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Market Analysis: Apr 25, 2008: Tomm Pfitzenmaier, Market Analyst

posted on April 25, 2008


Grain prices trended lower this week primarily on a strengthening dollar which makes U.S. commodities more expensive overseas.

For the week, May wheat lost nearly 70 cents, while the nearby corn contract declined more than 20 cents.

Soybeans also trended lower with the May contract down 35 cents, while the nearby meal contract lost $5.80 per ton.

In the softs, cotton had another losing week as the December contract posted a loss of $2.84.

In livestock, the April cattle contract was up $2.72. Nearby feeders were up just over $2.00. And the May lean hog contract gained $3.35.

In other markets of interest, the Euro lost 205 basis points against the dollar. Crude oil flirted with $120 per barrel. Comex Gold lost more than $25.00 per ounce. And the Goldman Sachs Commodity Index gained 6 points to close at 744.50

Market Analysis: Apr 25, 2008: Tomm Pfitzenmaier, Market Analyst Pearson Here now to lend us his insight on these and other trends is one of our regular market analysts, Tomm Pfitzenmaier. Tomm, good to have you back.

Pfitzenmaier Thanks, Mark.

Pearson Let's talk about a couple of things. The wheat market was under some pressure a little bit this week. Also, of course, people are watching conditions and it looks like things are looking pretty good out there.

Pfitzenmaier Yeah, the moisture that is slowing up corn and beans is also helping the wheat crop. There's plenty of wheat around not only in the U.S. but worldwide. Everybody geared up when we had that high priced wheat so it's not a huge surprise that that happened. And wheat is kind of falling out of favor with the funds. So, you just have a continuous liquidation of wheat contracts here and certainly this week didn't show any signs of that slowing up.

Pearson Alright, and as you pointed out before, we have a lot of wheat acreage worldwide now. So, hopefully not a crush for people to race out and buy every loaf of bread out there. Plenty of wheat going into the world market as we got into 2008. What about producers trying to make a profit on this?

Pfitzenmaier Well, when you're in a down trending market the faster you can sell the better off you're going to be. So, every dollar down here there is an area of support at $7.50 or $7.63 I think is the first area and about $6.40, $6.50 so there's a couple of areas of support underneath this. But I think any rallies that if wheat could get sucked along a little bit with corn and beans on a rally I think those should be used as selling opportunities.

Pearson Let's talk about corn next up and, of course, this is the one being pilloried now as a biofuel for ethanol. But a lot of acres could still be moved over to corn acres this year. I know we had the USDA number March 31, we had a big shift last year to more corn acres and fewer bean acres. What is your take on that, Tomm, right now? Kind of sort things out for us. What do you see in this corn market?

Pfitzenmaier Well, I think the day after that March 31 report the intentions changed by a couple, three million acres. Every day that goes by here without being able to plant I think that starts to shift back toward beans again and if the weather forecasts come out like they say they're going to I think there is a good chance you're probably not going to see much shifting at all when all is said and done here. So, I think that 86 million that they came up with in March is probably going to be close to where we're going to end up at.

Pearson You mentioned planting progress has been slowed dramatically this year with the constant rainfall, particularly throughout the key parts of the Corn Belt. A lot of concern about being able to hit trend line yields in 2008. We're not off to a great start.

Pfitzenmaier Well, it's kind of the inverse of the old planting dust in your bins

Pearson That's right, without the mud the crop is a dud.

Pfitzenmaier There you go. And it's hard to get much above trend line yields in wet springs. Historically if you look how yields react to that, I'm not saying you can't have trend line or have good yields but to have the really good yields is harder when you plant this late. The pollination gets thrown into a little bit hotter timeframe, frost threats crop up so it's just a little tougher.

Pearson It's a little more tense. And like you say as we delay more the odds are people will not change their plans and go with soybeans which we do have better opportunities with later planting. I want to get to beans in just a minute but to stick with corn right now. Selling purposes, you know, over $6, Tomm. Do you make sales here?

Pfitzenmaier I think you make sales but you'll probably have to protect those sales somehow whether you make a cash sale and buy back some kind of a call option I think you want to retain ownership through the summer because there is the potential for great up side here. Now, maybe if you sell at $6 and you're fine with that and you don't care about capturing the up side that's one strategy. But a lot of people are going to be bothered if they sold at $6 and then it goes up to $7.25, $7.50, $8.00, wherever it could go. So, I think as a peace of mind thing maybe it's not a bad idea to buy yourself some calls and retain some ownership. But also, like you said, $6 is a heck of a good price for corn. If you have a decent yield to go with it you can make a pretty good chunk of money this year.

Pearson Every time I come out and say $6 is a heck of a price, best price of our lifetimes, at the same time we've never had input costs like we have in our lifetime.

Pfitzenmaier Well, and that's true except that most of the inputs are locked in pretty well for the '08 crop. I think where that totally flies out the window in terms of doing any selling is for the '09 crop. Unless I had those costs locked in I wouldn't even dream of selling any '09 crop at $5.85, $5.82, wherever we ended up here this week. That's just not good enough for the potential inflation of input costs that I think we've got for next year.

Pearson Let's talk about soybeans. They were the glamour crop for the first quarter of 2008 and now with the intentions that came out March 31 this whole month we've seen prices erode. Obviously huge demand for vegetable oil, huge demand for product out there, demand extremely strong in soybeans and farmers are responding by planting more acres. But, Tomm, price wise what do you expect to see?

Pfitzenmaier Well, the other factor you've got is this Argentine shipping issue and the farm strike and that kind of fired up again this week and there's a lot of contention there and that just keeps throwing business towards the United States and we've already got a pretty tight carry out. So, at the bare minimum I think that's going to help firm this basis up as we go into the summer. That's been very wide, been a big complaint in the country about how wide that's been. I think if things are going to tighten up that is one of the places it's going to tighten up. In terms of net price, you know, you get to $13 plus November beans, new crop beans, probably not a bad place to make some sales. Again, if you have weather problems this summer it's not like we've got a lot of slop in the bean side either. That whole thing is pretty tight too with a lot of up side potential. So, again, I wouldn't want to give up ownership. If $13 is a good price for you and everything works there make some sales but I'd find some way to retain some ownership to participate in a rally because how high is high here. That's one of the things we need to discuss a little bit, I guess, is where do we have to go to slow up the demand on the corn and beans? Exports haven't slowed up much on either one of them. Ethanol demand apparently is not going to -- we haven't stifled that. We've got some livestock issues maybe here. But the rally in livestock prices certainly isn't going to discourage those producers as much as we thought it was going to. So, it looks to me like we have to go to higher prices in order to start rationing the demand.

Pearson Well, we're going to see what happens. But, again, you would retain some kind of ownership, even make some sales here at $13. This thing could go higher. We've had people, as you know, analysts we've talked to and I know you've heard from too who are saying these prices could be nothing if we have weather issues in 2008 growing seasons.

Pfitzenmaier Yeah, there is huge up side -- I don't know, could you have $8, $9, $10 corn, $20 beans? I don't know what the up side is. That probably is a little high but we don't know what the summer weather is going to be here. So, I think you have to retain ownership in some way just for your own peace of mind and to maintain your competitive advantage.

Pearson Let's talk about the livestock business where there hasn't been a lot of competitive advantage to these input costs, Tomm. A lot of people in the fed cattle industry are very concerned, looking at a lot of red ink. What is your take now? We had a positive week on the board, a decent week for the cash market. Have we maybe turned a corner?

Pfitzenmaier Everybody would like to think they cut out substantially in cattle, everybody thought $150 on choice was going to be the upper limit and we blew right through that. That was encouraging. Same thing on the cut out in pork. So, apparently they think we're going to move that meat at these higher levels. Cold storage was up on the pork side. The bulls try to use that to say, well, the people are looking ahead, seeing good demand, they're trying to hold it in cold storage. The bears are saying, well, cold storage is up because we're not moving it. So, we're going to have to see how that all plays out. There's been a lot of liquidation of hogs particularly in Canada. The long-term players in this pork industry we're going to have to see how they react. Obviously there is red ink now but also you can look ahead at some of these deferred contracts and sort of start to see light at the end of the tunnel. So, are you going to get out here if you've got a big pork operation just in time for things to get better? Probably not. I would guess that a lot o these guys are committed to it and they're going to find a way to gut it out.

Pearson Alright, that's the pork guy. Talk real quick about this cattle feeder right now. Looking at some tough times but, again, has to be encouraged with what happened this week.

Pfitzenmaier Oh, I think there's the playoff in demand. It looks like with the cut out going up on one side, on the other side is the economy, the high price of gas. How is all this cold weather going to delay that spring grilling season that everybody is kind of counting on to come in and shore up beef demand? We've got some question marks on the demand side. Supply side we're probably pretty good. I think longer term you're going to see a lot higher cattle prices. I think you could see those February contracts up in the $110, $115, maybe even higher than that. I think you'd see deferred hogs higher also.

Pearson Alright, Tomm, it's interesting, it's going to be a wild year. We appreciate your insights as usual. Tomm Pfitzenmaier, thanks for being with us. We also want to thank you and we also want to remind you to be tuning into Tomm on the Internet because you can check out more of Tomm's thoughts by visiting our 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 absolutely free. And, of course, be sure to join us again next week when we'll meet an entrepreneur who has quietly become one of the nation's top producers of ethanol. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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