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Market Analysis: May 13, 2011: Tomm Pfitzenmaier, market analyst

posted on May 13, 2011

The report and an early week sell-off helped run the bulls out of Chicago.

For the week, July wheat lost 31 cents, while the nearby corn contract moved 42 cents lower.

Soybean prices managed to hold nearly steady for the week even as some traders were left to wonder if the commodity bubble has finally burst. With bad weather in the Midwest, the July contract was relatively flat falling 4 cents. Nearby meal prices followed suit finishing with a loss of 40 cents per ton.

In the softs, Cotton slowed its retreat, from all-time highs, to a walk, as the July contract lost 41 cents per hundredweight.

In the dairy market, May Class III Milk prices added to last week's losses falling 27 cents, and the deferred contract lost 11 cents.

Over in livestock, the June cattle contract lost 85 cents. Nearby feeders were off 32 cents. And the June lean hog contract gained $2.18.

In the currency markets, a stronger U.S. dollar continued to pressure the Euro lower as it lost 223 basis points against the greenback. Crude oil lost $2.47 per barrel. Comex Gold also traded sideways dropping $2 per ounce. And the Goldman Sachs Commodity Index gained 12 points to close at 671-even.

Market Analysis: May 13, 2011: Tomm Pfitzenmaier, market analyst Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Tomm Pfitzenamier. Tomm, welcome back.

Pfitzenmaier: Thanks, Mark.

Pearson: Well, obviously a big factor in all these markets this week was the U.S. dollar. Certainly the issues over in Europe continue with Greece. The rest of the pigs drawing everyone's attention, and the greenback is still what everybody calls safety at home.

Pfitzenmaier: The dollar got quite oversold. Everybody was just sure it had to go down. It's been in a downtrend for several months, solid down trend for several months. So, you know, it had gotten a little carried away on the down side. I agree with you, the euro falling part is obviously a big part of that. But I don't think you can discount the contribution that killing Bin Laden had to that dollar. There's still a military component to the dollar and its underlying strength, and I think it was just kind of a reaffirmation that you don't want to discount the U.S.'s ability to go out and take care of business if we need to. So I don't want to overhype that, but that was in the mix there. If you look at the timing on the dollar turning around, that kind of gives you another indication that that was part of it too.

Pearson: All right. It calmed crude oil down as well.

Pearson: Yeah, it did. Same thing. You know, maybe settling things down in the Middle East. Again a rally in the dollar is a big deal for all the commodities. We got overdone on all those. Silver, gold, crude, grains, all of it got a little carried away and it was due for a correction. And I think we've had that. Whether, you know, that's the end of it all and the bursting of the bubble and all that, I'm not sure, but it certainly was a market that needed to correct and has now.

Pearson: All right. Let's talk about specifics. First let's talk about the wheat market. I was down in Lubbock a month ago and been out in Kansas, and it's dry, Tomm.

Pfitzenmaier: It hasn't improved any since you were down there.

Pearson: Apparently not.

Pfitzenmaier: I mean every category -- I mean the spring wheat isn't getting planted. The winter wheat looks bad. We still have some dry weather conditions in Europe that they're talking about. Maybe Russia is going to be up a little bit, but that's still a little bit of an unknown whether they're going to have wheat to export or not. But, yeah, things have not really improved all that much on the wheat side. Again, it was caught up in this general commodity liquidation and got pulled over this week too.

Pearson: All right. Well, as we look down the road -- and you mentioned lack of planting progress in the Dakotas, which could impact our other markets as well. If we don't get that spring wheat planted, will we go to corn? What will we go to?

Pfitzenmaier: That's the question. You know, in past years and years ago, you didn't have a lot of choice. With this preventative planting and the insurance packages that are available today, there is a possibility that they'll just go to insurance and they won't plant anything. So you can't discount that possibility either here, given how things have changed over the last few years.

Pearson: Well, let's talk about the corn market too and what you see happening on that front. Obviously it's been a touch-and-go deal. We raced the crop in. Made huge progress. We'll see huge progress again, if not almost total completion by Monday's crop conditions report and plantings report. We're a little bit -- is the market calming down? Is the trade calming down a little bit about getting this 2011 crop in the ground?

Pfitzenmaier: I guess we'll have to see. I guess I take issue with -- I think we'll being lucky to see 60 percent of the crop planted on Monday, which means 40 percent of the crop is going to be planted after that critical may 15 time frame. So the USDA did lower their yield about 3 bushel under the projected trend line or the last ten-year trend line yield, so they did sort of make some adjustment to that in that WASDE Report this week. I guess I'm still a little leery that maybe there's more adjustment that needs to be made there. And then you have the issue of are acres going to -- that 92.2 million acres that they're projecting, are we actually going to have that many acres with all the flooding and, again, abandonment. I don't know. I think we're going to have trouble achieving that. That's probably closer to something under 91, in my mind, which, you know, puts that carryout right back down to close to pipeline levels.

Pearson: Last time you were on, you were pretty aggressive on getting some sales booked and on new crop in particular. That's worked out pretty good. What are you doing now?

Pfitzenmaier: I think if you get any recovery rallies on December corn that take you back up in that 660 up to 680, even if we should happen to work our way back up to 7 because of some concerns, I think you have to be -- get pretty aggressive. I mean number one, it's a good price for corn. Number two, it's -- we've been banging up into that area. We went a little higher than that in the July, which is, you know, a tight nearby situation that took it higher. Taking December corn up above that is going to require some real -- some genuine pollination, lower acreage, lower yields, some problems.

Pearson: There's another rumor floating around about China. There's rumors about some cash deals that are 50 cents above current basis for some of these livestock people for early fall corn. Are you picking up any of that? Will that start to affect the cash market?

Pfitzenmaier: Absolutely it's going to. The other think is this supply/demand report that was out last week. If you go back and you look at the end of March, we came out with a stocks number that said we somehow lost 200 some million. That's when you had that huge run up beginning the first week of April because we lost all these acres. Well, they come out in the April report and say we've got 675 million bushel carryout. So everybody says, well, you know, we lost more than that in that stocks report, so they must figure that 675 is the pipeline and they can't take it under it, because everybody thought we should be down around 500 in reality. Well, now all of a sudden this report comes out this week. They adjust exports by 50 million and add it directly back on, completely ignoring the loss that supposedly took place in the end of March report. So there's a lot of concern on the part of the trade of are we going to get jacked around all year again by stocks reports just like we did in every one of them last year. So we're really going to have to watch that end of June report to see how that stocks thing gets reconciled here.

Pearson: All right. So at this stage of the game, you want to get back up to to 660. Then you want to use some kind of a strategy --

Pfitzenmaier: Yeah. If there's weather problems, we're going to go above that. You know, I don't know whether you make a cash sale and buy a call to protect against it going higher or when it rallies buy a put or just rally and get a good price established and don't worry about it, whatever. I think you need to take some kind of steps to get some coverage up at those kind of levels. And December corn really hasn't fallen like the nearby has. So, you know, we aren't all that far off of those levels.

Pearson: That's true. All right. Let's talk about soybeans. Now, what's your take to soybeans as we go into the planting season intensive with beans?

Pfitzenmaier: There the question is are we going to switch some acres away from corn ultimately to beans? The problem with that is that by most estimates corn is 150 to 200 bucks an acre more profitable, so nobody wants to switch unless they absolutely have to, especially if you've put nitrogen on. That's another hundred acres you've gotten invested in there. So there's going to be a lot of reluctance to switch from corn to beans. Now, some of these flooding areas are scheduled to go to beans. It may not get the beans planted at all. If you look at the supply/demand report for the projected 2011-12, we're only talking about 160-million bushel carryout, which is only 20 million above what most people think is pipeline on beans. So you lose one bushel per acre and, boom, you're down way under pipeline. So this thing is really razor thin, and there's a lot of questions about whether we can achieve the production numbers that were sort of set here.

Pearson: That's right. And we hit those acreage numbers too. So you just want to leave the upside open, or what do you want to do for new crop?

Pfitzenmaier: Again, on new crop beans, I think you get November beans up in that 1370 to just under 14, again, I think you have to become a seller there. We do have a South American crop that's competing on old crop and are probably going to grow another one next year. So that's a bit of a limit on the upside on beans. Under the right circumstances if we have a lower acreage and a yield drop, there's a ton of upside potential in beans. So I guess I'd want to use some strategy that protected that or opened the top back up. Again, whether that's buying a put, making a sale and buying a call, some sort of a strategy that does that. But I think, you know, you get up where it's 14 and you're locking in 13 plus, that's not a bad price to have some beans locked in at.

Pearson: Talk about the cotton market. Obviously the old crop thing has run its course. New crop prices -- we've seen a huge pull back. A little bit of a stabilization this week. What's ahead in the cotton market?

Pfitzenmaier: We've killed off the Chinese export demand. Internal demand has been pretty good for cotton. But again, they've got flooding problems, weather problems. The Texas crop has got problems. So I think there's probably fairly good support here. We've had all the fund liquidation in that just like we had all the other commodities. I think we're going to stabilize here and tend to work higher now for a while. I guess I'd use those rallies when they come along to start making sales there too.

Pearson: All right. Let's switch gears and talk livestock. Fed cattle market had a great first quarter. Seems to be under some pressure here of late. I know gas prices have got consumer issues and so forth, but, when you look at it from a beef supply standpoint, it looks like it's going to be tight.

Pfitzenmaier: It is tight. You know, we had some of the best export -- that month of March was just fabulous exports. A lot of that was to South Korea. We're watching to see if that export -- if this dollar rally is really going to have some effect. You're also starting to see some resistance at the retail level. That's simply partially because, like you said, competition from gas from the consumers' pockets. We really haven't had a great spring for sort of getting the grilling season going either, so all of those have contributed. I think beef probably has some more down side in it, maybe down to that 105 level basis the June contract. You're right, the numbers are down. I'm always a little nervous when you have declining beef markets. There's a tendency on producers to resist selling, put a little more weight on. Maybe with the higher grain prices, we won't see that to the extent we have historically. But that can add tonnage and potentially be a problem there.

Pearson: Fill any hole that we might be seeing out in the future.

Pfitzenmaier: Exactly.

Pearson: We've always seen that it seems like. All right. Feeder cattle market, it seems to be fairly robust out there at the sale barn.

Pfitzenmaier: Yeah. There aren't a lot of them to buy, and the demand for them has been good. You get those high beef prices and everybody -- kind of stick in everybody's mind. Everybody thinks maybe we can go back to those levels. You have a little break here in the corn price. That gives everybody a little confidence. So I think you're going to see those feeder prices stay fairly well supported. Again, very low numbers. Hard to find them. That's in and of itself going to keep prices high.

Pearson: Let's talk about the hog market and what you see happening there. You mentioned cattle earlier. The export market for pork has been very strong.

Pfitzenmaier: Yeah, it's been even better than for beef in the month of March. Yeah, really good. Again, a lot of it going to Asia. And I think that's probably going to continue. Whether pork is probably going to not get hit quite as hard as beef does, if the economy gets tight, it tends to -- consumer tends to go to poultry first, then pork, and then beef is a little more of a premium product or that's the perception. So, you know, I think we may be overdone, the pork price a little bit on the down side here. I could see a little bit more of a rally back $3-$4 at the most, and then I think you'd have to be a seller of pork.

Pearson: All right. Covering any feed needs, Tomm? Is this the time to get it done?

Pfitzenmaier: Yeah, we've had a great break here. I think we've got the potential for all kinds of tightness. If you're a feed -- livestock producer, you absolutely have to get your feed needs covered -- your cash needs. Not horsing with the futures and all that. You need to get your cash product bought and cover yourself into that September time frame. We've had a good price break to get that done, and the basis is going to tighten up for you so that you're going to have a tough time getting anybody to part with it at very good prices, but you need to get it covered.

Pearson:Tomm thank you so much. That wraps up this edition of Market to Market. But if you'd like more information from Tomm on where these volatile markets just may be headed, visit the "Market Plus" page at our web site. You'll find "Expanded Market Analysis," audio podcasts and streaming video of our program -- all FREE -- at the Market to Market Web site.

Pearson: And be sure to join us again next week when we'll examine the life of a farmer and engineer who turned his dreams into designs. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news