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Market Analysis: Dec 12, 2008: Tomm Pfitzenmaier, Summit Commodities

posted on December 12, 2008

USDA's projections for corn and wheat supplies were larger than many traders expected, but favorable export numbers supported a week-long rally.

For the week, December wheat gained nearly 50 cents while the nearby corn contract moved 66 cents higher.

Soybeans also recouped much of last week's losses. For the week, the January contract gained more than 70 cents, while the nearby meal contract was up $18 per ton.

In the softs, cotton trended higher with the March contract posting a gain of more than $2.

In livestock, December cattle were up $1.78. Nearby feeders gained just over 50 cents and the December lean hog contract was off $1.42.

In other markets of interest, the Euro gained 686 basis points against the dollar. Crude oil gained nearly $5.50 per barrel. Comex Gold rose more than $68 per ounce. And the Goldman Sachs Commodity Index gained more than 30 points to close at 347.90.

Market Analysis: Dec 12, 2008: Tomm Pfitzenmaier, Summit Commodities Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Tomm Pfitzenmaier. Tomm, always good to have you with us.

Pfitzenmaier: Thanks, Mark.

Pearson: Well, the bubble burst this last summer on commodities overall, we've seen things trend down and down and down. With the action this week in particularly the farm commodities that we follow is there some comfort or is there a feeling that may we've had a bottom in here?

Pfitzenmaier: Yeah, I don't know how much comfort there is, but I think there's a chance that we have. If the dollar, like you indicated it dropped quite a bit this week, if the dollar is topped out, if the crude oil found a good base there at $40 and is going to rally off that level then you're starting to run out of reasons to be bearish corn. We still have a lot of concerns about demand, all three legs of that demand stool, if you will, have problems. But we've got corn down around $3 on the futures, that is pretty cheap and I'd guess represented a value for a lot of people.

Pearson: So, maybe this stage of the game we'll start to see some confidence coming back in. What about the funds and all of those people who have been in and out and played such a big part in this market going up?

Pfitzenmaier: Well, a lot of these index funds have been involved with this market all through the year, really, were really responsible for a lot of the rally that took place. The problem with it was you had a lot of people involved in the commodities market that really historically had not been college endowment funds, all those sort of people that really thought that they were buying another asset to class, to give them diversification and I think by the end of the year this year they were kind of I just want to be out of that, I don't want to own it any more, I want it off our books for the end of the year and ready to move. And we've seen a lot of that in the month of December here where just the last vestiges of their ownership getting washed out. I think once that's gone then you can start to see the market stabilize. I don't know there's going to be a lot of fund money come rolling back in here to give us a huge jump up for a while until something really significant happens but I think most of that selling is going to be done with by the end of the year.

Pearson: Let's get down to some specifics. The wheat market which has showed some strength this week as well, USDA report came out and it looks like there's plenty of wheat out there.

Pfitzenmaier: Yeah, there's plenty of wheat worldwide, that's been a problem for the corn market too is there's plenty of people willing to offer that wheat for sale at cheaper prices than our corn. There's plenty of wheat around and until we work our way through that wheat is going to struggle. That's not to say we aren't going to have nice short covering rallies like we had this week but if the dollar weakens and crude goes up that's not going to help support the wheat market as well. But you get another 50, 60 cent rally on this wheat market and I think you'd want to lose your enthusiasm for owning a lot of wheat.

Pearson: Maybe improve your enthusiasm to make some sales if you haven't done so?

Pfitzenmaier: Absolutely.

Pearson: What about '09 sales?

Pfitzenmaier: '09 sales, I guess at that point I think you'd want to take a pretty hard look at starting to make some sales there too.

Pearson: Let's talk about corn. As we watch this corn market and the pressure that we've had really since the peak this summer as we look at this market come down and hit these new lows, $3.15 in that neighborhood, you look at what these crop expenses are going forward even at those levels lofty though they may be for those of us that have been around a long time and have seen corn prices a lot lower than that still pretty hard to get excited about planting much corn. That's kind of what these surveys are telling us.

Pfitzenmaier: That's exactly right. I can't imagine anybody that planted corn on corn last year that didn't have all that great a luck with it isn't going to be switching to beans. That's one factor. I think a lot of people got sick of harvesting corn all the way through Thanksgiving and there's still quite a bit of corn out there that's not harvested yet. So, just eliminating some of that corn on corn accounts for a three to four million acre shift from corn to beans and that's what you saw this week. We finally got worked through all the outside markets, got them turned around, a lot of people sort of in the background over the last two or three weeks who have been talking exactly what you're saying, how are we going to get people to plant corn. And then you have a report here at the end of this week that kind of confirms that through a survey and all of a sudden the market begins to pay attention to that and we're going to start factoring that in as we go through the winter. Now, that doesn't eliminate these demand concerns, the ethanol industry has a bit of a problem, if we lose another 300 or 400 million bushel of demand for ethanol, feed usage number starts to drift a little bit, exports suffer, we've got cheap ocean freight rates and we still aren't moving a lot of corn and we had a good number this week, a good export number and we're hoping we can build on that and it's not just a one week aberration and then maybe we can start to build something here as we go into the winter.

Pearson: But all those things all have to start going at the same time, feed demand and all the others that you mentioned to pull all that together. So, we look at 2009 on corn, you can't be too excited about selling '09 yet.

Pfitzenmaier: We thought around $4.25 would be a place to start, we hit that on Friday. I wouldn't be very aggressive at that level but from $4.25 up to $5.00, $5.10, somewhere up in there I think you'd want to start making some sales and getting some coverage. That allows you to get approximately $4.00 for your cash corn and if you have any kind of yields I think people can at least survive at those levels.

Pearson: Use an options contract or would you just go ahead and sell the board?

Pfitzenmaier: It depends on what your comfort level is. If you think there's a lot of up side potential beyond that then I think you'd want to use an option, get a floor underneath you and see where the market goes. If you're in the camp to think that's about all we've got and that we can do then make some sales. If the market sags back then maybe put a synthetic put on by buying a call against it.

Pearson: So, a couple of strategies to consider for 2009. A lot of this corn has been put away on farm storage. They're going to have to have some kind of a rally just to get it to come back out aren't they?

Pfitzenmaier: Well, we've had some tremendous basis improvement and if anybody is sitting out there that's going to need to make some cash sales you need to start watching that pretty close because here is the chance for your bin to make you some money. It has allowed you to hold this crop through harvest, now go out and shop that basis because I'm afraid that after the first of the year, everybody's got money now but they're going to need money to put in a pretty expensive crop next spring and when everybody gets the holidays behind them and starts thinking about that I think you're going to start to see some corn sales especially if you have the kind of rallies like we had this week that basis could deteriorate, fall apart on you really. So, we're in a lull here where everybody is in a holiday spirit and not paying that much attention but it's a time when you really do need to pay attention because there's opportunities right now today that you need to take advantage of to get that basis locked up.

Pearson: What about soybeans?

Pfitzenmaier: I'd say I'd want to be by early Christmas or early winter I'd want to be 60% to 75% sold on old crop '08 corn. As far as soybeans go the USDA didn't change anything in that report. We've got some concerns about acres shifting from corn to beans and the pressure that might exert but we also have some concerns about the weather in South America, the fact that they didn't put fertilizer on like they historically do. The USDA on this report this week lowered their yield or their production estimate a little bit. Some people think if we have a little more dry weather that's going to have to be lowered again so there are supportive factors there. Export sales on beans continue to be good. We're kind of on pins and needles here when that's going to start to shift to South America. Argentina's got a lot of beans to sell yet and because of the disruptions of those export strikes last year. So, I think beans have some up side potential, certainly if you want to look at November of '09 beans if you get up in that $9.25 area plus to $10.25 I think you'd have to be scattering some sales in for the '09 crop.

Pearson: Good thought. Let's switch over to livestock, Tomm. It's been a pretty dismal quarter for the fed cattle sector, for the calf sector, the whole beef cattle industry has been struggling here. You talked this last summer about concerns about consumer slow down and what that could mean in the beef industry. We've certainly seen it now. What is your outlook ahead?

Pfitzenmaier: Well, there's no doubt that the supply side of the cattle, the numbers side looks pretty good, looks pretty friendly. The problem is the demand side. The consumer can go out and buy cheap pork, can buy fairly cheap chicken and there's not a lot of incentive to pay up for beef. A lot of people thought that the South Korean market being opened up would really help. It did nothing. A lot of people thought that with gasoline prices dropping from $4 down to $1.40 that would help and that hasn't helped either. So, the demand side of the beef industry is a problem. That's not to say we can't get rallies back up to $87, $90 on the futures. I think those kind of rallies would be designed to be sold.

Pearson: So, your outlook really isn't that much brighter going forward into '09?

Pfitzenmaier: For the first six months of '09. I think once the economy kind of gets bottomed out, things get stabilized I think the second half of '09 could be pretty good.

Pearson: Smallest cow herd since 1950, we've been talking about that for a long time. But in this calf market it has struggled big time despite the fact corn prices have dropped.

Pfitzenmaier: Exactly, if you have friendly news like cheap corn it's almost always an inverse relationship between feeders and corn and they have both dropped together, that's not a very good sign for the feeder market. The guys just don't want to have anything to do with it right now. I think that will change, you get into the springtime and there's some grass and optimism comes back and the weather turns I think you'll start to see that come back. But through the winter I think they're going to struggle.

Pearson: Talk about the hog market, Tomm. You mentioned cheap pork is certainly out there. Pork has depended a lot on exports.

Pfitzenmaier: Yeah, and exports -- last year they were phenomenal, the best we ever had and this year we're having the second best year so it's not like it's terrible but domestic demand there, again, even though pork is cheap you could buy -- a major grocery firm in Iowa is selling those really nice, big pork loins for $1.59 a pound, that's some pretty good eating for pretty cheap price. So, I think ultimately that's going to come in and help support pork demand but it's going to struggle the first six months too. Numbers are down there but only 1.3% so not a lot.

Pearson: And I know we talk about hogs and I'll hear from producers all winter long at meetings who are saying I don't want to even talk about hogs because it's all vertically integrated but obviously it integrates into everything else that we do.

Pfitzenmaier: Yeah, and there are individuals out there raising hogs that have some price risks. So, it's certainly still worth talking about. It's not all locked up yet and those guys I think if you can catch some rallies on those April and June hogs it certainly would behoove them to have some kind of coverage on it. Now, there is up side potential on that. I'd be more inclined to probably use puts or a put call strategy on the pork that I would the futures position.

Pearson: As usual, Tomm Pfitzenmaier, 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 might be headed why not visit our Market Plus page right there at our Web site. You'll find streaming video of our program and you can download audio podcasts of our Market Analysis and Market Plus segments absolutely free at our Web site. Be sure to join us again next week when we'll pay a visit to the National Farm Toy Show. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices corn markets news USDA wheat