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Market Analysis: Jun 13, 2008: Tomm Pfitzenmaier

posted on June 13, 2008

Wheat prices followed suit with those of corn this week as the full effect of six consecutive weeks of rain in the Midwest took their toll.

For the week, July wheat gained 71 cents, and the nearby corn contract was up more than 81 cents.

With the nation's top soybean producing states deluged by floods, the rally was even more impressive. For the week, July soybeans gained $1.02 while the nearby meal contract was up $36.20 per ton.

In the softs, cotton trended higher again this week, with the December contract posting a gain of $4.50.

In livestock, the June cattle contract gained $1.62. Nearby feeders were down $3.10. And the June lean hog contract lost $1.72.

In other markets of interest, the Euro lost 409 basis points against the dollar. Crude oil lost $3.68 per barrel. Comex Gold lost $22.30 per ounce. And the Goldman Sachs Commodity Index lost nearly 8 points to close at 834.20.

Market Analysis: Jun 13, 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. Well, what a month it's been. It seemed like all winter long we worried about a drought and instead it's too much rain. A lot of concern out there. We talked about it earlier in the earlier feature. What does all of this do, Tomm, the already concern and the already frothy commodity markets worldwide?

Pfitzenmaier: It helps, I mean, everything is basically going up. There's some hazards on the horizon, I suppose, in terms of government policy, are the consumer attitudes about gasoline going to change and lower demand and cap crude oil. There's some mega things to kind of keep an eye on. I think weather, as you alluded to, is going to trump all of that. But there are a lot of things sort of lurking around on the perimeter that you have to kind of keep in mind here.

Pearson: We have viewers in Ohio, Indiana, Illinois, Iowa, southern Minnesota, so many places have been affected by these rains clear across the eastern and western Corn Belt and, of course, we're trying to get a wheat harvest started down in the South and get that going. It's just Mother Nature is not cooperating much so far.

Pfitzenmaier: The USDA came out with their updated supply and demand report, left acreage unchanged on corn which I don't think anybody believes is possible. It's probably off by anywhere from two to four million bushel. They left the harvested acres as a percentage of planted acres the same. Nobody that has driven around or flown or seen anything around believes that that's going to be the case. They've got yields in the high 140s. I'm not even sure that's valid. They did lower it five bushel per acre which was a help but I'm not sure that they aren't still a little high. So, on the supply side of corn things have gotten tight very, very quickly and we didn't have a lot of room to kind of wiggle on that either.

Pearson: This is a crucial year on so many fronts, like you say, the ethanol front, the biofuels front, the overseas production and the demand which has been phenomenal. Let's take this a piece a time. Let's talk first about the market that struggled for production the last couple of years and that is the wheat area. Take us through as you look at that market what is happening? Harvest is underway, typically it's time we see prices under pressure.

Pfitzenmaier: Yeah, if you looked at wheat in a vacuum we'd probably be substantially lower than what we are. The carry out is double what it was. It would take too many fingers to name all the countries around the world that are going to have better wheat crops than they had last year. So, the world supply of wheat continues to grow. The only thing that's going to sop that up is spillover demand for feed for wheat because corn has gotten so expensive. So, you saw, like you said in your feature, wheat got sucked up higher with the corn this week and may have a little more in it. You know, wheat up around $8.60 to $9.00 I think most people would say given the carry out increase we've had is probably overpriced. But if corn and beans continue to go higher maybe we're going to take wheat up to $9.00 or maybe as high as $9.60. I don't think that's going to happen but certainly you'd have to keep that in the back of your mind as a possibility.

Pearson: Wheat sales right now, Tomm? What would you do?

Pfitzenmaier: Whatever rally you get out of wheat because of this sympathy move with corn is a selling opportunity. I think with the world supplies of wheat, the good crop we've got coming I don't see any reason for wheat to be as high as it is right now.

Pearson: Alright, let's talk about the corn market. Obviously the one along with soybeans being hit the most in terms of this constant rainfall and delayed plantings, replanting and everything else. What is your take now on this corn market following USDA's report and the idea that things may be tighter than what USDA is telling us?

Pfitzenmaier: Well, I detailed the supply side of it, the other side of it is the demand side. The supply is going to be whatever it is. We have to figure out what do we have to do to choke off demand? And you look at the ethanol side. Now, you said that ethanol producers are not maybe quite as profitable as they have been but you've got to also recognize that ethanol has rallied almost 30 cents here in the last ten days so it's moved up quite nicely too. So, crude goes up, ethanol goes up, all of a sudden they can pay more for corn, DDGs continue to go up in value so it doesn't appear -- we used to hear that $4, nobody can make money on ethanol if corn goes over $4 and now they're saying well, if it goes over $7 we can't make money. If the end product keeps going up they're going to be able to pay more for corn so where do you choke that off. Livestock producers, you'd think normally they're going to start to lose money and then you look at the deferred contracts on cattle and hogs and every one is substantially higher. So, what is the incentive for anybody to get out of there. The feeder market is strong, you know, what is the incentive for the small guy feeding a few cows, a cow-calf operation out on grass, they're not impacted by this corn and they're getting a windfall because feeder prices are up. So, export, then you look at exports, exports continue to be strong. Up until this week the dollar had been fairly weak now and you can maybe make a case of the dollar breaking out, that causing everything to become a little more expensive and exports are the one area where maybe you are going to see some changes made. Then add on top of that potential changes in government policy and maybe that limits the price of corn. Without all that happening we're probably going to have to go higher.

Pearson: Alright, let's talk about making sales at this point for corn. If you haven't done anything what would you tell somebody?

Pfitzenmaier: There's so much weather to go through here. I mean, if we were sitting here at the end of July, first of August, had the crop pollinated, kind of know where we're at I'd say run right out the door and call your broker tonight and sell some. But I don't know with this weather thing and the demand not being choked off, I don't know if there's any particular hurry. Now, I think you need to watch over the next two to six weeks and if you can't stand it buy yourself some put options. If you've already made some sales and you want to cover them buy yourself some call options but you're going to need to build some flexibility into that plan whatever it is.

Pearson: Alright, soybeans same scenario in terms of making sales?

Pfitzenmaier: Yeah, I think there's up side potential in beans, maybe not to the extent that corn has but then you've got this Argentine situation in the mix on beans. You had the farmers on strike. Now all of a sudden you've got the truckers down there and sympathy on strike with the farmer. So, that's a really disruptive situation. It continues to throw demand export business to the United States, tightens up a carry out that is already substantially tight. Again, the USDA left the yield the same as it had been and that's almost a bushel higher than they were a year ago. I challenge you to talk to any farmer around in the Midwest that thinks their yield is going to be better than it was a year ago. So, there's adjustments that are going to ultimately have to be made in that supply-demand report too. Demand for bean product continues to be strong. So, beans have got up side potential too. So, yeah, the same strategy, buy puts if you can't stand it, if you've made sales that are starting to make you uncomfortable buy calls to cover them and try to be patient over the next month to six weeks and see what you can milk out of this market.

Pearson: Alright, let's move over to livestock, Tomm, and you mentioned the deferred contracts look pretty good. Nearby we've seen a little bit of softness on the board this week on futures, probably a natural reaction to what happened with the corn market. The fed cattle markets behaved pretty well. What is your take? Let's talk about fed cattle first.

Pfitzenmaier: Choice beef is moving quite well. I think demand has been -- given all the doomsday talk you hear about how terrible the consumer is and gas prices and all that stuff -- the demand for beef has continued to be pretty darn good. The Korean thing blew up on us and we thought that was going to help us and we kind of went through that and we're still going higher in cattle prices. So, I think you have to be fairly impressed with the way this market has reacted. I think there's probably a little more up side in the August contract but probably not a lot. If you get another dollar, two dollar rally I think you'd have to start, again, buying some puts, doing something to get yourself some coverage on that. Those deferred contracts, April is up at $1.14, is that high enough? You know, everybody says we're going to liquidate but cow-calf pairs are $1400, $1600. That doesn't sound like a market that needs to liquidate to me. You know more about the feeder cattle market or the cow-calf market than I do.

Pearson: Look at the calf market going forward. I'm not seeing a lot of people get that priced. They have a feeling that this thing is going to be stronger as we see some liquidation and it doesn't seem to be happening. Like you say, it's going to be an interesting year to say the least but I like the idea of the August contract maybe making some sales there and doing something, locking up just in case we see things start to pull back, have some coverage. Let's talk about the hog market, Tomm, and what you see happening with the hogs and hog prices and especially as that relates to this whole meat sector. Again, it seems to be big, big numbers out there of hogs despite these $7.00 corn which I can't believe I just said $7.00 corn.

Pfitzenmaier: Again, it doesn't seem to discourage anybody. The prices are high enough, the deferred prices are high enough that everybody I think is so committed to being in the hog business long-term that they don't seem to be too anxious to liquidate. Now, sow prices dropped a little bit which would probably indicate maybe a little heavier pressure this week. But hog weights are up, same thing in cattle. We're running carcass weights the same as they were a year ago. So, that tells me that nobody is in a big hurry to move those cattle out. They say the feedlots are pushing them out a little quicker than they had been but it hasn't translated to lighter carcass weights.

Pearson: We've got about ten seconds, Tomm, this isn't fair but real quick for those guys who are trying to cover feed needs what would you tell them right now?

Pfitzenmaier: The faster you can buy it in an up trending market the better off you are.

Pearson: We're going to leave it right there. Tomm Pfitzenmaier, thank you very much. That will wrap up this edition of Market to Market. But if you'd like more information from Tomm on where these wild markets are headed visit the Market Plus page at our Web site where you'll find streaming video of our program. And you can also download audio podcasts of our Market Analysis and our Market Plus segments free at our Web site. And be sure to join us again next week when we'll further examine the impact of epic flooding in the Midwest. Until then, thanks for watching, I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices corn markets news wheat