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Market Analysis: Oct 08, 2010: Tomm Pfitzenmaier, market analyst

posted on October 8, 2010

As expected, the major grains and oilseeds all rallied sharply on the news.

For the week, December wheat recovered all of last week's losses, moving limit up on Friday to close with a weekly gain of nearly 65 cents. The nearby corn contract, which closed limit down last Friday, also traded limit up this Friday to cap a weekly gain of 63 cents.

The reports were also friendly to soybeans which recovered all of last week's losses -- and then some --with the November contract moving 78 cents higher. The nearby meal contract, meanwhile, gained more than $26 per ton.

In the softs, cotton also enjoyed a strong rally as the December contract settled Friday with a weekly gain of $9.15.

In the dairy market, October Class III Milk futures gained 79 cents, while the deferred contract moved 31 cents lower.

In livestock, the October fed cattle contract lost 40 cents. Nearby feeders were off more than $4. And the December lean hog contract gained about a dollar.

In the financial markets, the Euro gained 132 basis points against the dollar. Crude oil rose $1.10 per barrel. Comex Gold advanced $27.50 per ounce. And the Goldman Sachs Commodity Index gained more than 13 points to close at 562.25.

Market Analysis: Oct 08, 2010: Tomm Pfitzenmaier, market analyst Pearson: Here now to lend us his insight on these and other trends, one of our regular market analysts, Tomm Pfitzenmaier. Tomm, welcome back.

Pfitzenmaier: Thanks, Mark.

Pearson: All right. I want to get to the volatile corn in just a moment. But the rural catalyst to this market moving higher was what happened in the former Soviet Union and the new demand for wheat that was going to have to come from elsewhere including the United States. Real quick, with the numbers that came out on the Friday report what is your take for the wheat market as we look forward?

Pfitzenmaier: Well, the wheat market actually traded Friday. The corn and beans never moved. The wheat actually did trade for a while although it ended up limit. In the U.S. wheat supplies are adequate, they're not near as tight as they are in corn and beans. The other thing you have to remember about wheat is about every quarter there somebody has another crop of wheat coming on. The Russian crop is getting planted. There is wheat available around the world so it's not quite as tight. Having said that, if the other commodities go up wheat is probably going to too. I guess ultimately we could possibly re-test that $8.20 high we put in here a month or two ago. I think up in the upper $7s is probably going to be tough to get through in the wheat trade.

Pearson: All right. So, we want to start making sales there?

Pfitzenmaier: Yeah, I think you have to sell up against those -- up against $8.00, somewhere up in there. I mean, it's a good price for wheat. Certainly there is going to be competition for acreage and all that that is going to pull wheat along but the going is going to be tough above that level.

Pearson: The going is not tough, as you mentioned, in the corn market today. I mean, it just shot up, stayed there. That's a big reduction, a nine bushel per acre drop in this report. People literally were gasping for air. What is your thought, Tomm?

Pfitzenmaier: That yield was below the lowest of the trade guesses so it was a surprise -- I don't know that it was a surprise to everybody that we had a number that low ultimately. I don't think anybody thought the USDA was going to give it to us all in one big chunk like that. So, the concern now is once you have a drop like that in October is it going to continue to erode a little bit? You know, we've been getting reports over the last month that these corn yields are disappointing virtually from about everywhere, every part of the country, even in the northern belt where it was supposed to be really good it was okay, good in some places but not overwhelmingly good. So, I guess ultimately it wasn't a huge surprise but the fact that we got it all in one chunk certainly was.

Pearson: As we look at this -- I had several farmers say, boy, this could be bad news for ethanol, this could be certainly a big problem for livestock producers who have been clubbed pretty good already by bigger corn demand and smaller crop. How do you think this thing is going to play out? Are we going to see the continued strength the next week?

Pfitzenmaier: Yeah, I don't think there's any doubt you'll see corn higher to sharply higher Monday again. A lot of corn wanted to be bought and wasn't able to be bought on Friday so yeah, we'll be higher. If you're higher on Monday all of a sudden you're up into prices where it starts to get a little difficult for ethanol producers to make any money. Now, you'd like to think that a lot of them procured some corn or got some bought sort of, you know, insulate themselves from that. But still, it's going to be difficult. If you look at a tight carry out on 902 million bushel carry out how do you make that work? I mean, where do you choke off the demand side? Well, it's hard to liquidate livestock herds very fast, the dollar keeps getting cheaper and we're still the cheapest supplier of corn in the world so that is going to continue to keep exports at least semi-well supported so you have to look at that 4.7 billion bushel of corn that is used for ethanol as the slop that has to get rationed back somehow in order to make it work. So, to me that is where adjustments are going to have to be made whether it is plants slowing down, shutting down, becoming unprofitable, however that plays out, it seems to me that is going to be the primary place where something is going to have to give.

Pearson: All right. Producers are sitting here tonight going, limit up Friday, limit up again first of next week. Then do we start unloading corn?

Pfitzenmaier: Yeah, I think, you know, you get up in that $5.60 towards $6.00 range I think then you have to start looking pretty seriously at moving some corn. I mean, maybe it's going higher, I wouldn't say that it's not, but all of a sudden you're up in an area where nobody can make money using your product anymore, maybe it's time to start unloading some of it. And if you're still wildly bullish then use some kind of a put strategy or a floor strategy to at least guarantee yourself some kind of a decent price.

Pearson: All right. What about 2011? 2012? Do you want to go out there yet?

Pfitzenmaier: I absolutely do not. I think there's too many things, balls up in the air. I mean, there is going to be a fierce competitions for acreage this winter. It's not like corn prices are high and nothing else is. Bean prices are high, wheat is high, you know, there's a lot of -- cotton prices are high. So, I wouldn't want to get in any big hurry to sell 2011 corn.

Pearson: All right. Let's talk about the bean market, also benefiting, tight supplies with corn, it's going to ride long and like you said, the acreage battle of wheat, corn and beans is going to be a wild one. Should we start selling beans here?

Pfitzenmaier: Chinese demand continues to be strong. Again, the most bullish thing about beans is corn because beans have got to come along to keep up and hold their acreage. Some place we've got to pick up five to seven million additional corn acres next year and that's got to come from some place. So, again, if we have a good rally here up in that $12.00, $12.25 range maybe you start selling some old crop beans. Again, I'm not in a big hurry to start selling 2011.

Pearson: All right. So, you're sitting a little tighter there.

Pfitzenmaier: Yeah, I think you need to watch it and see. I mean, obviously the ideal marketing strategy is to wait and sell everything at the high and you kind of have to make a commitment on the way up on that. But I think you can be a little patient here.

Pearson: Let's talk about cotton because that was a record breaking contract for modern times.

Pfitzenmaier: I'll tell you one thing about cotton, if you need new jeans you better get them bought soon because next year's jeans are going to be more expensive.

Pearson: Absolutely.

Pfitzenmaier: The Chinese continue to be strong buyers of cotton. They are going to keep that market supported similarly to the way they have in soybeans. If we can break up above this old high at 106.40, you know, 115 is probably a possibility on the cotton so there is definitely up side potential there. Again, they need to fight for their acres too to be able to satisfy the demand for that product.

Pearson: That's right. Of course, beans are going to play into that and so it's going to be an interesting year. Not in a big hurry to sell 2011 or 2012, let's see what happens. It's going to be a big week next week and you would make some sales. Basis levels, are they spreading out? What is happening with corn and beans?

Pfitzenmaier: They're going to spread out -- it's kind of an interesting thing, the farmer was an aggressive seller of corn at lower levels because the crop really looked good in May and June and everybody though, wow, these are halfway decent prices, it looks like I'm going to have a great crop. Well, now all of a sudden you get up to these higher levels, they don't have the crop they thought they had, the percentage of corn that they sold it turns out to be a lot higher than they thought they had sold so farmer selling has really dried up. Now, in the short run as the futures go up you always tend to have the basis widen up as the cash market gets sort of drug along reluctantly. But ultimately I think the rest of that corn is going to get locked up and farmers are going to say, hey, I've got plenty of storage now for what I've got left, I'm going to stick it in the bin and see what happens this winter. So, I think after the bin doors are shut you're going to see that basis level snap back pretty well. You're seeing the bull spreading going on in the corn, that is usually followed by tighter basis levels eventually.

Pearson: All right, that's true too. Let's talk about livestock. Hopefully livestock producers were listening when we talked about this break in the corn market last Friday was maybe a great chance to get some corn covered. But let's talk about outlook price wise for the fed cattle market. Obviously the unemployment report didn't do us very many favors but we've had good rally in the beef business this years.

Pfitzenmaier: Yeah, they completely blew off that on Friday. Cattle prices were sharply higher mainly because of corn. You could paint a scenario for fat cattle to go all the way up to $115 and you can paint another scenario for going down to $90 depending on how the demand shows up here and how cattle producers react to all these higher prices in corn. So, I don't think the down side potential is great, December cattle may be down to $95, $95.50. Up side potential, who knows, that to me is a perfect scenario for using options. Leave some of your top side open, get yourself a good floor underneath your prices at your break evens or maybe a little less and then just see what the market gives you.

Pearson: All right. With the boxed beef movement, the last report we had it was really doing pretty well. It's a small cow herd, Tomm.

Pfitzenmaier: It is and it's getting smaller all the time. It is amazing what liquidation we've had and continue to have so ultimately that tells me eventually you're going to have higher cattle prices. Now, you know, is the economy getting better or isn't it? Are people going to go back to work eventually? There's a lot of balls up in the air in that respect and that is going to be the key to whether you have the really high prices or just kind of rock along here in the high 90s.

Pearson: Calf market, with this big of a move in corn on the board, really didn't do that much.

Pfitzenmaier: Not yet, eventually it's going to have to have an effect on that market. Eventually you're going to have to see producers stand aside especially if the fat market doesn't start zooming up here a little bit.

Pearson: I talked to some pork producers that were kind of seeing some black ink now and, again, good managers are going to be able to take advantage of those lower prices, got them locked in and be all right. But, again, it looks like another hit for that sector of agriculture, of the meat sector. So, what do you think is going to happen with hogs?

Pfitzenmaier: Weights have been creeping up. This new crop corn, these hogs have been gaining weight like crazy on this new crop corn.

Pearson: Good summer.

Pfitzenmaier: Yeah, good summer, good weather. Compared to last year they were feeding that lousy corn that we were harvesting so we're generating a lot of pork and I think that is going to continue to kind of weight on that market, not to say you aren't going to have little rallies that come along and pop us up over $80 but I think those are going to be difficult to sustain here.

Pearson: All right. Pork expansion not happening in your mind?

Pfitzenmaier: You know, that last report the intentions were for them to expand. I would guess with these higher corn prices and things changing a little bit that probably those intentions have changed since the September report and I would guess in December we won't see those intentions -- they will have played out.

Pearson: All right, Tomm Pfitzenmaier, well said, we thank you so much. That will wrap up this edition of Market to Market. Now, 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 and, by the way, it's all free and it's at the Market to Market Web site. Of course, join us again next week when we'll examine the financial impact of Farm Aid. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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