the Keystone Pipeline and the looming threat of Tropical Storm Karen.  Comex Gold lost $21.60 per ounce.  And the Goldman Sachs Commodity Index gained nearly 3 points to settle at 638 even.

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: The topic all over the news, the topic at the top of our show, the government shutdown.  What effect is that having, if any, on the commodity markets?

Pfitzenmaier: Well, it's having an effect on the trade and having an effect on information because the USDA reports aren't coming out.  I can't really say that it's having any direct effect on any particular markets although I guess the hogs and pigs report that we had a few days ago came out and said that hog numbers were a little greater than we thought.  So everybody is trying to figure out does that mean the hogs were pushed back or that the hogs aren't there? Well, the only way to answer that is the daily slaughter reports which we aren't getting.  So in that respect it is probably having some effect because it's throwing some uncertainty into that market in particular.  The other ones I think everybody is just going to kind of react to private forecasts and carry on.  I think there's a good chance that October report, unless something gets resolved this weekend, probably is going to get pushed back, the October supply and demand report, sorry.  So uncertainty is never good in the market.  It tends to make things go lower.

Pearson: Certainly.  And uncertainty, the fear could be that markets, money is just going to pull out and sit on the sidelines until we get some reports back.

Pfitzenmaier: Yeah, there could be some of that too certainly.

Pearson: Alright.  Well, let's take a look at where we're at today without the government in place.  As we look at wheat we're up 4 cents even after Monday's sell off.  What is driving that wheat higher?

Pfitzenmaier: There's some pretty, there's pretty good demand for quality wheat, number one. Number two, the Black Sea area is having a little trouble getting their winter wheat planted.  So I think the combination of those two things has been pretty supportive.  I don't know that that's got a lot of carry through.  I still believe you get up around $7 in wheat, you've got wheat way above corn so there's going to be demand for wheat to feed is going to be practically non-existent.  So I think we've stretched that rubber band as far as we're going to be able to here.

Pearson: Because that spread did continue to widen all week --

Pfitzenmaier: Yeah, it did.

Pearson: So eventually we will see some pullback.

Pfitzenmaier: Yeah.

Pearson: Advice to producers out there?

Pfitzenmaier: Well, I think if you have wheat to sell I think you use resistance up against that $7.00, $7.05 whatever to start getting some sales made.

Pearson: Okay.  Well, now let's take a look at corn.  We had the bearish number come out on the quarterly stocks report, seemed to take a lot of folks by surprise, 200 million more bushels than the market was anticipating.  And corn languished all week.  Are we putting in lows this week do you think?

Pfitzenmaier: Absolutely not.  This corn market -- there's too much corn.  I mean, if we have another increase in yields, which we probably are going to have, and we struggle with demand we could be looking at a 2 billion, 2.2 billion bushel carryout and you aren't going to have $5.00 corn with those kind of prices.  We've had a nice little rally, the market got oversold, you had a little bounce because of harvest delays possibly over the weekend.  But the upside potential here I think is very limited and the downside is still pretty significant.  So no, I don't think any kind of a low got put in this week.  The demand for corn, ethanol is tapped probably at 4.9 billion bushels.  Feed demand, cattle numbers are down, hog numbers are up but not a lot.  Obviously we wouldn't be making new highs in hogs if there were a lot of hogs around.  Poultry is up a little bit.  And export demand, we're still 30, 40 cents above the world price on corn.  So how are we going to sell corn and meet the USDA's projections on demand?  Now, everybody says, well, yeah, exports are up 30-40% but the USDA is projecting them to be up 70%.  So even that isn't holding up.  So, no, if you're sitting on corn thinking that your revenue assurance program is going to be your marketing plan at some point you're going to have to sell some corn and develop a plan on how to do that.

Pearson: And probably looking at that supply of corn that is going to be coming off these combines, probably better to begin marketing sooner rather than later.

Pfitzenmaier: On a downtrend you're always better -- the faster you can sell stuff the better off you are and we're definitely in a downtrending market here.  Now, there's some strategies you can put together to sort of enhance that.  There's a good carrying charge in the market, probably is going to maybe even be a little more as harvest goes along.  You can sell that carrying charge and capture that to hold the grain.  There's probably going to be some basis plays because the areas in northern Iowa where all the ethanol plants are isn't going to be where the best corn is so you're going to have some deficits that give some opportunities there.  So there are things to do but the one thing I would point out is everybody you talk to says, oh I'm going to store my corn and take advantage of the carry.  Great.  Wonderful strategy.  The problem is to do that you have to sell the carry.  Just sitting here hoping, thinking that the carry is going to be there, that's not the way it works. The way it works is each successive month tends to come down to where the premiums went out.  So if you want to sell the carry you have to actually sell the carry.  So one of the things I think people really need to pay a lot of attention to here.

Pearson: Alright.  So that's good advice and I think that's important for people to remember that as we're putting corn in the bins trying to capture that carry.

Pfitzenmaier: Yeah, don't put it in the bin and just forget about it and hope things are going to get better because they did the last couple of years because a 2.0 billion plus carryout isn't really something that makes corn go up a lot.

Pearson: 2 plus billion, does that put us in the $3.00 range?

Pfitzenmaier: It certainly puts us in the $4.00 range or possibly slip under sub $4.00.  And then the other thing is looking at next year, we're going to go in on a carry in of 2 billion.  Everybody says, well, the corn to bean ratio favors beans.  No it doesn't.  If you compare the 2014 November beans to December 2014 corn it doesn't favor beans, it favors corn again.  So something is going to -- either beans are going to have to rally a lot or you need to be selling the daylights out of December 2014 corn here up against $5.00.

Pearson: Well, speaking of that, we're not seeing beans rally at all.  We're continuing to see a slide.  What is driving us in beans?

Pfitzenmaier: I think to some extent you've got a situation where the funds have been heavily long beans and all of a sudden you're starting to get bean yield reports drifting in that maybe the beans weren't quite as bad.  Now I'm not sure if we get into later beans if that is actually going to be the case.  But I think that is what is pressure -- the whole strategy for a lot of people has been to sell beans, store corn so you're -- as they come off the combine beans are being sold so that is pressuring it some.  You have the prospects of the South American crop being plant -- and planting is beginning, they're starting to think about it and their conditions are fairly good.  So all that I think is coming together.  Now, beans in my mind have more upside potential than corn does just because it's quite a bit tighter carryout.

Pearson: And looking at the world demand just seems so much greater for beans --

Pfitzenmaier: Yeah, the world demand is good and China is sort of always sitting out there as a potential price supportive factor.  And if anything goes wrong in South America that's going to be price supportive also.  So you've got a little different dynamics in the bean market than you do the corn in my opinion.

Pearson: Certainly.  Now one of the topics that has been discussed a lot is whether or not we have just front loaded all of our export orders or are we on a new export track where we're going to see exports continue at this current pace all winter?

Pfitzenmaier: Well, that's the question.  I would say probably not.  One of the reasons why people are selling beans off the combine and not storing them is there's a negative carry and there's a negative carry because there is an expectation that all those South American beans are going to get dumped on the market in February, March, April and so there's no reason to pump up and have a carrying charge in the bean trade.  So I guess I would argue against that as far as I'm concerned.

Pearson: Okay.  Alright.  Well, now let's take a look at cotton.  We have seen cotton come into a recent rally the past couple of weeks.  Is that going to continue?  What are some drivers?

Pfitzenmaier: I think it's in a trading range here.  Demand has been fairly decent for cotton.  We had that little spike up to 93 or whatever it was a month or so ago but the market quickly fell back down.  I think you're really in a trading range in cotton in 82 on the bottom side and you bounce up toward 90 you probably need to be a seller of cotton.

Pearson: Get in there and make some sales as it gets close to that 90.

Pfitzenmaier: Yeah.

Pearson: Alright.  Now, as we take a look over at livestock, we've seen cattle hot for the past month and we've got live cattle 35 cents higher this week.  Cash trade seems to be following.  Where do you see the cattle market headed?

Pfitzenmaier: Well, we've obviously, we've been in an uptrend in live cattle since I think May 5th.  So it has been a really nice, slow, gradually working higher market driven primarily by numbers and low numbers, feeder market driven by cheaper corn prices.  That has kind of had two things going in its favor.  I guess the question is are we going to be able to absorb and get the consumer to pay up?  Are we going to be in a situation where it's like gas where we kind of got used to, we complained like crazy about $3.00, it rallies to $4.00 and all of a sudden $3.00 looks like a deal.  Maybe we're going to run into that same thing.  There's a certain base of the population that likes to eat beef and we'll find out here if they're going to be willing to pay up for it.  If they are then you could see those December cattle work up into that $134, $135 range up a couple bucks from here.  If they can't we run into big resistance, they all start running out and buying pork and chicken then it's going to be a problem.

Pearson: How are the exports looking on the beef side?  We did have trouble earlier with Russia and China and ractopamine.  Did we get that squared away?

Pfitzenmaier: I think that's getting squared away.  I think that is one of the sources of the positive on demand.  I think you'll continue to see that help sort of underlie, give underlying support to the market.

Pearson: Okay.  So basically we're just looking at continued consumer demand, we're going to need the economy to continue to stay strong to keep those people buying.  Now, where have we seen box beef values going?  Have they been staying relatively elevated?

Pfitzenmaier: Yeah, they have been and they have been well supported.  That's why I'm saying, I'm wondering if the consumer isn't maybe getting adjusted to some of these prices and willing to accept them and help keep that supported here.  I guess I'm fairly optimistic although, like I said, we've already had a pretty good run and a lot of this has been anticipated by the market.  So the upside isn't great but I don't know that you want to rush out and make hedges until we get into that dollar or two rally from here.

Pearson: Okay.  Alright.  We're possibly getting close to the ceiling on fat cattle.  Now, as we look at feeders we have seen a tremendous rally, set off a contract high this week I believe in November feeders.  That is primarily driven by corn?

Pfitzenmaier: I don't know.  You're kind of forcing me here to put my boots and hat on and I'm not sure what motivates those guys that are buying those.  I know there's a lot of bad corn around and people are buying cattle to feed out to get rid of that corn which may turn one bad problem into two if they don't make money on the cattle.  But that is one of the things that has been a driver behind that feeder market being strong I know.

Pearson: And we've always been worried about that, the crush between the feeder price and the fat price but now that the fat price is rising maybe the guys have a little bit more breathing room to chase those feeders a little higher.

Pfitzenmaier: And, like I said, it's a double whammy because you've got declining corn prices and the perception that that's going to continue and so they're going to build that into the feeder price too.

Pearson: And is there decent carry in the cattle market in general?


Pfitzenmaier: Not particularly.  The deferred months aren’t that much higher.  They are up front here but beyond that, no.  So there's some incentive to hold cattle in the short run.  I don't know that there is farther out.

Pearson: Looking out nine months to a year.  Well, now let's take a look at the hog report.  You mentioned the hogs and pigs report that came out last Friday and it was bearish on the market.  We did see a little bit of a downturn, down 50 cents.  Are we going to hold at this level do you think or are we getting started?

Pfitzenmaier: See that is the question that could be answered by these slaughter numbers in that, okay, why are we where we are?  Do we have reduced numbers because of the swine virus?  Or was that no big deal, it's been thrown up?  Or were there heat problems that hurt the way the hogs produced this summer?  The deferreds are a little higher than the nearby so has that incentivized hog producers to hold hogs a little longer, put a little more weight on so all of a sudden you have a little hole here?  And if those hogs start to show up or don't start to show up kind of answers those questions.  So that is why I said earlier in the show how this slaughter thing shapes up over the next three weeks is probably going to be kind of important.

Pearson: Now, heading into the government shutdown we were seeing reduced slaughters 10-12% below year ago levels.  So that's the question.

Pfitzenmaier: That's the, yeah.  Is it the disease?  Is it the hogs aren't there?  Did they not do well?  What answers that reduction?

Pearson: So, producer advice in this time of uncertainty, without those reports how do you handle it?

Pfitzenmaier: We've, again, we've had pretty good prices in pork.  I think you get December hogs up in that 89, 90 cent area I think you'd have to be a seller of hogs too.  That's a pretty fancy price for hogs.  If we do start to see those numbers show up that market could top out at any moment here.  So I'd want to have some, you know, if you think what I say is completely full of bologna then buy yourself a put and leave your upside open a little bit.

Pearson: Wonderful.  Thank you so much, Tomm, appreciate you being with us.  That wraps up this edition of Market to Market.  But Tomm and I will continue our discussion and answer some of your questions in our Market Plus segment on our website.  You'll also find audio podcasts and streaming video of our program as well as links to our Twitter feed and Facebook account exclusively at the Market to Market website.  Be sure to join us again next week when we'll examine the market impact of a highly anticipated supply and demand report, if the stalemate in Washington is resolved and USDA releases it.  Until then, thanks for watching.  I'm Mike Pearson.  Have a great week.

Tags: agriculture analysis cattle commodity prices corn cotton dollar economy feeders gold live cattle markets Mike Pearson soybeans Tomm Pfitzenmaier wheat