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Market Analysis: Tomm Pfitzenmaier

posted on January 10, 2014

Grain prices were mixed this week as the trade prepared for a slew of government reports. And when the dust settled Friday the downward trend in wheat continued while corn staged an impressive rally.  For the week, March wheat lost nearly 40 cents while the nearby corn contract fell almost a dime.  Soybeans bucked the bearish trend as the March contract settled with a weekly gain of 7 cents.  Nearby meal followed suit advancing by $6.50 per ton.  In the softs, cotton continued its downward trend as the March contract declined by 35 cents per hundred weight.  In the dairy market, January Class III milk settled above $20 again this week with a gain of nearly 50 cents while the deferred contract moved 56 cents higher.  Over in livestock, fat cattle traded in record territory again this week as the February contract settled with a gain of 40 cents.  March feeders were off 45 cents.  And the December lean hog contract declined by 85 cents.  In the financials, the Euro gained 6 basis points against the dollar.  Crude oil shed $1.24 per barrel.  Comex Gold gained $8.00 per ounce.  And the Goldman Sachs Commodity Index declined by nearly 5 points to settle at 610.35.

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 did have the big 3 government reports out on Friday, annual production -- annual summary, WASDE and the crop production report.  Walk us through what we saw in those 3 reports and how the trade is going to respond on Monday.

Pfitzenmaier: Well, I thought the corn number was probably the most significant in that through the fall we had gradual increases in the estimate of the crop yield and historically when you have increases through the fall that final number tends to be larger, that is what the trade had anticipated, corn market had sold off in anticipation of that.  So it was a bit of a surprise when the USDA lowered their yield estimate, came in with a carryout or a production number and also a carryout number lower than the trade is expecting.  I think there was a bit of a surprise that -- a lot of people have been talking that USDA was probably overstating feed usage and they bumped that up another 100 million bushel which kind of caught some people off guard too.  It did bump ethanol usage up 50 which is probably appropriate because we have been producing a lot of ethanol the last few months.  So overall I think the trade was caught leaning a little too much to the short side.  We had sold off hard, like I said.  We're recovered 20 cents so that sell off on Friday, I guess I wouldn't be surprised to see a little bit of a carry through on that maybe Monday into Tuesday, although I think the upside potential from there is probably somewhat limited.  Carryout of 1.6 plus billion bushel is still ample quantities of corn but we still have the prospects, we have a lot of wheat around which was also a negative report today, which was a negative report I should say.  So maybe we can get another dime, maybe 15 cents.  I guess I would be surprised if there's much more than that in the corn market.

Pearson: Watching this little pop we had in the corn market, on Friday as we head into Monday, would this be a time for folks to start looking at making some new crop sales?

Pfitzenmaier: Absolutely.  I think old crop, new crop, whatever.  They're still offering some pretty good basis levels in a lot of areas for old crop corn so I think you need to -- there's two reasons there to look at making sales.  Again, new crop was pulled higher.  We got almost up to $4.60 on Friday.  Certainly if you get above $4.60 to $4.70 I'd be a seller of new crop corn definitely because acreage is probably going to be maybe not up but certainly adequate and I just think we're probably going to build carryout again next year.

Pearson: Alright.  Now, you mentioned this report was bearish for wheat.  We're just continuing that downward trend in the wheat market.  Where do you think this could go as we're looking?

Pfitzenmaier: I think you're going to continue to see pressure on both corn and wheat longer term.  There's a lot of wheat in the world.  The demand for U.S. wheat has been diminished.  The crop is a little bit better than the trade was expecting.  So I think you're going to see, eventually see wheat pull back and work its way down toward $5.00.  I guess if you catch a little pop or corn should happen to pull wheat up next week that may be a good selling opportunity there too.

Pearson: Time to jump in there and take a little bit of risk off the table.

Pfitzenmaier: Right, absolutely.

Pearson: Now, how was the report in relation to soybeans?  Relatively neutral, kind of right near trader's expectations?

Pfitzenmaier: Yeah, they did increase the bean yield 3 tenths of a bushel per acre, that's exactly what the trade was expecting.  They made an upward adjustment in demand on crush of 10 million and exports of 20 million, also fairly well anticipated.  Completely left the carryout unchanged at 150 million bushel.  So I think the trade behind us now we're going to look ahead at okay, are we going to have Chinese cancellations?  How is the South American crop going to develop?  Are farmers going to plant more beans than corn next year?  I think we're going to pretty quickly start focusing on those sorts of issues.

Pearson: Now, as we start to focus on that you raised the issue of Chinese cancellations and, again, that large South American crop.  Should farmers be looking to make some '14 sales?

Pfitzenmaier: Definitely.  November '14 contract has dropped quite a bit.  It wasn't that long ago we were trading $11.50, $11.60 and we dipped up under $11.00 on Friday so it has already taken a pretty good shot down.  Certainly if you should have some little hiccup in South America or anything that can bounce that up in that $11.30 to $11.50 area we'd be sellers again.

Pearson: Might be worth jumping in there and making a little bit of sales.

Pfitzenmaier: Because I think there's a lot of downside.  If we have the acreage increase everybody is anticipating, we have this big South American crop -- they're estimating the Brazilian crop at 90 and some even think it could be 95 million metric ton -- that's a lot of competition and eventually that is going to weigh on, especially on that new crop month.  You could see that trade as low as $9.50 by the time the fall rolls around.  So for those that want to make that switch from corn to beans there's some downside price risk that you better take into consideration.

Pearson: Some risk is on the table.

Pfitzenmaier: Yes.

Pearson: Well, now let's look at the opposite side as we take a look over at the cattle market.  We have been setting all sorts of records in the fat cattle market both on the board and in cash, reports of $140 cash trade and $141 cash trade.  Where is this headed?

Pfitzenmaier: Well, to me it is acting, starting to act a little toppy.  That $141, $142 range I think is going to be, it's going to be tough because we're all -- not only are we seeing the cash goods for cattle up, we're also seeing all the products go up.  So, we've been talking really for a year about when this is going to start to hit a little bit and we are seeing weights actually fairly well under control and why the heck wouldn't they be.  If you've got those kind of bids for cattle you better keep moving them right along.  But the product being that high I guess I'm wondering whether we're going to be able to sell the beef.  And I understand that beef is a quality product, it is perceived that way, when people go out to celebrate they want a steak and most of the time don't care what they pay for it so there's that component of the beef market that is going to be supportive.  But, for anybody who is struggling financially, poultry and pork offer a pretty good value and that's going to be a problem for the beef industry I believe.

Pearson: And now, is that going to be a problem we're going to see overseas?  We know exports have been picking up. Where are we at price --

Pfitzenmaier: Actually exports have picked up in beef, they have really picked up in pork.  I wonder about that.  I happen to be in the camp that thinks the dollar -- if we have Fed tapering through the year, which looks like a probably good possibility, that's going to tend to be dollar supportive.  We've had it pretty well stated by the people in charge in Europe that they're going to stay accommodative to their stimulus.  So I would expect to see the dollar gain relative to the Euro and the Yen and so that is going to be kind of a head wind for these meat prices, both pork and beef.  But, maybe it doesn't matter.  Maybe they want to buy the stuff bad enough that they're going to pay up for it.

Pearson: It's uncharted territory.

Pfitzenmaier: Yeah, it is.  You're right.

Pearson: Now, is this support going to carry over into the feeder market here?  Do you think we'll see additional gains here in the next week or so as these cash bids make an impact?

Pfitzenmaier: I told someone the other day with these high beef prices, for what they're paying for feeders, those guys must be assuming a buck and a quarter corn because they have really got them bid up and it looks like they have no intention of stopping.  So I would expect that to continue, as long as you've got cash up and a downward trend in corn I think that feeder market is going to stay because the supply of them is pretty limited.

Pearson: And we were talking earlier, you mentioned we had heard about herd retention or calf retention beginning?

Pfitzenmaier: Not a big deal but 2% to 3% which is coming right out of that beef supply.  So there's another supportive factor that certainly should keep that feeder market well supported.

Pearson: You bet.  Now, you mentioned the export market in hogs has been hot and has been hot now for a couple of months.  As we take a look we're continuing to see hogs slide.  We dropped another 85 cents this month.  Where do you see us going next week?

Pfitzenmaier: I think there was a perception that that PED virus was going to be supportive on the pork side and that has turned out to not be as big a deal partially because we've got heavier hogs and that has created an increase in turnage.  If they start to get that under control a little bit and we continue with these weights and I think we're going to have plenty of hogs around, I think those June hogs up in that $101 to maybe up to $102 create a pretty good hedging opportunity for pork producers.

Pearson: Alright.  Now, as we're looking in the short-term, as you mentioned, is the export demand predicted to continue in the hog market?

Pfitzenmaier: Yeah, I see, like I said, I think the dollar is going up but probably not shooting up, just kind of gradually working up and in that case I don't see that having a big effect in the short run on pork demand.

Pearson: Okay. Probably going to continue as it has been.

Pfitzenmaier: Yeah, I think so.

Pearson: Now, before we let you go, we have seen crude oil dropping pretty substantially.  Do you expect that to continue?

Pfitzenmaier: Well, like your earlier report said, we're producing the daylights out of crude oil in the United States.  I understand that if the economy improves that's probably going to tend to help create demand for crude oil but I also expect stocks to be relatively high, stocks in distillates, both gasoline and the other distillates has been increasing.  So is the demand for crude oil going to hold up in that situation?

Pearson: We'll have to see.

Pfitzenmaier: Yes.

Pearson: Thank you for being with us tonight, Tomm. 

Pfitzenmaier: Thanks, Mike.

Pearson: 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 online.  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.  And be sure to join us next week when we'll learn why hopes are high for one controlled substance to become a lucrative cash crop.  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