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Market Analysis: Aug 01, 2008: Tomm Pfitzenmaier

posted on August 1, 2008

The Agriculture Department will release its much anticipated crop production report August 12th. While private estimates will be released next week, favorable weather continues to put the pressure on grain prices.

For the week, September wheat lost 17 cents and the nearby corn contract was down more than 12 cents.

Despite very strong sales for exports, soybeans followed the grains lower. For the week, August soybeans lost more than 40 cents while the nearby meal contract was down 80 cents.

In the softs, cotton returned to its losing ways with the December contract posting a loss of $2.61.

In livestock, the August cattle contract was up $2.20. Nearby feeders gained $3.87 and the August lean hog contract was up nearly $3.00.

In other markets of interest, the Euro lost 141 basis points against the dollar. Crude oil gained $1.84 per barrel. Comex Gold lost nearly $19.00 per ounce. And the Goldman Sachs Commodity Index gained more than 5 points to close at 762.70.

Market Analysis: Aug 01, 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 back.

Pfitzenmaier: Thanks, Mark.

Pearson: Huge bull market has gone on in the commodity markets really for the last three years. And now with oil prices, crude oil dropped back sharply last week, a little softer again this week, all of our grains coming down a little bit. Have we seen the air come out of this market?

Pfitzenmaier: No doubt the air has come out of it. We've stalled out, like you said, crude oil sort of led that. The dollar has firmed up a little bit here. The gold market has pulled back, got us back under 900 for a brief period of time this week. So, I think yeah, some of the speculative money, fund money has started to exit the commodity markets looking for other places to go to put their funds and that has just kind of helped let the air out of all of these markets.

Pearson: Let's talk about fundamentals and what's happening now. The wheat harvest rolled along, hearing really good comments from farmers out there of either record or near record wheat crops out there in 2008. What are your thoughts on making sales for those who maybe haven't sold some of this?

Pfitzenmaier: Most of our information on wheat is fairly benign. I think wheat is kind of being caught up in what's going on in corn and beans and all these other outside markets although on Friday wheat was up when everything else was down. But I think if you work your way up toward $9, maybe a shade over that I think you'd have to become a seller of wheat. We're down in the low eights right now so that would take a fairly good bounce to get there. But I think those kind of bounces are certainly worth waiting for.

Pearson: A lot of wheat being grown worldwide, big demand worldwide. What about making 2009 sales? Is that something you're entertaining or not?

Pfitzenmaier: No. I'm not interested in entertaining making sales for 2009 in much of anything and wheat would be included in that.

Pearson: Too long of a time to go or you think the tightness and the demand the way it stays in place you think prices will just be too strong again?

Pfitzenmaier: I think the potential for strong prices is too great to justify jumping in there and doing too much. I guess I don't know so much about wheat but I think that potential exists in corn and beans and if they go they're going to drag wheat along. So, I guess I just don't have that much interest in going out that far in the wheat market.

Pearson: Let's talk about the corn market, a lot of concern there about the crop and just how good it is. And then, of course, now we're going to be in that holding pattern until we get that August 12th report and we see what USDA is thinking. As we look towards that report, Tomm, and as you talk to clients around the country what is your take on this corn market over the next couple of weeks? What could the government tell us?

Pfitzenmaier: Well, the crop condition rating last week was about eight percent above a year ago and a year ago's yield, USDA yield is around 151. If they stay unchanged on Monday we'd be ten percent above what we had a year ago. So, you have to think that they're going to have to come up with a yield something above 151. Private estimators were using 152 as much as a month ago. So, I think 152 to 153 is probably where most people think they're going to come in. There's a lot of argument in the country about whether that is valid to compare crop condition ratings this year versus where we were at last year because last year at this time we were on the way down and this year we're sort of on the way up from where we started off. But that's kind of the general consensus.

Pearson: So, with that in mind what kind of an impact do you think it will have price wise?

Pfitzenmaier: Well, we've obviously broken the market pretty hard in anticipation of that so if going from 148, 149 up to 153 justifies a $2.20 break then I'd guess you'd probably got most of it factored in. I think anything under $6, that $5.50 to $6 range probably represents a fairly good place to be owning corn rather than selling it.

Pearson: Take us through somebody maybe who hasn't made any sales yet. What would you tell them about doing something?

Pfitzenmaier: I'd tell them to be patient. I think the lateness of this crop, particularly if you look at where the crop is laid, Minnesota, Wisconsin, those areas that are most vulnerable to cold weather so we have that yet to deal with and I think it's going to -- maybe if it doesn't even damage the crop the fear of it is going to give us enough bounce to justify holding off here and being a little patient. Having said that, if you're a livestock producer or an end user we're creating some opportunities here in the corn market I believe.

Pearson: So, take some coverage?

Pfitzenmaier: Absolutely. And there's some people that made some early sales that they're a little uneasy about that, uneasy about what prices might do. This might be an opportunity for them to jump in and buy a call option that is fairly cheap and gives them some protection if something happens and we do blow it back up to the up side.

Pearson: Get some insurance. '09 same kind of tightness is going to occur in the corn market?

Pfitzenmaier: Yeah, this '09 thing is extremely serious. We need to increase the acreage in corn and I'm having trouble figuring out how we're going to entice farmers to do that. The price of beans is high enough that there's not -- a couple of years ago obviously you should plant corn relative to beans. I don't know that that's so obvious this year. The cost of production of corn is going to be way up and there's no question about that relative to beans. So, the only incentive to entice farmers to plant more corn we're going to have to rally prices to do that and I know people are excited about selling Dec. of '09 corn at $6 but if you do you better go buy yourself a call option to cover that because there is some potential for real fireworks and this acreage battle again shaping up this winter.

Pearson: Let's talk about the soybean market and what you see ahead there. What are you anticipating for this 2008 crop? A lot of these beans went in, as you know, last week of June, first week of July.

Pfitzenmaier: And I recognize that. The only thing I would say is that beans tend to mature by day length rather than the way corn does. So, I think that mitigates that a little bit. But certainly there is going to be a lot of beans subject to an early frost also and it can be pretty damaging to beans. So, again, we've had a pretty hard break off beans. There aren't very many beans left in the country so things are pretty tight there, certainly more tight than they are in corn. So, down in these mid $13, I guess we'd break in the low $13 that is a possibility, but down in these areas I'm not too excited about making sales. I think you're going to get a pop in a market that's going to allow you to do better.

Pearson: Again, nothing for '09, like you say we've got a long way to go.

Pfitzenmaier: Yeah, nothing for '09. I cannot get excited about doing that. If you look at the corn to bean ration beans are probably a little cheaper than your normal 2.4 corn to bean ratio. So, again, I'm not excited about doing anything in '09 unless you're a user and want to start covering some meal down in here.

Pearson: So, livestock producers who have been really stressed this is the time to cover yourself for maybe '09?

Pfitzenmaier: Any kind of an end user, yeah.

Pearson: So, for corn, soybeans, again, you're not worried, you're not going to make panic sales in here, just sit tight and we'll get some better opportunities.

Pfitzenmaier: Yeah, I'm not saying we're going back to $10 on corn or anything. I'm just saying you're at least going to probably have 50 to 80 cents better than where we're at today.

Pearson: Let's talk about the livestock producer, let's talk about cattle prices first. Big move on the board this week. What is your take on cattle futures?

Pfitzenmaier: Nice recovery on the cattle futures. Cattle market I don't think the cash market was all that spiffy the way it traded this week but we've got excellent demand, exports are really picked up, they're up 29% in the first five months of the year. That's driving cattle up. The consumer seems to be staying home and not driving but they're eating fairly well. So, I think you can see that October contract work its way at least back up to 108, 108.25. There's a little resistance kind of up in that area. If you break through that then maybe we've got a shot at 110. But I'd start to be a little more aggressive selling in that 107.75 to 108.25 area.

Pearson: Calf market I keep hearing these reports that we're looking at the smallest cow herd since 1950. We still seem to produce plenty of beef. But the calf market your take on that?

Pfitzenmaier: Calf market is going to follow the corn market. We've had corn dropped a lot and you've seen firmness in the feeder cattle contract and if corn starts to come back up that feeder market is probably going to soften. And I recognize the cow herd has diminished somewhat but I don't see that being something that lasts a long time because what's the incentive, cow-calf pairs are still selling fairly well, a lot of those guys, the cow-calf guys aren't buying corn, they're feeding grass and grass is good so I don't see a big mass liquidation in the cow-calf side here.

Pearson: What about on the pork side, Tomm?

Pfitzenmaier: On the pork side that market gets propped up by you look at those deferred contracts you've almost got $100 hogs for the next summer. The guys that are in it for the long run, you know, historically they bail out because they look ahead and say well, things look even worse than they are today, I'm getting out. Well, now that you look ahead and go, well, maybe things are going to get a little better I think I'll hang in there. So, there's no dollar seeing some liquidation and a lot of that is Canadian, more than it is U.S. liquidation but I don't see that being massive either. I'm a little friendly yet to the hog market. It really looked good this week. We turned around and turned some corners there particularly the October contract seems to be strong, it has a little more upside potential to it so I guess I'd hold off and be a little patient making any sales right here anyway.

Pearson: Cheap dollar, a little bit of a rise against the Euro this week. Is that starting to turn a little bit?

Pfitzenmaier: I think it might be. That's one area I think you need to be a little cautious about. I think that's part of the reason you saw gold sell off this week and obviously crude is going to follow that too. So, yeah, I think we're seeing that begin to stabilize.

Pearson: Tomm Pfitzenmaier, as usual appreciate your insights. That is 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 absolutely free right there at our Web site. And be sure to join us again next week when we'll examine how the winds of change prompted one community college to incorporate alternative energy in its curriculum. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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