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Market Analysis: Jan 28, 2011: Tomm Pfitzenmaier, Market Analyst

posted on January 28, 2011

An increase in South American exports helped push corn prices lower while the lifting of wheat import tariffs in the European Union left prices relatively flat.

For the week, March wheat gained 2 cents, while the nearby corn contract fell a little more than 13 cents.

As harvest rapidly approaches, good growing weather in South America pushed soybean prices lower. For the week, March soybeans lost 14 cents, and nearby meal prices declined $2.60 per ton.

In the softs, cotton remained in record territory, as the March contract posted a weekly gain of $7.81.

In the dairy market, February Class III Milk futures gained 50 cents while the deferred contract moved more than $1.20 higher.

Over in livestock, fed cattle prices held nearly even with last week gaining only a dime. Nearby feeders were up 67 cents. And the April lean hog contract closed at a 14-year high gaining a little more than $5.

In the financial markets, the Euro rose 2 basis points against the dollar. Crude oil gained 23 cents per barrel. Comex Gold declined by nearly 30 cents per ounce. And the Goldman Sachs Commodity Index gained three and a half points to close at 642.50.

Market Analysis: Jan 28, 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 Pfitzenmaier. Tomm, welcome back.

Pfitzenmaier: Thanks, Mark.

Pearson: All right. Well, let's I guess first talk about the fact that you heard the president talking about biofuels. He seems committed to them. Obviously so is congress. They've extended the tariffs and all that. That happened at the end of last year, which was surprising to a lot of people with the smaller crop that that would happen, that they're still pursuing the biofuels course. And ethanol demand still remains strong. Production is high; 13 million bushels a day of corn. So we've got that situation in the corn pit. And we've got soybeans that can't seem to produce enough soy protein to satisfy the world's demand. And then we've got the wheat situation too, which Australia was supposed to be the one that pulled it out, and huge weather problems down there. So let's start with that one, Tomm. Let's start with the wheat market. Tell us what you see ahead. The action this week relatively flat. But where are we going on wheat prices?

Pfitzenmaier: Well, it's kind of a tale of -- two tales in the wheat story. One is there's plenty of feed grain quality wheat. That wheat in Australia wasn't necessarily destroyed. It just isn't food quality. It's now feed quality and that's why the Chinese have been stepping in and buying it. In that respect, there's plenty of wheat, so to speak, in general. But the quality wheat is what's the problem. The u.s. crop doesn't look like it's going to shape up to be very good. Nobody around the world has anywhere near this much. So there's going to be a premium on top quality wheat. I guess I think overall we're going to see corn and beans and wheat all move higher, and all ships are going to be raised by that tide.

Pearson: All right. Saleswise, for the producer who hasn't done much -- and I know there's cash issues out there in wheat country as far as big basis differential, but are you stepping up sales, Tomm, or where are you on that?

Pfitzenmaier: Well, if you haven't made any sales, I think you're crazy to not be thinking some sales here.

Pearson: Well, you may be very rich.

Pfitzenmaier: Well, there's that possibility too. And going to be richer if you wait.

Pearson: Yes.

Pfitzenmaier: Yeah, these are good prices. You'd hate to see them get away from you. There's certainly -- I guess I'm friendly enough to think that you wouldn't want to sell everything and you'd want to hold some back to see where we can go here. But these are too good of prices to completely pass up.

Pearson: All right. So clean up old-crop sales? Start making new-crop sales? Where would you be on that?

Pfitzenmaier: Yeah, I'd be working on finishing up old crop, maybe just barely starting on new crop.

Pearson: All right. So you're not in a big hurry --

Pfitzenmaier: Not in a big hurry, no.

Pearson: All right. Let's switch over to corn. Again, we've had a huge move in corn. Not much this week. Surely there's some profit taking. I hear so much about the fund movement in there. Where are we on that?

Pfitzenmaier: The funds have been aggressively buying. At the end of the week here, we saw some profit taking, which we may see again Monday as, you know, traders sort of even up for the end of the month. But there's plenty of money. We've got all this stimulus money that's gone in and investors are putting a lot of that to work in the commodity markets and a lot of it is flowing into corn and it's probably going to at the beginning of February. You know, historically we see, mark, corn markets sag from late January into mid February, but we're in a whole different situation here with a carryout that's extremely tight and it's going to be difficult to break that -- I'm not saying you aren't going to have the 30-, 40-cent correction type pullbacks, but beyond that it's going to be difficult.

Pearson: All right. From a producer standpoint -- and we're in this period of time here where we're deciding acreage. A lot of fertilizer was applied last fall, Tomm, so I'm not sure how flexible that's going to be.

Pfitzenmaier: See, my point is a lot of the acreage battle was fought last fall, and corn won. Now, you know, most of the private estimates are saying around 91 million bushel -- or 91 million acres. And that's probably adequate if we have a good yield. I guess we'd feel a little more comfortable if we're up there in that 92-, 93-million-acre range. So that's going to be the question is: can we produce enough corn this summer; is the weather going to be good enough to allow that decent yield; and then what's going to happen with demand? You know, the reason they're crushing so much corn to produce ethanol is they got a lot of cheap corn bought and they're making a lot of money. Now, you get into next year and we're pay high prices for corn, I don't know if you can assume that ethanol production is going to go up this match. Cattle-on-feed numbers are indicating eventually we're going to have fewer cattle so that feed portion, although it hasn't dropped yet, is probably going to. And then you're down to exports. And then the big question there is, is china going to come in. There are some -- or statements were made by the u.s. feed grain council this week that they think there's still a possibility of some decent Chinese buying coming in here --

Pearson: In corn.

Pfitzenmaier: In corn. If that happens, then it's going to get wild quick.

Pearson: All right. Well, of course, it will be -- it's always dicey once fall hits -- or the spring hits. We'll see what happens. But in terms of making sales, Tomm, what are you telling producers?

Pfitzenmaier: Again, as in wheat, I think you need to clean up old-crop sales or, you know, get yourself up to that 80 percent. Again, I don't see nothing wrong with holding a few into the summer, because if we tighten this thing up like I think we could, you're going to see the basis continue to tighten and there's going to be a real demand for old-crop corn through the summer. So holding some into the summer, I have no problem with. As far as new crop sales go, certainly if you get new-crop December corn up in that $6 range, I think you'd have to start making a few sales. Like I told some clients this week, you'd feel really disgusted with yourself if this was the top and it fell apart here and you may have passed up selling some $6 corn. So I think you just have to do it.

Pearson: All right. Let's talk about soybeans. Again, very tight there. What's your take? What are you telling producers.

Pfitzenmaier: Again, it looks like the Chinese are going to buy every extra kernel of beans that we produce. So the carryout is tight and is probably going to tighten. There are -- very few producers have hardly any beans left, so that's not really an old-crop issue anymore. Guys that have them are probably going to hold them through the summer, and that's probably fine. As far as new crop goes, you get up to $13 plus, same thing as in corn -- $6 corn. I think you have to make a few sales up there. I'm not saying get aggressive but 15 to 20 percent certainly wouldn't hurt anything.

Pearson: All right. Let's talk about the cotton market. Such a huge move this week. Almost $8. This market is unhinged, Tomm.

Pfitzenmaier: Yeah, it's a wild old crop market. This is a classic situation -- and it's sort of true in corn and beans too where you've got the old crop substantially higher than the new crop, and everybody is pretty much sold out of cotton -- old-crop cotton. And nobody wants to sell that new-crop cotton because it's $50 less than the old crop, so they sit there. Well, the reality is $114 for new-crop cotton is still a heck of a good price for cotton. The wild card here in cotton as I see it is everybody is assuming we're going to have a two-million-plus acre increase. And I wonder about that because it's not -- these guys have kind of switched away from cotton in the last two or three years, switched to corn and beans, bought combines, build bins, all that stuff. Infrastructure is gone. It's really expensive to buy a new cotton picker. So I wonder whether they really have the money and the inclination to go out and do that. Now, I know the profits -- huge profit potential is there, and maybe that's going to drive it and make it happen. But there's going to be a big acreage shuffle between these four major crops, and it's going to be interesting to see if, even at these high prices, cotton can grab all acres they think it's going to.

Pearson: All right. Let's switch gears and talk about livestock which, again, hasn't been sitting idly by. Let's talk about fed-cattle market first. Obviously a huge week in hogs. But let's talk about fed cattle first. Where do you see us going in this fed cattle market? Do we sustain these levels or is it going to get stronger?

Pfitzenmaier: I think -- we had a cattle inventory report out on Friday afternoon, and it showed that heifers saved for beef-- to be beef cows were about 3.8 percent less than the trade was expecting. So guys just aren't -- everybody has been assuming, well, they're selling some cows but they're keeping back some heifers. No, they're not. So those numbers are going to continue to decline. It's going to have to continue to be supportive to beef. Now, the big wild card there is can we sell beef at higher prices. And everybody says, well, unemployment is high and blah-blah-blah, we can't sell the beef. Well, yes, for those that are unemployed, high beef prices are going to be a problem. But you've got to remember that almost 90 percent of the people are working, and for those people, they're doing fairly well. They're making decent money and seem to be willing to pay up for this beef. So I agree with you. There could be pullbacks. You could see April fat cattle pull back in at $1.09, maybe $1.07 area. Beyond that I think it's going to be very difficult to see them pull back, and we could go back up and retest those highs at $116 plus.

Pearson: All right. That heifer number is kind of scary because we've been shrinking this herd for a long time and we're not rebuilding it. So this is going to play right into the calf producer out there. The cow/calf producer has got to be smiling.

Pfitzenmaier: Well, and that's why you've seen these feed -- everybody has been scratching their head that his corn has gone up. Feeder prices have gone up. Well, that's why. I mean some of it is attributable to maybe grass wasn't very good last summer and corn is expensive and all that, but it's been a trend of reduction, reducing the number of cows, and it looks like that's going to continue and support feeder prices.

Pearson: I had a rancher up in Fargo, North Dakota, this week; he said a lot of it's demographics. These are older folks. They're seeing a great opportunity to liquidate the herd right now with these high kill cow prices, this high calf market, and everything else. So not a lot of incentive there to stick around in the business if you can get out on this much of a high note.

Pfitzenmaier: I've been hearing about that too. And that's historically who's -- had the cows is the small herds and mom-and-pop type operations.

Pearson: All right. Hog market, wild week, record price. Where are we going?

Pfitzenmaier: Well, with this South Korea -- this huge South Korean market that we're playing into, again, declining numbers -- I mean that's been a trend too, of course. Sow numbers have been going down. Productivity has been going up. But it just looks like that market has got quite a bit more up in it. Demand for pork is very good. Exports have been great. Numbers are probably going to be declining as we go into the spring. We're probably going to see the summer months hit that $100 level, maybe even take that out. We were close today actually. So, yeah, I think there's some more upside potential in hogs. They're going to get overbought. They're going to correct and all that but overall --

Pearson: Tomm Pfitzenmaier, 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 high flying 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.

And, of course, join us again next week when will see how a key ethanol producer is discovering what it takes to turn one man's trash into a cellulosic treasure. ….. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices corn markets news wheat