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Market Analysis: Jan 30, 2009: Tomm Pfitzenmaier, Summit Commodities

posted on January 30, 2009

As the week began, the lack of rain in dry areas of South America kept grain prices afloat but a rainy forecast pressured prices downward as the week came to a close.

For the week, March wheat lost almost 15 cents, while the nearby corn contract trended lower by the same figure.

A rainy forecast in Argentina helped push bean prices downward. For the week, March soybeans lost 29 cents while the nearby meal contract lost $7.30 per ton.

In the softs, cotton dipped below the 50-dollar mark as the March contract dropped most of last week's gain losing a $1.23.

In livestock, February cattle lost nearly 70 cents. Nearby feeders were off $1.75. And the February lean hog contract lost 37 cents.

In other markets of interest, the Euro fell 183 basis points against the dollar. Crude oil lost $4.79 per barrel. Comex Gold gained almost $31 per ounce. And the Goldman Sachs Commodity Index lost nearly 12 points to close at 337.85.

Market Analysis: Jan 30, 2009: Tomm Pfitzenmaier, Summit Commodities 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: 2009 is underway and already it has turned out to be a volatile year so far. Obviously the situation in South America, dry weather, that kind of had the market going stronger and then we get these forecasts. It's kind of been an adjustment for us the last few years to start trading South American markets as weather markets for us.

Pfitzenmaier: Well, the weather markets down there aren't any different than the weather markets here and everybody kind of knows what happened last late June and July up here where it looked like the crop was getting worse, everything looked terrible and yet the market topped out and went lower and this week kind of had that same feel to it where they were still talking about dry weather and dead cattle in Argentina and all this stuff and yet the market kind of divorced itself and started to turn lower. So, technically things didn't look very good in the grain markets this week, as you alluded to in your report before this, we lost some ground this week.

Pearson: And I hear about exports and what the potential is for exports for all commodities, really for moving all products because shipping prices are so cheap. But except for beans it's been kind of a disappointment there.

Pfitzenmaier: Well, and then like you reported too how much does the dollar gain relative to the euro, that didn't help matters any either. So, especially wheat took a pretty good hit this week. Cotton did. Corn and beans not quite so much. But there's some other things going on there besides just shipping rates.

Pearson: That's right. Let's talk about the wheat market. Obviously some pressure this week in the wheat market, talk about a weather market, that's usually the longest weather market that we have is winter wheat.

Pfitzenmaier: Yeah, and there's some really dry conditions down in that Oklahoma and Texas area that has the market a little concerned. I guess we are going to be watching to see how the winter wheat comes out of dormancy over the next month or two. Again, like I said, export sales weren't very good this week. That was disappointing. So, I think there's recovery potential in the wheat market but probably not a lot.

Pearson: What is kind of your target, Tomm? We'll talk about Chicago wheat because that's what we show on the show.

Pfitzenmaier: Certainly if you've got it back up in that $6.30 to $6.50 area I think you'd have to become a seller and I know there are some who think we're going higher than that but I guess I'm not that optimistic. I think there's some -- demand is a big problem for wheat just like all the other commodities and I think that's going to keep any rallies limited.

Pearson: Let's talk about the corn market. It seems like a lot of head winds in the corn market these days. You've got the ethanol factor, the VeraSun bankruptcy, you've got reduced livestock numbers, your feed demand of broiler numbers and so forth, that's on the front. What is your outlook for corn just based on what we know here at the end of January? What are you thinking?

Pfitzenmaier: Corn has only had one thing going for it all winter and that has been this January drought in South America. If it wasn't for that corn doesn't have anything going for it. So, I guess I think any rallies in that March corn up in that $4.00, maybe on up to $4.10 if everything works out right I think we're going to have a tough time getting there but if we did that would be a place to get a lot of old crop corn sold. New crop corn $4.25 to $4.75, again, I think that top end is going to be tough to get to but maybe as we talk about acreage and all that over the next 60 days maybe there is some potential. But I think rallies are to be sold there. We started to see the momentum indicators and some of the moving average indicators rolled over and start to turn lower and I think the lack of demand here is going to continue to pressure the corn market. This demand problem that is being generated by all the problems in the country right now I think are going to plague corn throughout 2009. I just think it's going to be hard to get any demand straightened out in any of the categories you alluded to earlier through most of this year.

Pearson: So, you would clean up your old crop on rallies and start selling some of the '09 crop too.

Pfitzenmaier: Absolutely. I'm not saying go out and sell 80% of your new crop corn because maybe you will have a spring rally on acreage or on planting concerns or some of that but I think you need to get it bumped up to 10% to 20% here because this could very well be the best selling opportunity of the year.

Pearson: Let's talk about what's happening in soybeans where the exports have been good and obviously they have also had the other tail wind would be certainly the situation down in South America.

Pfitzenmaier: Well, the beans are a tale of two contracts. You've got the old crop beans and the new crop. The old crop situation has been certainly short but there's one word there, China. They have taken 57% of our exports this year. If you subtract them out exports haven't been all that great in beans. So, you need to have them continue to be in there in order for beans to continue to do well on the old crop. Now, you've also had this dry weather in South America. Having said that, that's being diminished. There is a big chunk of Brazil that is in very good shape and then the areas that were dry are starting to get some rain so that problem is starting to be mitigated. Now, we're starting to watch to see if the Chinese are going to come back after their Lunar New Year holiday and see if they come back. They have been trying to get their reserve filled. Once that is filled we have the potential for demand for beans on the export side just to nosedive here so you're kind of playing with fire by holding beans too long here. We've been given an opportunity to make old crop sales at fairly good levels. I don't think you want to let that get away from you.

Pearson: What are your targets on beans?

Pfitzenmaier: I think anything over $10.00, $10.25, maybe $10.40 on old crop beans I think you'd have to be a seller, somewhere around the $10.00 level basis the cash market in central Iowa. As far as new crop beans whole different story. You've got the potential for wheat acres to move to beans, cotton acres to move to beans, probably some corn acres moving to beans, you apply a 42 bushel per acre trend line yield to that and assume some fairly modest exports and demand numbers and all of a sudden you're looking at a $500 million plus carry out in beans next fall. I mean, that's not $9.00 beans, that's something substantially less than that. So, you get those new crop beans up there in that approaching $10.00 you've got to start selling some new crop beans.

Pearson: And you talk about the acreage battle in corn and soybeans right now, that's going to be very interesting and also you've got a million and a quarter of CRP acres that are going to come out too.

Pfitzenmaier: Exactly and everybody is running around here saying, well, bean prices are so much higher than corn so there's no way anybody is going to plant corn relative to beans and I think the one mistake they are making is there's more to it than just price, there's also the yield potential and the yield potential for corn is still substantially better than it is for beans. The hybrids, the seed technology we're putting out there is a lot better for corn than it is for beans and if you're paying high cash rents you need to make good profits on those acres you're planting. Corn is still the answer. So, there probably will be some reduction in corn acres. I guess I'm becoming convinced that maybe it won't be as great as we thought. Costs have come down, fertilizer is starting to work its way lower. I think when people start working the numbers corn doesn't look as bad as it did maybe around Thanksgiving time.

Pearson: Absolutely. All right, so that will be interesting. Again, that could be another opportunity maybe to make sales as that acreage battle heats up at the end of March. Real quick you mentioned cotton earlier in the show, back below $50 and just kind of a slow down. Is that the Chinese New Year celebration or what?

Pfitzenmaier: We had a fairly good export number this week and we still couldn't go anywhere. I think worldwide demand, again, a recession or whatever word you want to use around the world is going to be a problem for cotton. Now, you're going to have acreage shifting, like I said, probably to beans. It doesn't work that well down south to switch them to corn acres so it's probably going to be beans. So if you have any weather problems there is the potential for a pretty good bounce, a supply side kind of a bounce in cotton back up in that 55, 56 cent area basis the December contract, a good place to make some sales. If we don't have that and just strictly look at demand then cotton is going to have trouble sticking its head above 50 cents for very long.

Pearson: Let's talk about livestock and what you see happening there. Obviously cattle numbers, cattle on feed report was a fairly bullish number and the market responded negatively.

Pfitzenmaier: All we've talked about all winter long is everybody is bullish cattle because of the supply side, that's all you've heard ever since last fall is the supply is down, cattle on feed is down, placements are down, it's got to be bullish and continually forget that the demand for beef is poor. We've got an economic problem that has given us cheaper alternatives, people aren't paying up for the expensive beef and that continues to plague the beef market. I agree, if we had normal demand supply would dictate substantially higher beef prices but as long as this demand situation stays like it is, and like I said earlier, I think that's going to persist through most of 2009 and beef is going to struggle. I think you have the potential to see that April contract dip down under that $80 level at some point here before it starts to stabilize.

Pearson: And the calf market as you look at what's happening with feeders they've had a little bump there in the last ten days.

Pfitzenmaier: Historically we've always thought lower corn and higher feeder cattle and the two have been moving in sync with one another through most of the winter which has really been a huge surprise. I think as the spring rolls around people are going to be a little more optimistic. If corn prices are depressed I still think you'll see some people trying to buy some calves and is going to support them. But I wouldn't get too frisky on thinking that there's a big up side potential on that feeder market either here. Again, demand is a problem.

Pearson: Let's talk about the hogs and what you see ahead for the hog market. The last hogs and pigs report talked about fewer farrowings. You mentioned the strong dollar. Pork has been a big export item.

Pfitzenmaier: Yes, that's a big component of why pork prices have been as good as they are. You had that pork in the cooler up 20% here a week or two ago and that really killed the hog market. Everybody is kind of trying to be a little optimistic and that came out and that was the end of it. So, until we start moving that pork get it out of the cooler and try to get it exported. Now, the dollar is continuing to work not making new highs but it has certainly been firm especially against the euro and we're going to have trouble moving the pork and that's going to be a problem. Again, just like on the beef side demand is a problem on the pork side. The numbers aren't as big a problem as the demand is.

Pearson: All right, Tomm as usual you have touched upon everything. We appreciate it and appreciate your insights. That will 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 come and visit the Market Plus page, it's on our Web site. You'll find streaming video of our program there too and you can download audio podcasts of this Market Analysis segment and the Market Plus segments. It's all free of charge at our Web site. Of course, be sure to join us again next week when we'll see how young farmers are getting a chance to live out their dream. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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