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Market Analysis: Aug 06, 2010: Tomm Pfitzenmaier

posted on August 6, 2010


The Agriculture Department released its annual estimates on agricultural land values this week. According to USDA, the national average value of U.S. farm land rose 1.4 percent to $2,140 per acre, ranging from a low of $480 in New Mexico, to a lofty high of $13,600 per acre in Rhode Island. And like the terra firma itself, the values of coarse grains produced on agricultural land also are on the rise.

For the week, September wheat gained another 64 cents and has risen more than 20 percent in the past two weeks alone. Corn prices followed wheat higher as the nearby contract rose 12 cents.

Concerns over tightening feed supplies were friendly to soybeans as the September contract rose more than 27 cents. The nearby meal contract also rallied with a gain of $4.70 per ton.

In the softs, cotton broke through the $80-dollar barrier with the December contract posting a gain of nearly $1.50.

In the dairy market, August Class III Milk futures were up 10 cents, while the deferred contract lost 9 cents.

In livestock, October cattle gained 90 cents. Nearby feeders were off nearly $2. And the October lean hog contract lost nearly $5.

In the financial markets, the Euro gained 220 basis points against the dollar. Crude oil advanced by $1.75 per barrel. Comex Gold gained $21 per ounce. And the Goldman Sachs Commodity Index gained nearly 10 points to close at 533-even.

Market Analysis: Aug 06, 2010: 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, thanks for being with us. Let's get to it. The big story is this wheat deal. Russia, Vladimir Putin saying we're not going to export anymore. The market has been up wildly. Friday was kind of interesting, the action in wheat. What do you make of this wheat thing and how real is it?

Pfitzenmaier: Well, I think it's certainly real that Russia, the Ukraine, and Kazakhstan have all reduced crops. That's real, there's no question about it. I guess the question becomes whether it's as dramatic or as important as the trade and the people buying wheat tried to make it look. Obviously we rallied sharply this week, up the limit on Thursday, back down limit on Friday. A big part of this is money chasing commodity. You saw it in the wheat market too, where you mentioned earlier we broke up into new levels. That was related to fund buying. There's not a great return on people's money sitting in the bank and sitting here and there. So there's a lot of money chasing some place to find a good return and some place where they can find a good bull market. They found it in the wheat and they jumped on it hard. That also led to good buying in the corn market, where the fund positions are as high as they've been since the 2008 run up. So there's a lot of money out there running around looking for a home. That contributes to some of this rally. As far as the wheat crop goes, the Russians aren't going to run out of what they've got. Last year they had a big crop. They've got big stocks built up. If you assume most of the people that buy wheat from the three people I mentioned -- Russia, Kazakhstan, and the Ukraine -- don't historically buy wheat from the United States. So that's going to be the big question is -- we're not going to get a hundred percent of that business come over here. If we get 30 or 40 percent of it that would probably be doing well. The next step is what's the U.S. crop -- well, the U.S. has some of the biggest wheat supplies we've ever had. If you assume a hundred percent of that loss came to the U.S., we'd still have the fourth highest stocks we've ever had.

Pearson: Even with all the buying that's been lost, though, that the former Soviet Union states came over here, we'd still have the fourth largest excess of wheat on record?

Pfitzenmaier: Right.

Pearson: Wow.

Pfitzenmaier: So it's not really a running out of wheat problem in the world. It's a reallocation of where Egypt and all these places that are traditional, Syria, traditional buyers of Russian and former Soviet Union country wheat, where are they going to -- where are they going to now buy their wheat. Now, part of the reason we were down on the limit on Friday was that Russia did come out and say they were going to honor the sales that have already been made, which amounted to fairly substantial quantities of wheat. So that may -- that may have put the market -- the high end on the market on Friday. Now, everybody was looking at the market Friday and saying, wow, wheat was down the limit and corn and beans actually closed higher. And the explanation for that is there's been massive spreading where people have been buying wheat, selling corn and beans against it for the last two weeks. Well, all of a sudden wheat is down, so they're unwinding those spreads. That gives corn and beans a little pop. It doesn't necessarily mean that there's anything bullish that happened to corn and beans at the end of the week. It's just part of the trade unwinding.

Pearson: All right. So with the fundamental situation really not changed that much, huge increase in price, and a nice move -- nice rally in corn and soybeans, obviously you're telling the wheat producers to back the truck up and let's unload.

Pfitzenmaier: This is a good price. This is a great opportunity. I say that and at the same time you can't really do that because the basis has widened out. The cash market hasn't followed along here. this has almost all been a futures-driven deal, so the only way you do that is you either try to get somebody to do you a hedge to arrive, sell the futures and either make delivery on the futures contract or wait for that to come back together. You really can't drive the truck up to the elevator because the basis is so terrible.

Pearson: Yeah, it was a figure of speech because, you're right, the cash basis is extremely wide. But obviously, if you're looking at selling wheat, maybe go out to 2011, 2012?

Pfitzenmaier: Yeah, I think you can go out -- certainly go out to 2011. 2012 is a little far for me to go. It's hard for me to get excited about that. That brings up the next point is we could potentially have an acreage battle this winter. That's part of the reason corn and beans have been drug along here. If you're trying to make that decision and you're on the fence and you look at wheat prices, they match up pretty good relative to corn. and so there's some concern that maybe our balance sheet is going to be okay for 2010, 2011, but beyond that are we going to lose some acreage and have trouble holding -- you know, if we have an increase in exports because of these competition with the wheat and -- or problems in wheat -- in Europe and Russia, you know, that ramps up that whole acreage concern thing. and plus we're not exactly sure -- I mean the two reports you showed on companies that came out with estimates this week shows some increase in yield. And if we come out at those levels, we're probably going to be all right. If we don't and we're somewhat less than that, things tighten up pretty good here.

Pearson: All right. Make wheat sales. Corn and soybeans had a big rally too. Make sales there too?

Pfitzenmaier: Yeah, I think so. Certainly if you get up toward the highs that we put in this week, the December corn up in that $4.25, to $4.35, $4.40 area, if you could get to that, I think certainly would be areas to make sales. As far as -- you mentioned 2011. There could be more up in that but, having said that, at $4.49 to $4.50, locks you in $4.00 plus corn. If you can roll it out to July of 2012 for 30 cents plus, you know, that's $4.80 futures to pay for your storage, you certainly can make a case for that. I don't think input costs are going to get too far out of line for you for 2011. You'd have to take a piece of that. I wouldn't get super aggressive but I'd want to have some sales made out there.

Pearson: Over $10 in soybeans, Tomm, you'd make sales there too?

Pfitzenmaier: Absolutely. Again, you get soybeans run up to that $10.40, $10.48 high that we put in this week on the November beans, that's not quite locking in $10.00 cash, but up toward that level I think you'd have to be a seller.

Pearson: All right. Let's move over and talk about the livestock side of the equation. Fed cattle market has shown some resilience here. $148, $148.5 in the beef in Nebraska and Kansas this week. What's your take going forward? Obviously it's a small cow herd out there.

Pfitzenmaier: Yeah, numbers are down. That's -- that's the bullish side of that scenario. It's pretty easy to summarize. The second half of it is can we sell the meat at this high price, and I think we're running into resistance here. You saw April cattle up at $101 plus this week. That's a pretty good price for cattle. I think you'd have to take a piece of that, and all the way back to February and December too. Hit some pretty lofty levels and are probably going to work lower going into that august/September time frame. So for cattle you're going to have to sell in those periods. Otherwise, you know, you go out to April, look at what your breakeven is. See if you can lock in a good profit in cattle, make some sales.

Pearson: All right. And it's going to be somewhat challenging with what this corn price has done. Also, we didn't have much of a fade on feeder prices for the strength that we had in corn, did we?

Pfitzenmaier: No. They were off a couple bucks but not bad. Again, that goes right back to numbers. There aren't that many feeder cattle available that are getting bid up pretty aggressively, and it's a hard market to break. I think ultimately you could see that feeder market work higher, especially if you start to see corn prices back off, you know, when people get confident that we're going to have a decent crop, if we are going to.

Pearson: On the board this week, we talked about a $5.00 drop off in this hog market. What's your take on that?

Pfitzenmaier: What a wild deal that was this week. I mean we were up 5, down 5, all over. Those are the kind of moves you don't hardly ever see in hogs, and we did them in a week. The hog market is starting to look very toppy. It has that feel of a market that's shot up, kind of got overdone, shot back down. The cash market is starting to slip a little bit. I'm really uneasy about that market. I think you're going to have to be a fairly aggressive seller on that going into the fall.

Pearson: A couple of outside markets I wanted to talk about real quick. First of all, oil market. What's your take on oil?

Pfitzenmaier: We got up over -- we popped up over 82. Certainly if fund money continues flow into that market, the economy can start recovering a little bit. You could see it work up into the upper 80s. I don't think that's going to last very long. I think it's more likely to slip back down into 70s. But we did have a nice pop up and probably is going to be tough to sustain above 80 for a real long period of time.

Pearson: Gold is still making a move higher. What's your take on that? Is the financial market starting to calm down at all?

Pfitzenmaier: You had some nice pop up. The Chinese have announced they're going to start incorporating gold into their financial mix here. That gave gold a little pop up. Anytime you've got some uncertainty in the general economy, people tend to run the gold, so it gave it a nice bump up. I don't know that that's sustainable. I guess I'm not a long run big bull in the gold market but, you know, it does have some nice pop ups occasionally.

Pearson: All right. I guess the final thing, Tomm, we've only got about 15 seconds or so. But as you look at the situation and look at what's happening with the dollar, are we in pretty good shape there? Has the dollar seen its strength now?

Pfitzenmaier: The dollar has backed off actually, relative to the other currencies. Seems to have stabilized. I expect we're going to stay stable and chop around here and wait and see how Europe shows up relative to the United States. If the United States stabilizes, I think we'll see just see the dollar chop here for a while probably.

Pearson: Very good. Tomm Pfitzenmaier, thank you so much. That will wrap up this edition of Market to Market. 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 it's all free at the Market to Market Web site. And, of course, join us again next week when we'll examine Louisiana's seafood industry's struggle to recover from the largest oil spill in U.S. history. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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