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Market Analysis: Dec 17, 2010: Tomm Pfitzenmaier, market analyst

posted on December 17, 2010

Grain prices were mixed this week, despite a weakening dollar.

For the week, March wheat lost more than 18 cents, while the nearby corn contract moved 22 cents higher.

Soybeans also were stronger this week as the January contract gained 25 cents and nearby meal prices advanced more than $10.

In the softs, cotton rallied more than $13 and settled above $150 per bale Friday to cap a record week that culminated in a $4 move in the final session alone.

In the dairy market, January Class III Milk futures gained 28 cents while the deferred contract moved 10 cents higher.

In livestock, the February fed cattle contract gained 55 cents. Nearby feeders were up 85 cents. And the February lean hog contract rose 80 cents.

In the financial markets, the Euro lost 57 basis points against the dollar. Crude oil advanced 29 cents per barrel. Comex Gold was down $13.60 per ounce. And the Goldman Sachs Commodity Index gained nearly 4 points to close at 610-even. Here now to lend us his insight on these and other trends is one of our regular market analysts, Tomm Pfitzenmaier. Tomm, welcome back.

Market Analysis: Dec 17, 2010: Tomm Pfitzenmaier, market analyst Pfitzenmaier: Thanks, Mark.

Pearson: All right. Well, it's another wild, woolly week in agriculture. I really think we probably should be leading with what the land prices are doing because we've had huge movement in the Corn Belt as far as land prices. And, of course, that's all tied back to what's happened with the profitability in the farm and corn and soybean and wheat prices. And again, this week, the tax bill that was passed had some key provisions there for extending ethanol. We're chewing up 13 million bushels of corn a day, USDA says, in ethanol, and that's going to continue and expand in the year ahead, and it was a short crop. So a lot of things out there. And the short crop in the former Soviet Union has had a big impact on the wheat market. Tomm, tell me what's ahead. Let's talk about the wheat market first. What do you see happening there right now, and what's should a producer be doing?

Pfitzenmaier: Well, the wheat market, as you indicated on your report, pulled back a little bit this week. Conditions improved a little bit in Australia. You know, they were on the wet side trying to harvest. They've dried out a little bit. South America got a little rain. It needed a little rain. U.S. got a little rain. So wheat pulled back and corn and beans rallied up. I think, you know, we've had a nice -- wheat also had gotten a little overbought. It needed to correct. It kind of did that this week. I would expect to see, ultimately, that March wheat go up and challenge that high of 810, so another 50, 60, 70 cents up here. And then we'll have to see what the circumstances are at the time, whether we can take that out or not. I think there's more upside potential in wheat, and I guess I'd be patient before I made a lot of sales here.

Pearson: All right. Is the cash market improving on wheat? Basis starting to tighten up some?

Pfitzenmaier: Some but not much. There's still plenty of wheat around in the U.S., so I don't expect the basis in wheat to tighten up like I do in corn and beans.

Pearson:: Let's talk about the corn market. Again, it was an up week in corn. Obviously the market didn't show much of a response, but obviously the president's signature on that tax bill, which includes the -- what they didn't think was going to happen, which was continuation of the blenders credit and, of course, the tariff protection for ethanol as well. Those are two big items. That could have meant, you know, perhaps a dent in corn demand, although we still have the mandates for ethanol. But not much of a market reaction, at least today. Was that just so anticipated?

Pfitzenmaier: No, I don't think it was anticipated. I think there's been talk about that over the last week or two, and I think that's what's put that 20-cent rally in the market this week, or was a contributing factor to it. Yeah, the ethanol industry is soaking up a lot -- lots and lots of corn. I think the USDA's number in terms of number of bushels used for ethanol is probably low by maybe as much as 2- or 300 million bushel. So there's room for the USDA to tighten up the carryout that's already tight. And I think that's going to continue to be very, very supportive to -- particularly to old-crop corn.

Pearson: Are you in a hurry to sell any corn at this point?

Pfitzenmaier: No, I'm not. You know, let me talk out of both sides of my mouth here for a second. I think there's more upside potential. I think things are going to get tighter. Export demand has been not great, but it's been what the USDA has been projecting so, you know, you can't argue with that too much. Feed usage is good. So I think there's more upside potential on corn. Having said that, this is a heck of a good price for corn. It's higher than most people have ever sold corn. And I think you'd be kind of foolish not to take advantage of at least some of it. I'm not saying go out and sell everything, but you really should take a piece of this, I think, or at least buy yourself a put and get a floor under it, in spite of the fact that I think we have more upside potential here, because things can change. Things can go wrong. You know, high prices tend to make -- people tend to make adjustments, and we may see that through the winter.

Pearson: The last time you were on, you said continue to watch the basis, and basis has improved in corn.

Pfitzenmaier: Yeah, it has, and it's probably going to continue. The farmer has been a very tight holder of corn. A lot of them sold more than they really wish they had -- wanted to last summer, and so they've held off here. You can -- I mean they can read the news. They can see too that things are probably going to work higher. And being patient has been beneficial, and that just continues to tighten up the basis. I think you're going to see all the way through next summer.

Pearson: So if you haven't done much, make some sales, take advantage of these markets, otherwise you're going to sit tight for a while.

Pfitzenmaier: Yeah, absolutely.

Pearson:: All right. Soybeans same story?

Pfitzenmaier: Basically. Things keep tightening up there too. We had a little bit of a disappointing export sales number this week. Had some cancellations and that kind of put everybody back on their heels a little bit. We still have the dry weather in Argentina, which has also been supportive of the corn market, by the way. And Chinese demand for beans continues to be very strong. We do have an acreage battle setting up here for next year, so that's sort of in the mix. I think you're going to continue to see tightening of the basis in beans and probably going to have to have higher prices.

Pearson:: But again, if you haven't sold, make some sales, take advantage of the --

Pfitzenmaier: Ease a little into the market and kind of reward these prices that are being made available to you.

Pearson:: But, patience, your right, has been a virtue in 2010 so far.

Pfitzenmaier: Absolutely it has.

Pearson:: All right. Let's talk about cotton. The last time you were on the show, you said buy your jeans now. And cotton has exploded again this week, so hopefully people got their jeans bought. What's ahead now for cotton, Tomm? These are pretty lofty levels.

Pfitzenmaier: Like you indicated, we closed over 150. I think we could go up and test 155. Who knows beyond that. Export sales, they're a big driver, and they were off just a little bit this week. I don't know. You know, that old-crop cotton market, about anything could happen there. We're expecting 2 million plus more planted acres next summer, so you aren't seeing the December new-crop cotton being drug along. But in that old-crop cotton, about anything could happen here.

Pearson: Some of the analysts were talking about acreage going into 2011 crop. And we -- literally, Tomm, it looks like we've run out of acres to buy. We've got this huge move in cotton, strong prices in beans, strong prices in corn, strong prices in wheat. Where are the acres going to come from?

Pfitzenmaier: Beans -- in my mind, beans are the ones that have got a problem. In most areas you talk to, corn is more profitable than beans are. There's a report out this week that indicated corn acres are going to be up 2, 2.5. There's a big battle being fought between corn and beans, and it's my contention that that battle was fought last fall. We had a great fall for getting field work done, fertilizer done. People made decisions last fall, and corn won that battle. Now, to what extent, we're going to have to sort that out through the winter here. But the beans are going to be a problem. If you have any kind of a hiccup in South America, that's going to tighten things up even more. So it's going to be really interesting to see how that shakes out, and it's going to be hard for either the corn or the bean market to break much. I think cotton is -- people -- at those kind of prices, you're going to get the acres from cotton. It's those other three that are going to be --

Pearson: -- Sowing some shifting.

Pfitzenmaier: Yes.

Pearson: All right, Tomm. It's been real interesting for livestock producers, and they're not the happiest campers right now about the ethanol thing and where that's gone. We have seen a nice move in this fed cattle market. You got a little bit cautious on fed cattle. What do you think going forward as we go into 2011?

Pfitzenmaier: I think we're going to be fine going a little farther out. In the short run here, you may see cattle prices, a February pullback in that 102 range. I don't see it breaking much more than that. It looks like the economy is starting to recover. They're starting to eat more beef, and I think that's been supportive. We did get the China thing opened back up, and that I don't think is going to have an immediate result, but it's a positive in the market. So I guess over time I think you're going to see that February contract probably work up as high as 107, maybe push that up a little bit. I just think longer term you're going to be fine. What's amazed me about all of this is how high priced feeders have gotten in the face of extremely expensive corn. People have really stood in there and paid up. When you talk to -- all over the place, feed lots are full. They're buying the feeders, keeping them strong, and apparently figure they can make some money.

Pearson: Apparently. Your right; very strong market in feeders. We've seen it on the board too, but cash markets and a lot of these calf sales, these runs have been huge. Let me talk about the hog market before we close, Tomm, and what's your take on hogs and where we're going from there.

Pfitzenmaier: It's been kind of interesting. You know, the numbers -- well, the numbers have been up a little bit, but they're starting to creep back down. The problem is the weights have been way up and their tonnage is way up. That's been the killer on the hog market. And if that continues -- and I'm not sure it will because indications are maybe we're starting to back the numbers off a little bit -- then there's probably, you know, some downside potential. February cattle -- hogs, excuse me, trading up around 75. The cash index down closer to 69. So there's a pretty wide spread there that we're going to watch and see who blinks and which way that moves. I'd guess you could still see February hogs work their way down toward 72 going into the middle of the winter. After that, again, if demand starts to pick up for meat in general, I think that's going to be helpful for the hog industry. We've been punished a little bit by all this turmoil between Mexico and us over this truck driver business. That's hurt some. That's probably going to sort of get pushed into the background here pretty soon, and I would guess that it's going to be supportive to hog prices eventually.

Pearson: We don't have a lot of time, Tomm. We've had a break in this grain market. It's back up again. What about covering feed needs?

Pfitzenmaier: I think any break, especially -- if we would have a correction in grains into the end of the year -- we've had a correction almost every month through this year, so having the funds take some profits at the end of the year -- the markets are pretty overbought, so if we can get some correction for that end the year, that's the time to step in and get some feed needs covered.

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 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 be sure to join us again next week when we'll examine the outlook for chestnuts. They're not just for Christmas anymore... Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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