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Market Analysis: Oct 24, 2008: Tomm Pfitzenmaier

posted on October 24, 2008

Continued volatility in the financial markets revealed its influence on commodity prices again this week. And in the wake of a global collapse in stock markets grain prices fell precipitously.

For the week, December wheat lost 50 cents, while the nearby corn contract moved more than 30 cents lower.

Soybean prices also were under pressure. The November contract posted a loss of 30 cents, while the nearby meal contract fell more than $10 per ton.

In the softs, cotton prices slipped below $50 with the December contract losing more than $6 per bale.

In livestock, October cattle were down $3.20. Nearby feeders moved $2.25 lower and the December lean hog contract was up more than $2.00.

In other markets of interest, the Euro lost a whopping 816 basis points against the dollar. Crude oil declined nearly $8.00. Comex Gold was down almost $60 per ounce. And the Goldman Sachs Commodity Index lost more than 40 points to close at 428.40.

Market Analysis: Oct 24, 2008: 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: Again, capital markets in a frenzy, in a panic this week, extremely volatile trading, commodity markets following suit, sharply lower corn, soybeans, cotton, all the crops that we follow on this show. The one exception was lean hog futures made a move up. What is your take? Crude oil is down 50%, corn and soybeans down 50%. Where do we go from here?

Pfitzenmaier: Well, I think you have to start with the equity markets and the dollar in particular because that's the one thing that is the common denominator amongst all the other commodities is this reversal in the dollar. If you think about it for years and years the dollar has just been dropping. We've sort of incorporated that assumption into all of our investments, all the hedge funds, everybody has been using that as an assumption and it's very deep within their strategies. Now all of a sudden that is totally changing and there's a lot of liquidation of those positions to be done. If you watch the dollar you refer to it against the Euro is just huge jumps that took place in the dollar this week and that has ramifications to all of the Midwestern commodities that we tend to talk about.

Pearson: Strong dollar makes their prices higher.

Pfitzenmaier: Absolutely. It makes the product more expensive, it makes it harder to sell. The dollar is stronger because the people that we sell things to are in worse shape than we are here and if the people that are buying your product are having problems you're probably going to have problems too.

Pearson: The word on the street is deleveraging, we're seeing this deleveraging occur. Has enough of it occurred yet? Or is there more to come?

Pfitzenmaier: I think there's still more to come. I think there's more strength to come in the dollar. That is going to continue, again, to pressure particularly exports and probably some other things too. I mean, if you have problems with the livestock demand that transfers over into demand for meal and corn so it's all kind of interrelated in that respect.

Pearson: We just had a feature on biofuels talking about what's happening there. What is the take on that demand? Is it still there or is it starting to lighten up some?

Pfitzenmaier: I think biofuels demand is fairly good on the ethanol side. I think the biodiesel side is struggling here now. Bean oil is dropping and that's helping but you're seeing big stocks in all of the vegetable oils, around the world stocks are building, that's driving the price of bean oil down and may ultimately help but the price of fuel is going down too so that buying that they're in continues to be -- having profitability there continues to be difficult.

Pearson: Kind of a parallel relationship there between crude oil and biofuels speaking of which OPEC voted this week that they were going to reduce production but prices continue to plummet.

Pfitzenmaier: Absolutely no effect. We were down to $4.50, $5.00 on the open early on Friday morning after that announcement was made, we came back a little bit on Friday but the market pretty well shook it off. And the problem is, again, you've got a world economy reducing demand, killing off demand, whatever word you want to use and that is true for fuels as well.

Pearson: Let's talk specifics -- sharply lower in the wheat market this week. Again, a lot of those factors you've already talked about impacting things there?

Pfitzenmaier: Yeah, absolutely. We're going to start talking about winter wheat and the first winter wheat crop conditions report starts next week so that will be a little something we can watch. But, yeah, demand for our wheat is a problem and as a result we just continue to work lower. We're down around $5.00 on the nearby wheat contract in Chicago. By the end of the week there's probably a good chance we're going to slip back under $5.00 here.

Pearson: What are you telling wheat farmers right now, hold off?

Pfitzenmaier: I think they have to hold off. We need to get this equity sell off sort of stabilized and maybe get a rise in the dollar or at least slow up a little bit and I think you can start trading the actual main fundamentals of the grains and at that point I'd assume we're going to stabilize and you can see some rebound in prices.

Pearson: It may be the end of this quarter or maybe first part of next year?

Pfitzenmaier: I'm thinking into the post-Christmas probably.

Pearson: Let's talk about the corn market. Again, so many factors influencing it, all of the things you mentioned earlier, certainly the strong dollar, certainly cheap oil but also supply. It was mentioned at the top of the show this is going to be a big crop.

Pfitzenmaier: USDA bumped the yield in the October report. Virtually every time they have bumped it in the October report they have bumped it even more in November so we're assuming another jump in yield there. And anecdotal evidence, you talk to farmers all over the Midwest who say their corn crop is coming in pretty good if they can get it in. That's one of the things that is ultimately going to be supportive is we do need to get this crop harvested, we're not very far along, we made practically no progress in that this week. The corn is wet so it takes time to get it dried down and you can't harvest, can't progress as quickly with those problems either. So, I think ultimately that's going to be a problem. No farmers are selling so the basis has gotten very tight which is creating an opportunity for those that do have corn available to maybe move some on a tight basis and re-own it on the board or buy calls or developing some different strategies that way.

Pearson: So, maybe do that, take advantage of the strong cash market and make some sales and then re-take the position somehow.

Pfitzenmaier: Right, re-own it. You want to own it in the vehicle that's going to go up the most. Well, you know, once harvest gets going you're going to see pressure on the basis and it's going to widen out more and drop more than the futures do. So, if you can convert that cash into a futures position you're going to own the thing that is least likely to go down or most likely to go up.

Pearson: Let's talk about soybeans. Again, a relatively slow harvest occurring there and soybeans a little bit different story. I'm hearing from a lot of producers telling me not quite the yield that they had hoped over in Illinois, Iowa, parts of Minnesota but, again, a big crop.

Pfitzenmaier: A big crop and it didn't help us any that we had that big stocks jump and then we had that acreage jump in the last month or so. I think there's an expectation that USDA is probably going to have to lower bean yields just a little bit. We're 60%, 70% harvested but we still have the last 25%, 30% to get done and the conditions for getting that done don't look all that great so there's potential for some yield loss here in the beans. So, beans and corn both ended up at very critical points at the end of the week this week. We got within a penny of the lows on corn and within 12, 14 cents on beans. If we have a lower opening on Monday we're going to take out those lows and be ready for another leg down. So, early trade Monday is going to be very important here.

Pearson: Basis for soybeans strong?

Pfitzenmaier: Basis in soybeans is strong, again, an opportunity to roll some cash beans into the futures. You ought to maybe just sell cash beans if you don't think we have much up side potential. It depends on your outlook what strategy you'll want to use. But, yeah, if we want to stay long beans or own beans we've had basis levels that are fabulous for harvest here and it's a chance to move some because the farmer is either hasn't harvested or he's just bound and determined he's not going to sell anything here and that's forced a narrower basis.

Pearson: So, have we got an acreage battle going into 2009 and South America is having problems down there, credit issue and operational issues down there that could be a factor in this thing?

Pfitzenmaier: Yeah, do we have an acreage battle? That's going to depend. If we have some export problems, exports go down, we're liquidating livestock herds, ethanol struggles a little bit and then we come in and the USDA bumps the yield on corn we could end up with a 1.5, maybe 1.5 plus billion bushel carry out. That begs the question how much of an acreage battle do we really need to have next year. That's going to be kind of what we're going to be working through as we go through the winter here.

Pearson: You mentioned livestock herds, obviously very soft demand right now on fed cattle and on the calf market. Obviously when you have the global situation like we have right now there's a lot of pressure all the way around. What is your take for fed cattle prices for the balance of the year?

Pfitzenmaier: Well, again, the dollar is a problem for there because a lot of this rally we've had in the beef market has been because of good exports on cheaper dollar. So, that's slowed way up. Domestic demand is off because the general economy being softer. I guess the one positive you can say is gasoline prices have dropped so that's put a little more disposable income into people's pockets and that might help shore us up but I think the beef trade is going to struggle. We've dropped $25 or something like that over the last two or three months, we've really taken a lot out of it but we're down sharply again on Friday. If these outside influences continue to be negative I think there's a little more down side in the cattle business.

Pearson: And the calf market, again, you mentioned herd liquidation, certainly we've seen the smallest cow herd since 1950, even smaller now?

Pfitzenmaier: Cow slaughter continues to be up. You'd think that with the price of corn plummeting you'd see that feeder market be well supported and the weakness in the fat market has really trumped that. So, the cattlemen need to get some confidence that they've gotten calf prices down to the point where they can make a little money and it doesn't look like we're there yet for them.

Pearson: Hog market, what is happening there? Obviously some big numbers continue to show up.

Pfitzenmaier: There's some support -- the report you made which showed a rally in strength in hogs was pretty much the December contract. Everything back from that wasn't that strong this week so that was kind of a unique phenomenon there. I think you've got a lot of hogs coming, they're going to be subject to the same demand problems. We've exported a lot of pork, the stronger dollar is going to hurt that so I think you could take another $5 off the front end of the hogs and then I think you get December hogs in that 53, 55 range we'll probably see some support start to show up there then.

Pearson: First quarter of next year, Tomm, what do you see?

Pfitzenmaier: I think we're going to struggle there. We're going to have big numbers that we need to work through. After that then maybe things can start to get better.

Pearson: So time will tell. As usual some great insights, Tomm, thank you so much. That will wrap up this edition of our program. But before we go we want to reflect on the passing of a great friend and colleague. Market to Market lose a dear member of our family last Friday when 51-year-old James Kay passed away. For the past two decades many of the words which shaped our program were written by Jim. He was the consummate wordsmith, a stickler for journalistic accuracy and a fastidious grammarian. Throughout his career Jim wrote for Market to Market while courageously battling a long succession of illnesses that would have stopped lesser men. Jim was committed to the craft of journalism and expected nothing less from his colleagues and he was also a person of remarkable grace. His passion, skill and especially his sense of humor will be sorely missed.

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