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Market Analysis: Feb 01, 2008: Tomm Pfitzenamaier

posted on February 1, 2008

World grain stocks remain tight leaving traders to wonder if supply will cover demand over the next year.

For the week, March wheat gained 10 cents, while the nearby corn contract went up slightly more than 2 cents.

As South America gets closer to harvesting a record, or near record, soybean crop the market trended upward. For the week, March beans gained a little more than 45 cents. Soybean meal kept pace closing up $8.20 per ton.

In the softs, cotton remained mostly even adding just 31 cents to the March contract.

In livestock, February cattle lost almost a $1.20. Feeders went the opposite way and closed up $3.35. And the February lean hog contract went up nearly $3.40.

In other markets of interest, the Euro gained 131 basis points against the dollar. Crude oil went below $90 losing $1.75 per barrel. COMEX gold lost $2 per ounce. And the Goldman Sachs Commodity Index lost 4 points to close at 596-even.

Market Analysis: Feb 01, 2008: Tomm Pfitzenamaier 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: The volatility continues in 2008, now we're in the second month of 2008. What are you seeing right now, Tomm, let's talk about the wheat market first? Obviously a short crop last year, it's been very tight as we've gone forward. What is your feeling from here? And should we be making sales in this big market?

Pfitzenmaier: Minneapolis wheat has been leading, everything else is following. As long as that continue to go up the rest of the wheat contracts are going to go up. I think once that's sort of worked out and it's in the process of getting worked out then I think we're going to look around and say, well, I think maybe wheat is a little overpriced here. So, I'd guess maybe you don't get in a big hurry, kind of key off that, watch it closely but the second that starts to turn I think you start to make sales in wheat. These are very, very good wheat prices and need to be taken advantage of. We got caught up a little bit, as several markets did this week, and this cold weather in China and some fear that some of their wheat crop might have been damaged, I think once that kind of works its way through the system you're at levels that wheat probably needs to be sold.

Pearson: Worldwide wheat production has to be shooting up dramatically.

Pfitzenmaier: Yeah, everywhere you talk to and worldwide it was hard to get wheat seed which tells me there is a lot of wheat planted.

Pearson: And, of course, that's going to affect us next time around. So, looking at these, you know, around $9 in some of these crops if you can lock in 2009 would you do it?

Pfitzenmaier: I guess I've said before I'm a little cautious on 2009. But I suppose if it works in your program, if your land is paid for, you kind of know what your costs are it probably doesn't hurt to take a piece of that, no.

Pearson: Alright, let's go over and talk about what's going on in the corn market. Obviously since the USDA's final numbers we've seen the corn market gyrate wildly higher and now backing off some and I know there are some producers getting a little nervous about what's ahead. Just looking at the numbers doesn't corn still need to buy some acres?

Pfitzenmaier: I think most of the acres have been bought that need to be bought but, yeah, I mean, that's where you can't see corn or beans get too far out of whack from each other because you need -- that differential has to be maintained. So, yeah, everybody talks about acres but really I think it's probably more of an inventory issue. Around the world for the last 20 years we've been able to stay hand to mouth fairly comfortable in all aspects of corn demand. And now I think we're entering a situation where maybe that's not such a great way to be. You've seen Japan and others indicate that they're going to increase their inventories and I think you're going to see that happening all around the world. So, you know, is that front end loading? Maybe, maybe it's just building up stocks that are going to be maintained for quite some time here. So, I think inventory management is going to be a big issue, it's going to be the reason that corn prices stay supported in here.

Pearson: Alright, while you're talking about that obviously this export market has really been helped by this cheap dollar. What is your feeling on the cheap dollar? Is this going to continue to stay cheap?

Pfitzenmaier: Well, it looks to me like interest rates are going to be low and stay low and probably go lower and in that case there's nothing about that that's friendly to the dollar. And as long as the dollar stays down the grain markets are going to stay well supported, gold is going to continue to go up, silver is going to continue to go up. So, that looks like a pattern that is in play here. We went down and tested the dollar a little bit lower on Friday and bounced back pretty nicely. I think that was just a recovery bounce. I think, you know, we're only 30, 40 points off the lows in the dollar, I think that's going to be re-tested and probably taken out.

Pearson: Alright, new crop corn sales, are you nervous? Could we see a bigger acreage number that might put this thing under some pressure?

Pfitzenmaier: I think the acreage number, we're going to see some shifting of acreage away from corn. Whether that is 4 million acres or 6 million I don't know, it's probably going to be in that range and then all of a sudden what's really going to be important is yield. If you do some theoretical supply-demand tables it really boils down to what the yield is going to be. The three aspects of demand are very important. Export sales, when are they going to crack? They've been very good. There's some expectations that they're going to fall off here a little the next week or two. You've started to see the basis fall apart a little bit down in the Gulf which is an indication that maybe the end users haven't been quite as strong. You're starting to see livestock liquidation which is a little crack in the wall there on the livestock side. On ethanol demand you saw the feature earlier in the show where maybe some of these tariffs are going to be taken off. There's even some talk about the blenders credit being tampered with a little bit to the end of the year. So, there's some things going on in demand that could back things off a little bit too.

Pearson: Alright, let's go over and talk about soybeans, again, part of the big acreage battle with corn. We've had people asking about what about all that pasture and hay ground out there? I'll tell you what, hay prices are darn high these days so you've really got a lot of different factors, wheat, corn, beans are all in tight demand and getting enough acres is going to be critical. What do you see though for soybeans? They've got to stay in this neighborhood?

Pfitzenmaier: Yeah, they have to, they have to maintain that differential. You're right, I sell some hay and it's about three times what it had been. Soybean prices have to, I mean, they're going to have to maintain that 2.3 to 2.4 bean-corn ratio. So, if corn breaks, beans can break a little bit. If corn goes up it's going to have to pull beans along. You asked me a question about selling December corn, I guess I think corn is going to re-test that $5.54 1/2 1996 high so I'm not in a big toot to get much sold ahead of that. In terms of beans if corn does that beans are probably going to have to test the $14 level. So, I guess these are a good price. If you've got your farm paid for, you know your costs, you know all that stuff these are good prices and you should probably take some of it but I think there's higher prices ahead of us.

Pearson: Alright, real quick the cotton market, fairly flat here recently. Again, I should have added that one to the acreage mix too. What do you see ahead for cotton?

Pfitzenmaier: Again, cotton is -- one of the big problems with cotton is demand. China has backed off a little bit, there's concern that this cold weather may have hurt that industry a little bit over there and that their demand is going to fall off a little bit more. We had a pretty good number on exports on Thursday, the week before that wasn't so good. I think cotton is going to find fairly good support in that 74, 74.50 area, it's going to find big resistance at 80 with the potential to move up to 84 if it can break through that.

Pearson: Alright, let's talk livestock. You mentioned liquidation of hogs. Let's talk about the cattle market first. We had a big break on feeder cattle and then we saw this feeder cattle market has come back here in the last seven to ten days. Let's look at the fed cattle market first. What do you see happening on this fed cattle market? Are we moving product along, Tomm?

Pfitzenmaier: We are fairly well. That is one of the big areas of concern is the slowing of the economy going to hurt demand and it doesn't appear to have yet. You've got another big thing that is going on here in the beef industry is liquidation. You're really seeing those back months a lot stronger, well up over 100 on some of the back months. So, I think you're going to see some pressure or at least lack of strength in the front months through the first quarter, second quarter. Then after that I think you're going to start to see things get better because you are seeing cows go to town and ultimately that's going to have to be supportive.

Pearson: The calf market, that was reflected on the board this week, we saw it in the cash market actually a little over a week ago when this thing started really turning around, just fewer numbers out there.

Pfitzenmaier: Well, yeah, there are fewer numbers out there, usually that is related to corn. When corn started to break feeders started to go up a little bit, I thought well, okay, that makes sense. Well, this week you had corn go up and feeders go up so there's some optimism out in the country and apparently there's some people that think that they can buy these calves at these prices and make some money on them.

Pearson: Okay, I'm hearing these horror stories about sow liquidations and everything else from the various state pork congresses out there. It's been pretty dire short and near term on this hog market. Is there a brighter picture ahead?

Pfitzenmaier: Oh, absolutely, we're going to liquidate a lot of sows here, we're going to liquidate a lot of breeding herd. You think the back months of cattle were strong, the back months of these hogs are really strong and are probably going to get stronger. I think you're going to see December hogs well over $80 and that is certainly some incentive for the people that are going to hang in there to continue to do so.

Pearson: Alright, but that's where opportunity is probably going to come. They're at least a year away to really see an advantage.

Pfitzenmaier: The futures have gotten ahead of the cash market quite a ways so we're probably going to set up some hedging opportunities for the next two or three months to take advantage of that futures differential between the cash market so I'd look at that pretty hard.

Pearson: Tomm Pfitzenmaier, as usual, some great insights, thank you so much. That will 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 why not visit the market plus page, it's right there 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 market plus segments free at our Web site. And be sure to join us again next week when we explore the issues surrounding the dwindling salmon population in the Pacific Northwest. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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