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Market Analysis: Feb 05, 2010: Tomm Pfitzenmaier

posted on February 5, 2010

Grain prices continued their downward trend -- albeit modestly -- this week as a strengthening dollar made U.S. commodities more expensive overseas.

For the week, March wheat moved fractionally lower while the nearby corn contract declined by a nickel.

With the South American crop rapidly approaching maturity soybeans also were under pressure. For the week, the March contract lost a penny, and the nearby meal contract was down $2.70 per ton.

In the softs, cotton traded lower again this week with the March contract posting a loss of $2.40.

In the dairy market, February Class III Milk futures declined one cent, and the deferred contract was down 12 cents.

Over in livestock, February cattle lost $1.62. Nearby feeders were down 55 cents. But the February lean hog contract gained 20 cents.

In other markets of interest, the Euro lost 230 basis points against the dollar. Crude oil fell $1.70 per barrel. Comex Gold declined $31 per ounce. And the Goldman Sachs Commodity Index lost more than 10 points to close at 473.50.

Market Analysis: Feb 05, 2010: Tomm Pfitzenmaier

Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Tomm Pfitzenmaier. Tomm, good to have you back.

Pfitzenmaier: Thanks, Mark.

Pearson: Well, we opened talking about the dollar and renewed strength in the dollar, it seems like it wasn't that long ago we were talking about how weak the dollar was and now it's how strong the dollar is. A few issues over in the European Union are really giving some strength.

Pfitzenmaier: They are giving us some great strength. I mean, we made new highs almost every day this week in the dollar and it's really going to be difficult for all of these commodities to rally much at all with that continuing to go on. You saw in your report we just read that crude oil down, some of the gold bugs are starting to give up a little bit, it's going to have far reaching effects and I don't think it's done going up either.

Pearson: I can remember you on the show last fall talking about when these currencies change directions it usually goes for a while.

Pfitzenmaier: Yeah, they trend for years, not just a few weeks, for years. So, we may be in for some problems, some rough roads here in the commodity markets just simply because of the dollar strengthening.

Pearson: All right, you mentioned gold being under some pressure, that has been a big spot, the people on media everywhere have been talking about get gold, get gold, get gold. Do you think that party is over?

Pfitzenmaier: Well, they're all excited about inflation and I'm not sure that maybe some cold water hasn't been thrown on these inflation fears over the last month or two and people are starting to rethink that a little bit. So, as a result they're pulling out of some of their gold positions. Maybe a year or two down the road inflation is going to rear its ugly head but it doesn't look like in the short run we have a lot to worry about, probably more to worry about with deflation than we do inflation.

Pearson: All right, good point. Let's talk some specifics here. Let's talk about this wheat market first. The wheat market has been under some pressure for really a long time and obviously in the crop report despite fewer planted acres really the wheat has still been under pressure.

Pfitzenmaier: Yeah, there's a lot of wheat around the world, we've got plenty of it. Again, the dollar rally isn't helping the demand for wheat either. So, rallies on wheat are designed to be sold and not very big ones either, 30 cents rally and you need to develop some sort of a selling strategy.

Pearson: All right, let's talk about the corn market. A couple of things have happened there. The renewable fuels standard II came out, we talked about it earlier in the show. It really wasn't all that positive for ethanol as far as a greenhouse gas reducer. This indirect land use thing ...

Pfitzenmaier: Yeah, the ethanol industry was just really sitting around waiting to see if this 15% cap, it's not really a mandate, it's a cap, is going to come along, approved next summer, probably implemented in 2011 and if it's not a mandate then it's going to be up to everybody's discretion whether they want to do it or not. So, I think the trade was pretty ho-hum about the whole ethanol portion of that report that came out this week.

Pearson: I was up in Grand Forks, North Dakota this week, a lot of corn still in the field up there, a lot of corn in South Dakota, a lot of quality issues are surfacing on this corn crop. Could that help give us a boost? Could that be a catalyst for this corn market to go stronger?

Pfitzenmaier: No, in a word. There's a couple of things that happened. I think the USDA fluffed up that feed and residual number on the January report on the demand side to sort of compensate for that. So, I think that's already sort of been factored in and everybody wants to be bullish corn because of quality issues and I guess I'd come back and say the other side of that is everybody, a lot of our end users export, corn we export in particular, are going to shy away from our corn because they're concerned about that quality. So, I think that has as much potential to be a problem as it does to be a benefit.

Pearson: What about the corn still out in the field with all the snow and ice and everything else that we've had in the Corn Belt?

Pfitzenmaier: Well, we have yet to see what that's going to -- people that are harvesting, sneaking out there and grabbing a little here and there are saying it's, some are saying it's not that bad, some are saying it's a big problem. So, I think we're kind of waiting to see when all this snow melts whether it's going to drag some of that down or whether it protected it or how that's actually going to work out. The general consensus is we're probably going to lose about 20% of what's out there.

Pearson: Okay, so the corn market you mentioned the feed usage issue which you've said for some time has been too high. They keep talking about every time they release a crop report in the last few years, Tomm, they have said we're going to have a revision. They used to not do that. They're doing it all the time now. What is the reason?

Pfitzenmaier: Well, I guess I'm not sure what the reason -- I guess the same reason they're doing revisions on the employment number. Every time they come out with one things change, they're trying to re-evaluate and sort of adjust on the go and I guess that's what you have to do. You have to do it through revisions.

Pearson: So, let's go forward now, corn crop, we're going to try and battle to buy some acres this year. Is that going to give us any kind of a rally?

Pfitzenmaier: There's no reason to battle to buy acres. The price of corn is pretty good relative to beans. As things tighten up here if you're a corn producer in general and you're trying to make these lower prices work the only thing you've got that can help you out at this point is better yield. I'm of the opinion that there's more upside potential in yield in corn than there are in beans for most producers. So, I think just by virtue of that we're going to have plenty of corn acres. I really don't think the mix is going to change all that much. If you talk to farmers, look at surveys, there may be some minor adjustments, I don't think that much. I think the whole bidding for acres thing is kind of bogus as far as I'm concerned.

Pearson: So, with that in mind what is your sales strategy for corn at this point?

Pfitzenmaier: At this point, obviously we've had a huge break. We talked about the potential of it to break a month or two ago. So, if you got something sold on that rally you're probably in pretty good shape. If you're sitting there wondering what to do now we're back, again, if you've got good quality corn store it, wait and see if the basis doesn't improve, let your bin do some work for you. If you've got quality issues go out and find somebody that will allow you to deliver that corn and maybe defer the pricing on it. I think you're almost going to have to now wait for some sort of recovery rally of 25 to 30 cents and then you're going to have to be an aggressive seller again. That is probably $3.70, $3.75 basis the March contract, $4.10, $4.15 maybe on the December corn contract and then you're just going to have to get right back with it and get some sales made.

Pearson: Soybeans?

Pfitzenmaier: Soybeans, same thing. And we've got this huge, huge number of beans, 31 to 33 million metric ton increase in bean production in South America versus a year ago. We've had very good bean prices in the United States over the last year because of the problems that they had down there. And we started to think we deserved to have those prices and maybe we don't with this kind of an increase. So, there's a big wall of beans coming, their weather is perfect, their harvest is starting to pick up down there so their beans are going to become available. I think beans have potentially got a lot of downside. Now, they're oversold, we could see a little pop up, 20, 30, 40 cents, turn right back to being a seller again but don't get your expectations very high. And the downside potential is $1.50 maybe from here.

Pearson: Okay, let that one kind of sink in. Real quick, cotton, they had a nice rally before the end of the year, now it's been under pressure.

Pfitzenmaier: Again, the dollar went in and slaughtered the cotton market plus I think everybody's expectations are that we're not going to see the competition from corn and beans down in those cotton growing areas that we have had so they're looking for a million to maybe a two million acre increase in cotton production. And with the problems we've got with the dollar and the inability to sell cotton we had a nice rally up, we had a pretty good pullback. Again, rallies are going to be designed to be sold in the cotton market too.

Pearson: Let's shift gears, let's talk livestock. Fed cattle market -- the economy, 9.7% unemployment rate, manufacturing number was decent, nothing is fantastic out there on the general economic front but it's getting a little bit better. Is that going to help the beef market?

Pfitzenmaier: People are going to have to get back to work for the beef market to go very well. The beef are facing some real problems with this Russian poultry ban and if we start backing poultry up that's going to back up into the pork, back up into the beef and it's going to be a problem. You've got to sell those high priced cuts of beef to really get a good beef price going here and we aren't yet. The restaurant business is starting to pick up a little bit but not great. People are tending to stay home and eat sort of moderate cuts. So, we need to get them back to work and spending some money before you're really going to have a good beef market. Now that is not to say we can't rally the live cattle market back up in to the $91, $92, maybe $93 range but expectations beyond that I think you're being overly optimistic.

Pearson: All right, there has been a good movement in the calf market. That wet corn helped out there.

Pfitzenmaier: Cheap corn always is going to support that market. I would suspect that's going to go right on through the spring. So, that feeder market is probably going to be well supported here.

Pearson: Real quick, 30 seconds Tomm, your thoughts on the hog market.

Pfitzenmaier: The hog market had a big rally, has had a nice pullback, the cutouts every day it's like watching a tennis match where it's up and down. If we can pull this pork market up and it doesn't get backed up by the poultry a $2 to $3 rally in pork it probably needs to be sold.

Pearson: All right, so some good news there. Of course, it's great feed buying opportunities in the livestock sector.

Pfitzenmaier: Yes, you get corn prices down 20 cents from where we closed on Friday night you need to start being a buyer of corn again for livestock feed.

Pearson: Well put, Tomm Pfitzenmaier, as usual appreciate your insights. That is going to 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 where you'll find streaming video of our program and you can download audio podcasts of our Market Analysis and Market Plus segments absolutely free. Of course, join us again next week when we'll ride to the end of the line on the Fresh Express, a unique train route that saves fuel and reduces greenhouse gases. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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