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Market Analysis: Apr 24, 2009: Tomm Pfitzenmaier

posted on April 24, 2009

Grain prices reversed recent trends this week as both wheat and corn posted modest gains.

For the week, May wheat gained 6 cents, and the nearby corn contract moved nearly 5 cents higher.

But the recent rally in soybeans ran out of steam as the May contract lost 13 cents, and the nearby meal contract was down $1.70 per ton.

In the softs, cotton had another winning week as the December contract posted a gain of nearly $1.50.

In livestock, April cattle moved 57 cents lower. Nearby feeders gained 38 cents. And the May lean hog contract was down $2.70.

In other markets of interest, the Euro gained 223 basis points against the dollar. Crude oil was down nearly $1 per barrel. Comex Gold advanced more than $46.00 per ounce. And the Goldman Sachs Commodity Index lost nearly 7 points to close at 369.35.

Market Analysis: Apr 24, 2009: 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 with us.

Pfitzenmaier: Thanks, Mark.

Pearson: Well, it's been an interesting spring, it appears to be a very fast start to the corn planting for 2009. There seems to be kind of a softening this week in the commodity world. We watch what happens with the futures markets for oil and seeing a little bit of pressure there. What is your take on energy as we go forward? There has been obviously speculation as the world economy picks up that oil prices could pick up too.

Pfitzenmaier: Well, I think crude is sort of the thing everybody looks at to judge that and I suspect we're going to be in a trading range here with that mid 50s on the high side and the mid 40s on the low side and until things get really rolling here crude oil can't go up. You've got a huge carrying charge in the market. Every time you have a carrying charge market they're renting and leasing every ship and filling up with oil they can, sell those deferred contracts and sitting on it so there's this huge inventory of oil sitting around the world just bobbing around waiting for things to get better and as long as that situation exists crude oil can't go up much. You can have a trading range and you can move to the high end of the trading range and to the lower end but you're not going to break out until that carrying charge, Contango they call it, goes out of the crude oil market.

Pearson: So, with that being the case what are your global thoughts in general? Are we starting to see the world economy start to recover some?

Pfitzenmaier: That's what everybody is trying to say. I guess I'm not convinced that that's the case yet. We've had a dead cat bounce off the bottom where it looks like maybe things are going to get going but there's a lot of bad news to get worked through here. GM announced this week they're going to shut down for the summer. That's not good for the overall economy in the United States. So, there's some problems here that need to get worked through and I'm not convinced that we're going to go shooting straight up out of here.

Pearson: Let's talk about our commodity markets, let's start first with the wheat market and the food fiber as we look at what's happening worldwide. We looked at what's happening with the United States and we've had some real challenges for the U.S. crop, certainly the dry weather and then the freeze and I was just down in Oklahoma and I just heard it over and over again from people this is one of the worst that they've seen at this stage but still plenty of wheat around the world.

Pfitzenmaier: There's plenty of wheat and not a lot of people wanting to buy ours so that is a problem. There's problems around the world but we're not selling and so I think the upside on wheat is fairly limited, maybe 30, 40 cents. I feel for those guys in Oklahoma and the problems they have got but in terms of the big picture I'm not sure it's that big a deal.

Pearson: In terms of making sales, Tomm, is this the chance to be doing that in here?

Pfitzenmaier: Yes, again I don't know that I'd jump right in now, some of the technicals have turned higher and it looks like maybe we're going to have a little updraft here for a while, 30, 40 cents up at that point you'd want to start making some sales.

Pearson: That's on old crop and new crop?

Pfitzenmaier: Yes, absolutely.

Pearson: Let's talk about the corn market. I mentioned at the start of the show that it's going in the ground pretty fast in the western Corn Belt, slower for our viewers over in the eastern Corn Belt where they've had some challenging weather but they're talking this could be one of the fastest weeks of corn planting in history. That bodes well for getting corn produced and doesn't bode quite as well for seeing much of a shift to soybeans.

Pfitzenmaier: No, west of the Mississippi it's going to be really interesting Monday afternoon to see the planting progress because it has got to have been huge. Now, east of the Mississippi you hear all kinds of stories about not much going on so it's going to be a case of haves and have nots. The trade is looking for a planting progress number in the 20% to 25%. I wouldn't be surprised to see it 30% plus the way things got planned. Now, whether that report doesn't include all the days we've had so maybe it won't pick it all up but we really have planted a lot of corn this week.

Pearson: What is that going to tell you for making sales right now and for making new crop sales for '09?

Pfitzenmaier: Well, you always have that spring seasonal rally, a lot of times that is generated by concerns about planting progress so everybody is a little apprehensive here. Yes, a lot got planted in the west but no it didn't in the east, there's rain forecast in the east so if they get delayed for a couple of weeks then the overall progress isn't going to be that great. So, I think if you can catch rallies generated by weather that can take December corn up in that $4.25, $4.40, $4.39, somewhere up in there then I think you have to make sales. If you slip under $4.00 then I guess I wouldn't get too excited about it and kind of wait for some kind of a recovery.

Pearson: Maybe some kind of a summer weather rally, is that where it's going to come from?

Pfitzenmaier: Yes, and then you've got a lot of farmers pent up selling sitting out here too. You had some good sales when we bounced up against $4.00 on the cash market and then we kind of fall away, planting started, everybody quit thinking about it. Now when they get the crop planted if we bounce back up I assume you're going to start to see farmers selling and that $4.00 level is really going to be a cap on prices.

Pearson: It's been pretty magical so far.

Pfitzenmaier: It has been and I think it's going to continue to be. We still have a $1.7 billion bushel carryout expected and that's plenty of corn.

Pearson: Plenty of corn, the USDA their production number they have been dialing back the ethanol demand and we've had this report out of California, that came out on Friday that it's a billion gallon ethanol market for U.S. producers so there's a lot of concern out there on the ethanol front as well as with inexpensive crude oil.

Pfitzenmaier: You've got the government mandate so that's going to provide a pretty good floor, so to speak, for the demand for ethanol. On the other side of the coin we've had really, really good exports and so there is an expectation that the USDA's next adjustment on our supply and demand report we're probably going to have to boost up export sales and maybe offset that by reducing ethanol so who uses it is going to get shifted a little bit.

Pearson: Tomm, talk about soybeans and what you see happening on that front. Again, it doesn't look like we're going to have that slippage, at least in the western Corn Belt to soybeans, so some people are feeling a little more friendly towards the bean market but if we look at normal carryout, I think last time you were on, normal production, again, unless these huge export demand continues from China we could be looking at substantial soybean carryout going into 2010.

Pfitzenmaier: It could be huge. The other thing that's kind of flying around here is we have that seven million acres that really didn't get accounted for because the USDA said I guess it wasn't worth planting which is beyond me. If you have $9.00 plus beans the fringe area is supposedly where we're not getting planted, you've got that kind of a price for beans and probably fairly low cash rents in those areas, who wouldn't take a stab at throwing some beans out there. So, I think there's going to be some adjustments are going to have to be made in that regard too. So, I talked to people in Iowa that got started planting soybeans this week so they're going to go in the ground a lot of them in pretty good shape too here. You have any kind of a crop this summer and you're going to be awash in beans by fall. Now, you're right, old crop is tight, it's probably going to get tighter, exports have been excellent, we had a new crop sale that was really good this week, almost all that is China, they were trying to build up that reserve, they announced this week they're going to make that reserve a little bit bigger but as soon as that gets filled up then what happens. The other thing we have to take into consideration is granted Argentina's crop was poor, really poor but they also had a lot of beans carried over for next year and at some point they are going to run out of money and have to move some beans so we're going to bang up against that here at some point too. So, all we need is one extra bushel to make it through the summer and then we've got plenty of beans into the fall.

Pearson: So, with that in mind what's your strategy for making soybean sales?

Pfitzenmaier: On the old crop beans I think if you go up and retest those highs in that $10.70, $10.75 area maybe we can work up to a little over $11.00. Anywhere up in there I think you have to finish up your old crop sales and get that stuff moved out. In terms of new crop sales anywhere in that $9.40 to if some weather concern or some scare comes along that gets us up to $10.00, $9.90, somewhere up in there I think you have to start scaling up, maybe not using futures, maybe use options, some sort of a strategy that starts establishing a floor price of close to $9.00.

Pearson: Cotton continues to ratchet up, now granted it's coming from a pretty discounted level, but it has continued to rally.

Pfitzenmaier: Oh yes, very nicely. We had some dry weather in west Texas, that has kind of gotten them a little excited, we've got a lot of cotton in the traditional cotton areas being switched probably to bean acres, exports have been excellent. China, again, the big factor there. Domestic usage of cotton is as low as we've ever seen it, it's terrible. The millers just have no interest in it. But export sales are very good, a few weather problems with reduced acreage and all of a sudden we've got December cotton up in the mid 55 area. Going beyond that is probably going to be difficult but if there's some problems and the dry weather persists in west Texas and they don't get their crop -- dry weather isn't unusual out there so you don't want to get too excited about that -- but there's a little upside potential here for cotton.

Pearson: Not in a big hurry to make sales at this point?

Pfitzenmaier: No, but you get in the upper 50s and you'd have to look at it because, again, demand isn't that good, China has a little cotton reserve that they were trying to build up, again, same as beans when that's done their demand could fall apart at any moment on us.

Pearson: Demand for beef certainly at the hotel and restaurant, institution level dropped off sharply in the last quarter of 2008, it's been slow to rebuild itself. Tomm, the smallest cow herd since 1950 and all these cattlemen are scratching their heads, is it going to get better the second half of the year?

Pfitzenmaier: I've been harping all winter that the supply is not the problem, it's the demand and if you've got pork loins as cheap as they are against beef you can't rally the price of beef and get the consumer to buy it very much. Maybe there's some upside potential, we tried to be a little firmer this week but when you've got those competitive meats, chicken too, fairly cheap relative to the beef we're going to have a tough time moving the beef. Now, the cash market is above the futures relatively speaking so there's no sense in getting in a big hurry hedging anything, there's no opportunity there, you're going to have to have a pretty good rally up into the 86, 89 area basis the June contract before you want to get too excited about hedging anything. But it's going to be tough for that beef market to go much higher unless the economy turns and people really come back -- we're excited now because we think that grilling season has started and that's going to generate a lot of buying and that is yet to be determined I think.

Pearson: We've had this choice select issue that's been going for a while and obviously hamburger demand has been good and we've had dairy culling so there's not a lot of wind at our back here.

Pfitzenmaier: And that dairy culling has kind of backed off, it's going to pick up again here in another week or so, so you're going to have that problem kind of cropping up here. So, here's the other issue, the feeder cattle market traditionally you tend to work higher from now on into the fall but we've got some things working against that. If beef fat prices don't work higher, if corn prices stay well supported in here can people really afford to pay more and more and more for feeder cattle going through summer and into the fall. It's going to be difficult.

Pearson: I want you to talk further about this calf market and, again, as you say it's not about the supply but a relatively light supply of feeder cattle, we've seen a little bit of improvement in February and then we flatten back out again. You were thinking unless things improve dramatically that's where we're going to stay.

Pfitzenmaier: You're in the traditional time where if we're going to go up this is -- we had been going up some but, again, it's topped out, maybe not topped out but leveled off and I think it remains to be seen whether cattlemen are going to pay up for those feeder calves. If they can't make any money at some point they're going to back away from them or at least not continue to pay higher and higher prices for them.

Pearson: I want to talk about hogs for a minute. A bad week on the hog futures. We heard about reduced farrowings and we've heard about what should be some positive things but still a lot of pork out there?

Pfitzenmaier: There's a lot of pork out there, it's moved fairly well but there's been some bad news there too, the Russians have kind of backed away from us a little bit. Again, pork is the same issue, the numbers have backed off and that's been good but we've got to sell the stuff and get it moved and we're having trouble getting that done. So, we've got a situation sitting here in pork where you've got the cash market, the cash index down around $60, $61, you've got the futures up there in the $70s and everybody is sitting here being complacent saying I'm not going to do anything because the futures are at $70 but the two may come down and meet. If you're looking for a hedging opportunity when you've got a spread like that, almost as wide as $15, make a sale, sell those hogs up there in the mid $70s, assure yourself that that's the price instead of sitting around waiting to see if it's going to show up for you.

Pearson: Tomm Pfitzenmaier, well said. Thank you so much. We appreciate your passion. 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 where you'll find streaming video of our program. By the way, you can 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 a controversial decision in California mandating a 10% reduction in carbon content of all fuels by 2020. Until next time, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices corn markets news wheat