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Market Analysis: Nov 30, 2007: Market Analyst Tomm Pfitzenmaier

posted on November 30, 2007

A rally in the wheat pit put stirring bears back to sleep for now as worldwide weather conditions and increased exports kept bulls in place for a little while longer.

For the week, December wheat gained 63 cents, while the nearby corn contract moved just 2 cents higher.

Bean contracts slipped just a touch. For the week, the January contract lost 4 cents, while soybean meal gained 90 cents per ton.

In the softs, cotton continued its decline this week, with the December contract losing $1.55.

In livestock, the December cattle contract lost $2.50. Nearby feeders were down $2.20. And, the December lean hog contract lost 85 cents.

In other markets of interest, the Euro lost 97 basis points against the dollar. Nearby crude oil prices dropped $8.59 per barrel to close under $90 for the first time in a month. Comex gold lost $3.30 per ounce. And the CRB Index lost almost 8 points to close at 343.59.

Market Analysis: Nov 30, 2007: Market Analyst Tomm Pfitzenmaier Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Tomm Pfitzenmaier. Tomm, welcome back.

Pfitzenmaier: Thanks, Mark.

Pearson: Well, some good news. We just noted those oil prices dropping substantially. Is this the beginning of a term? Maybe a strengthening of the dollar?

Pfitzenmaier: Good news is in the eye of the beholder. With soybean oil and corn viewed as energy markets that's probably not good news for those markets, for the consumer maybe it is. You know, there's a lot of things going on here with this dollar until this week had been on kind of a break. Bernanke announcing that he's probably going to be a little softer on interest rates. If that's the case it seems to me that it's going to be rather hard for the dollar to firm up with declining interest rates. You've also had hints around that maybe some of the OPEC countries are going to begin trading crude oil and something in a basket of currencies rather than the dollar which means that's going to be a reduction in demand for dollar. That's dollar bearish. So, I don't know that -- we've had a little bounce here, probably just a correction and a longer term down trend in the dollar. On that side of the point, I guess, is in the long run probably going to be supportive to our grain markets and our exports in general. In terms of the reduction in crude we were just starting to get ethanol sucked along to get a little bit more profitable. If crude breaks you're probably going to see ethanol soften again. You've got big stocks of ethanol sitting around, backing up here and I think that's going to ultimately continue to be a problem for the ethanol market here. So, some of the negative things going on outside of the grains per say are kind of giving us mixed signals here.

Pearson: Alright, so like I said with the continued weak dollar and, again, these relatively strong energy prices, strong commodity prices overall, we've had demand driven corn, soybean and wheat markets here and a weather issue. People seem to be wondering where's the top.

Pfitzenmaier: You've seen gold and silver back off a little. I think that's a correction I think also related to this dollar and interest rate situation. I think that's going to come back so we're going to have overall commodity inflation probably. In terms of where is the high in corn and beans, that's a good question. A lot of it depends on these outside markets. Normally you would think, you'd sit and look and say, you know, at what point do prices get high enough that you choke off demand? Well, if the dollar continues to weaken then really the people that are buying our product aren't affected so much. Having said that, that's a big of a misnomer particularly in corn because when everybody quotes the dollar they're quoting that dollar index and that dollar index is made up, about 77% of it are European currencies and we don't sell any corn to Europe. Most of our corn goes to Japan and goes to Mexico and the dollar hasn't weakened against the peso and the yen like it has against those European currencies. So, you know, we like to talk about that but I don't know that it's as important as we like to make it sound like. Having said that, though, we still haven't gotten to the point where we've choked off demand. Export sales in corn and beans this week, again, were very, very good. We continue to sell the product and people want it. So, as long as that's the case and the farmer is a bit of a stingy seller, that has firmed up the basis in corn, I can't really think that you can say that a high is in. Now, maybe if energy prices are done here, crude oil has done all it needs to do and maybe that's dollar related too because if they aren't going to be getting paid in dollars, they're declining in value, you don't need to rally the value of crude to maintain that value for them. I don't know, a lot of the bottom line on this is that we're up at awfully good levels and if you were to ask most farmers 18 months ago if you had a chance to sell corn or beans at $10 and corn at $4 would you do it and they would have been all over it. And now you talk to people and they're not sure it's a good idea or not. So, I mean, attitudes have really changed over the last year and a half.

Pearson: Let's take them one by one. Let's talk about the wheat market first, obviously reduced supply. Is this going to be a short crop, long tail scenario?

Pfitzenmaier: I think it is, we've had a really nice bounce in the last week or so as your earlier report showed. But that's been weather related, you know, there's a lot of nervousness about the weather down in Texas and Oklahoma and Kansas and that whole area and the effect that's going to have. From as near as I can tell there's some pretty good moisture supposed to go through there over the weekend and you saw wheat went up, was up almost limit on Thursday, only owned up a dime, barely was higher on Friday. So, that market looked like it's running out of steam. Everybody around the world is going to plant wheat if they possibly can and it's ultimately pretty darn hard to kill a wheat crop. Things have to get pretty severe. So, I think ultimately you're in a longer term down trend in wheat. And this rally we've had over the last week or so is probably an opportunity to get caught up on some wheat sales.

Pearson: And you would definitely be selling new crop?

Pfitzenmaier: Yes, absolutely.

Pearson: The July contract, I think, last time I checked it over $7.50, something like that.

Pfitzenmaier: That's still not a bad price.

Pearson: That's Disneyland, that's amazing. Okay, so make some wheat sales. Let's talk about the corn market. You mentioned that people were saying $4 corn, you know, this thing could get crazy this winter and it seems like a lot of people are just kind of waiting here.

Pfitzenmaier: Yeah, there's a lot of complacency. There have been some beans moving, not all that much corn has been moved and there's a pretty good carrying charge out into the July, as good a carrying charge as we've seen over the years. So, maybe there's been some sales made but I don't pick up that there's been a lot of that done either. There's just a lot of optimism out there and everybody thinks every sale, the attitude is every sale I've made up to this point has been wrong. You know, the next week it's higher than this week so I'm just going to hold off and that's maybe a good attitude down at $3, I'm not sure it's all that great an attitude up at $4 or $4.25.

Pearson: We have this acreage battle. Corn around $4 looks to be pretty profitable.

Pfitzenmaier: Yeah, it does. I think it is and of course everybody throws right back at you input costs are going to go up and I certainly recognize that. But it's still going to be fairly profitable at these levels. And the other point is profitability doesn't necessarily matter to the corn and futures market.

Pearson: A friend of ours, Dr. Steve Johnson, calls it margin compression. I like that. Let's talk about soybeans. South American crop, talked to some people down there this week, said it's perfect conditions down there, looks really good.

Pfitzenmaier: Yeah, I mean, we tried to talk up a little bit some dry weather in southern Argentina moving into southern Brazil earlier in the week and rain has gone through and kind of eliminated that. So, you're hard pressed to find anybody that says there's any problem with the crop down there.

Pearson: Obviously that's one they're going to be watching this winter. Things can change. If they did change you could certainly see some volatility. Going to get back to your point at the beginning, $10 bean sales historically been an amazingly good sale.

Pfitzenmaier: Yeah, you know, you can hand ring and you can listen to all the analysts and you can do charts and you can do all that stuff but ultimately if $10 or $10.25 or whatever you can get for beans works well on your farm you probably should sell some of it. I mean, okay, so maybe we're going to go higher and if we do and you're nervous about that and you can't stand to not own beans go buy yourself a call option or a bull call spread or something that allows you to participate if it goes back up. But I think you need to take a piece of this somehow.

Pearson: Alright, we've talked about corn, we've talked about beans and the wheat market. But as we look at this cotton market it's been on a real slide here, kind of countered everything else that's been going on in commodities.

Pfitzenmaier: Major fund liquidation, I mean, the funds have just been sliding away from it. The Texas crop was probably a little better than we thought it was going to be. Chinese demand hasn't been what we thought it was going to be, there's some concern about maybe a little recession in the United States hurting cotton demand and the market got way ahead of itself, it needs to pull back here. We're going to be watching acreage there too. We get under 10 million, some think we're going to be at 9.9 to 9.6 range for acres next year and the crop is just mediocre then there's plenty of up side potential. That Dec. of '08 cotton probably should be bought at $70 with the potential to move to $80. As far as March cotton the one that is nearby we're right on support, we need to kind of hold this $63, $62.90 area, if that doesn't then we're going to go back and re-test $60 which is kind of approximately where the December contract is at. So, I don't know that if I was a cotton producer I'd get in a big toot to sell anything here. I think you need to see some kind of a recovery rally to do that because that market has gotten kind of beat up over the last month or so.

Pearson: It sure has. Now let's switch gears totally and talk about what's happening with livestock production. Fed cattle markets as we've been following them they've been under some pressure. We have had this trend where we've been getting larger and larger carcass weights through the years, fewer number of cows really hasn't offset our beef supply because that increased yield on the animals that are out there. We're backing up a little bit of the 120 day numbers in the lots. Talk me through the end of this year, first quarter of next year for fed cattle.

Pfitzenmaier: Well, we've been talking really on this show for several months here that the numbers really aren't that big a problem, that on its own hasn't been a problem. The problem is there's a lot of pork, there's a lot of poultry, the economy has gotten a little soft and we're just not able to push beef through, the demand for beef hasn't been there. You don't have that export option that you've got in pork on the beef side at all, almost all has to be domestic and it hasn't moved like we'd hoped it would. And as a result you've struggled because everybody expected February cattle to be up in that $99 to $102 range and we just are having trouble getting there. I think we're going to have to change our sights a little bit and we get to $99, $98.5 maybe even you're going to have to start stepping in and making some sales.

Pearson: Absolutely. And let's talk about this calf market too, Tomm, and what you see happening there. Again, was virtually no expansion. Is that your feeling that we're just not going to expand this beef herd at all?

Pfitzenmaier: No, I don't think we are. You know, in order to do that you have to have huge profitability and you don't have that with $4 corn and the price of calves the way they are right now, I don't think there's a lot of incentive for huge expansion. So, I mean, I don't think the herd is going to decline but I don't see it growing here like you normally would expect with these higher prices.

Pearson: And we've also got weather issues too, you know, ongoing droughts in a couple of different big parts of the country.

Pfitzenmaier: And you bring up a good point on that fat market, you know, maybe as we go into the winter we'll see that pick up a little bit as weather becomes, you almost always have some weather event that gets cattle going in that January, February period and, you know, if we haven't rallied by then I think you have to be a little patient and see if something like that doesn't come along to give us a little boost there.

Pearson: Alright, you mentioned hogs really being the problem here. These numbers have remained huge, these kill numbers. Is that going to let up?

Pfitzenmaier: Not for a while. At least not through the first part of next year, January period, something like that and maybe you're going to start to see the numbers back off. But you've got all these Canadian hogs getting moved down here because, again, these bigger picture with the Canadian dollar firming up relative to the U.S. dollar, seeing hogs moving in there, that hasn't helped any either. We've been moving a lot of them on the export market, the packers are making money there so they're slaughtering them as fast as they can get their hands on them. That whole side of the market is good but it makes it a little tough for the cash side to go anywhere.

Pearson: Alright, let's talk flip side on livestock and that is covering feed needs. As we look at this market right now, again, with these potential volatility going into this acreage battle you mentioned South American crop, exports continue to be strong, continue the weak dollar. What is a livestock producer supposed to do for covering those needs?

Pfitzenmaier: Well, I think if we have a correction there's a pretty strong seasonal in grains when you're rallying into Thanksgiving, the break into Christmas. If you get a good break into Christmas I think that's the time you start to use that as an opportunity to get some stuff locked in. I mean, these are good prices but I think you could see some correction. I don't think the correction is going to be great because they're going to continue this battle between corn and beans, how they're going to get planted and that's going to fairly well support that market I think. So, we're going to get breaks but I don't think they're going to be huge. I don't really expect a lot of problems but there are a lot of producers that say, well, look at this drought down in Georgia and those dry weather in the southeast tends to move up into the Midwest and there's a lot of nervousness here and all of that is going to continue to underlie support on the corn and bean markets for a while.

Pearson: Alright, what kind of weather forecast are you buying into if any?

Pfitzenmaier: I think you have to assume normality because that's what we have 80%, 90% of the time. Occasionally you've got some problem but you have to assume normality when you're a grain producer.

Pearson: Absolutely, Tomm, thank you so much. That will wrap up this edition of Market to Market. I want to thank Tomm Pfitzenmaier. But if you'd like more information from Tomm on just where these markets might be headed please visit 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 market plus segments free right there at our Web site. And 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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