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Market Analysis: Oct 30, 2009: Tomm Pfitzenmaier

posted on October 30, 2009

Despite showers keeping many combines idle late this week, earlier reports of better-than-average yields pressured grain prices.

For the week, December wheat lost more than 55 cents, while the nearby corn contract moved 37 cents lower.

The rare "harvest rally" in soybeans also ran out of steam. For the week, November soybeans moved nearly 30 cents lower while the nearby meal contract fell almost $4 per ton.

In the softs, cotton moved lower this week with the December contract posting a loss of 91 cents.

In the dairy market, nearby Class III Milk futures advanced 22 cents.

Over in livestock, December cattle lost $1.71. Nearby feeders were off $1.60. But the December lean hog contract was up nearly $3.00.

In other markets of interest, the Euro lost 298 basis points against the dollar. Crude oil declined more than $4.00 per barrel. Comex Gold lost nearly $20 per ounce. And the Goldman Sachs Commodity Index lost 27 points to close at 295.50.

Market Analysis: Oct 30, 2009: Tomm Pfitzenmaier Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Tomm Pftizenmaier. Tomm, good to have you back.

Pfitzenmaier: Thanks, Mark.

Pearson: Let's talk a little about what you see happening out there globally. GDP number was good. looks like the economy perked up some in the last quarter, which was good news. Globally are we seeing a pick up, Tomm?

Pfitzenmaier: It looks like we're trying to put in a bottom. I think that probably started about the middle of last summer. a lot of times when markets bottom out like this, everybody expects it to be a v bottom, and I expect -- suspect it's probably going to be more like a saucer bottom where we're going to go down and kind of bounce around here and build a base and then things are going to get better. So, yeah, I think that was an encouraging number out.

Pearson: Crude oil has been kind of leading charge. It pulled back some this week. We have we got a new trend starting or is this just a one-time occurrence?

Pfitzenmaier: I think all of this is related to the dollar. Everything we're going to talk about tonight is more than likely related to what's going on with the dollar. The dollar seems like it kind of stabilized this week, found a bottom, is trying rally here. We had that little setback yesterday on that GDP announcement but, other than that, it looks like it's stabilized and ready to have a little price recovery here. And as it does, that's going to pressure the cotton market, the livestock, grain, the whole thing, gold. Everything suffered because of that strengthening of the dollar.

Pearson: Is that a new trend or is that just more of a hiccup on –

Pfitzenmaier: That's just absolutely a hiccup. That's not the beginning of a trend. We're in a major down trend in the dollar that's going to continue for a while, maybe quite a while. There's a lot of money flowing out of the United States. A lot of fear over our tax policies and some of the other things that are going on. As long as that continues, the dollar is going to weaken. That's not going to say we're not going to have corrections. We're probably in the middle of one right now, but longer term it's a problem.

Pearson: Let's talk about some of the other issues. Some of the other -- let's talk first about the wheat market and talk a little bit about that. We've had some slow progress on this winter planting. What's your outlook on wheat?

Pfitzenmaier: We've got a ton of wheat around. There's plenty of it around. That's not a problem. The rally we had was related to fund buying. The market got overdone, \e got ahead of itself. Threw in -- just kind of throwing gas on the fire with the delayed harvest on beans, which backed up the planting on soft winter wheat. So, you know, that's all going to get straightened out. It got straightened out quite a bit this week, like you alluded to, down 55 cents. Rally is over five bucks and wheat is going to be difficult to sustain.

Pearson: If you get them over five bucks, do you want to sell them?

Pfitzenmaier: You've got to part with some wheat if that happens, yes.

Pearson: All right. Demand going forward. Obviously huge supplies in 2009 for wheat. As we go into 2010, are we going to look at similar numbers, do you think?

Pfitzenmaier: I think so. I haven't seen a lot of change there. I think the wheat demand is fairly stable. We've got a lot of competition around the world for it. We're going to sell our share, and that's probably about it.

Pearson: All right. Let's talk about an area where we've got a real weather concern, and that's the harvest of 2009. Obviously we're a month behind practically on this corn crop and bean crop. It's slow coming out of the field. All the yield reports that I've heard anecdotally – all my relatives and everybody else that's been calling me and giving me the updates -- it's a big crop what they're getting in. It's a very wet crop and it's got a lousy test weight.

Pfitzenmaier: I mean that pretty well sums it up. We've had a good to excellent rating on the corn crop all summer long for a reason, because there's a pretty good crop out there. I understand test weights are light. I understand they're wet. It's going to be expensive to dry it. There's a big bottleneck at the driers this year. That's all a problem for a farmer. It's a big problem. I'm not sure it's that big of deal in terms of total market. everybody got kind of caught up in this rally we had in corn the last two weeks, thinking it was totally weather related, and I maintain it was dollar related. We had terrible export sales actually the last two weeks in corn and yet we rallied corn. That tells me there's something going on besides just the fundamentals of the corn market, the supply side and demand side of the corn market that's giving us this little pop up here.

Pearson: The corn export numbers have been lousy this marketing year. What's your take? Is this just a slow start to the buying year, or do we have a real problem?

Pfitzenmaier: The corn market, it was a perfect example that you get below $3.50, pretty good demand for corn. You get up toward $4, it falls apart on you. The other disturbing thing we had out this week was the ethanol -- corn use for ethanol in the month of august was actually less than July. We had some plants coming on, on strain here, and we still had a little decline. That to me was pretty disappointing, especially in light of what crude oil prices have done and how much a rally we've had in ethanol prices. Barges have improved and everybody had been hanging their hand on that side of the equation thinking it was going to shore up the demand from livestock, and maybe that's not going to be so great either.

Pearson: The cash prices while okay, you're taking some big hits on this wet corn.

Pfitzenmaier: You are. Cash prices have been good from a pure basis standpoint. If you're looking for an opportunity to make some sales on a cash basis, you aren't going to get any better than we've had this fall in terms of a narrow basis to move grain on. Yeah, you're going to get huge docks. That's going to be a problem and it's going to reduce the price that you get for the corn. Not too many ways around that.

Pearson: All right. Something out to 2010, Tomm. If there's some places you can still sell $4, do you want to do it?

Pfitzenmaier: I liked selling corn -- December of 2010 corn when we got up in that $4.25 to that $4.40 area. If we get back up in that area again, I'd certainly be a seller. Down around four bucks or under, I guess I wouldn't get that excited about it, selling something a year out. There's enough things that can go on through the winter that I think you'll probably get a chance to get up in that area, which is going to lock in close to $4 cash.

Pearson: Good point. Beans. We haven't talked about beans getting docked for moisture in a long time. Boy, this year it's hitting. sometimes over 14 percent, 50 cents over 14 percent, 50 cents, over 14 percent, 50 cents, 15 percent or more, maybe a buck a bushel. Some people are getting hit in there with these very wet conditions. Of course, processors, they can't use the product. We've got a real challenge here in this cash market right now.

Pfitzenmaier: Again, this is going to contribute to the bottleneck. And it's not bad enough that you've got a bottleneck in the drier because of corn, but a lot of guys are being forced to dry beans too and that's muddling up their whole drying system. There's going to be some awful docks, and the weather we're having isn't really contributing to those beans drying down much.

Pearson: Not much as all. It looks like we're going to see drying corn in the forecast going into this week, and we can lock a lot of this crop out in a very short period of time if we get some decent weather. Hopefully some of these problems will be behind us. Let's talk fundamentally about what you see for soybeans. There's been huge export demand on soybeans.

Pfitzenmaier: There has been. Again, 60 to 65 percent of that is coming from china. The big scare is that we're also planting a big crop in South America. There are some estimates that jumped the Brazilian crop size estimate from 62 to 63 million metric ton up to 64, 65 this week. So as long as we can hang onto that Chinese business, the demand is going to be good. As soon as you have -- I mean one of your customers take 65 -- does 65 percent of your business, if they leave on you, things deteriorate pretty quickly. So that's a potential problem we need to keep a pretty close eye on. As long as they're buying, things look pretty good.

Pearson: Soft dollar has been helping out there in a big way.

Pfitzenmaier: Soft dollar actually doesn't help all that much because the U.N. is tied to the dollar. Other currencies, you see them -- their currencies change relative to the dollar and it benefits us. But the Chinese currency is tied directly to the dollar. It changes right along with it so that you don't get that much advantage to the Chinese by the dollar moving.

Pearson: As we go forward, like I say, a big crop -- we're encouraging more of that big crop right now with the kind of numbers we're seeing on the board, so we could see more expansion. They're still planting more acres down there. There's nothing about $10 beans that's going to discourage them a lot, I don't believe.

Pearson: All right. So what about making sales, Tomm, for soybeans?

Pfitzenmaier: Again, I think the 2009 crop, you've got an excellent -- a very good basis for harvest. You've got no carrying charge in the market, so there's no incentive to store the crop. \e so I guess if it was me, I'd be aggressively selling cash beans. If you want to reown them on the board, buy yourself a call. And if you think there's some upside potential, you can do that. But there's no real good financial reason to own cash beans, especially if you're trying to make a decision between putting those beans in a bin or putting corn in. There's a lot more advantage to storing the corn because of the carrying charge in the market there.

Pearson: We don't have that in soybeans. So you don't want to make sales there. Let's talk about this cotton market. Big enough on cotton primarily because of the wet weather in the south.

Pfitzenmaier: Again, same thing. Weaker dollar, wet weather in the south, cotton is notorious for not really standing up very well for wet conditions. It's got cotton rallied up, just banged up close to 70 cents. We pulled back a little this week. I don't think the downside potential is very great on cotton from these levels, and I would not be surprised to see if we didn't see 70 get taken out here sometime through the winter.

Pearson: All right, I want to take some time to talk about the livestock sector. That's been the most trouble. You just saw the segment we had on the challenges facing the dairy industry. I want to get to that. Let's talk about the beef cattle market first. Some good news also reported on the show. Maybe some more export business perhaps into Taiwan getting that trade reopened, which is critical. It's a small cow herd. What's your take on demand, though? Are we going to start to see this beef demand start to ignite?

Pfitzenmaier: I think you're starting to see that. You know, this GDP number is a little indicator that maybe things are starting to improve a little bit, and that's what we need to have happen. It's not going to be all that great the next couple of months because you've got the ham and turkey and all that competition over the next 60 days or so, but after that I think you could start to see things firm up a little bit on the beef side. So I guess I'm starting to be -- having not been very optimistic for quite a while, I guess I am starting to see a little optimism creep into that market.

Pearson: What we're seeing with this -- we've a couple cwt buyouts, the cooperatives working together for dairy. It's put more hamburger out there. A lot of people concerned about what could hold down the road for additional dairy liquidation, which could still be a downer on the beef side.

Pfitzenmaier: Yeah, that's going to continue to pull more meat -- they're almost going to have to have some more liquidation in order to get that shored up. So, yeah, that's going to be a problem. There's still plenty of beef on the market. I'm not saying, again, that we're just going to have a bottom in the thing. We're probably going to build a base and then start to work out of it as we get a little farther into 2010.

Pearson: All right. So do we have hedge opportunities? Do we buy these calves and make them work right now?

Pfitzenmaier: I think they need to get a little cheaper, and then you can. I think in terms of fat -- the fat market, you get up in the upper 80s and you're probably going to have to start looking at making some sales up in that 88. maybe as high as 91, 92, 93 on the February cattle is possible, if we have some weather event that kind of gets the market excited through the winter.

Pearson: Again, the dairy cycle, the continued liquidation, maybe that's what will bring up this class III milk price. The improvement in the global economy would seem to be such a critical factor to getting trade going again.

Pfitzenmaier: Again, that's probably going to happen, but it's going to be a slow grinding kind of a thing, not a quick improvement. And I think you're going to have to liquidate dairy herd in order for that milk price to get a lot better a lot quicker.

Pearson: So not overly optimistic but you've turned the corner at least in the beef market. We're going to start to see an uptrend.

Pfitzenmaier: Yeah, I think you're starting to see a little demand start to come into that market. I think the worst is probably behind us there.

Pearson: Let's talk about the pork business. Obviously some good news of the china decision regarding pork in this whole h1n1 fiasco. I don't think anyone anticipated that that was going to weigh in this market as heavily or as long as it has.

Pfitzenmaier: That wasn't good but we've also -- we've been killing a ton of hogs and had a lot of competition for the meat, so that's been a component, obviously. But I'm not sure that's been as big of a story as they tried to make out of it. We just had too many hogs around in a poor economy. That's been the big problem.

Pearson: Is it the vertical integration? In the old days we have more of a hog cycle. Is it more the permanence that we're going to be dealing with down the road?

Pfitzenmaier: I don't think there's any question that the people in the market -- or in the business today feel like they're in it for the long run. They're committed to staying in there as long as they possibly can. It's not like when we were kids and they drug a few A buildings out and if it didn't work, you pulled the A buildings back by the fence and hung it up for a while. They've got big financial commitments that are long term. A lot of them -- most of them are committed to riding that out.

Pearson: With that kind of a scenario, at least in the last hogs and pigs report, it looked like fewer and fewer independent producers left behind.

Pfitzenmaier: That's a mega trend that's been going on for ten or fifteen years, and I don't see anything about this that's going make that abate.

Pearson: What it does do is when you have excess supplies, it weighs on poultry, it weighs on beef. It has such an impact protein-wise.

Pfitzenmaier: Absolutely.

Pearson: Are we getting the sow liquidation now? Do you think it's starting to occur?

Pfitzenmaier: I think we're getting it. The problem was you really could have a few sows and then you increase the productivity, the ones that are left, and you don't really make that much progress. Yeah, I think slowly over time we're starting to do that. I guess, again, in 2010 I think that you're going to see a little better times for the pork producers.

Pearson: All right. So price-wise hogs, where do you think we're headed?

Pfitzenmaier: I think you're gonna go up. You've got a chance of going up and testing the high 50s, maybe even above that if demand can show up here. If the Chinese business or the Russian business comes in and amounts to anything at all, that's certainly gonna -- I mean that's been a big problem this year is exports have been way, way off. If you can start shoring that up a little bit, it's going to have a big impact on prices.

Pearson: Absolutely. Real quick, flip side for the livestock producer covering feed needs, what do you do? Do you think things are going to get softer? Are you in a hurry to cover needs?

Pfitzenmaier: We tend to drift lower in November. You have this good week next week with some fairly good harvest progress, some good hedge pressure. I think that's going to drive prices down some. So, yeah, in the next week or two, I think you need to keep your eyes open for some opportunities to buy meal as well as buying corn.

Pearson: All right. Do you want to buy the board? Do you want to buy cash? What do you want to do right now?

Pfitzenmaier: Buying cash I guess if that basis starts to fall apart. If the basis stays narrow here for a while, I think you want to stay with the board and wait for the cash to widen out. You've got a 13-billion-bushel crop, it's probably going to widen the basis out. Eventually some of that is going to come to town. At that time you can step in then and convert that futures position to cash.

Pearson: All right. Tomm Pfitzenmaier, as usual, appreciate your insights. That's going to wrap 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, where you'll find streaming video of our program. You can also download audio podcasts of our "market analysis" and "market plus" segments free at our web site. And be sure to join us again next week, when we'll examine the efforts of National Guard soldiers from Missouri who are beating their swords into plowshares to win the hearts and minds of farmers in Afghanistan. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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