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Market Analysis: Aug 17, 2007: Tomm Pfitzenmaier, Summit Commodities

posted on August 17, 2007

The grain markets continue to be dominated by the world wheat trade. And traders of other commodities may have difficulty focusing on their own fundamentals as wheat prices flirt with historic highs.

For the week, September wheat gained 5 cents, while the nearby corn contract moved a nickel lower.

Abundant rainfall in many key soybean-growing regions over the past week pressured prices. For the week, the September contract lost nearly 45 cents, while soybean meal was down $15.50 per ton.

In the softs, cotton trended lower again this week with the December contract posting a loss of $3.74.

In livestock, the August live cattle contract gained $1.73. Nearby feeders were up $1.44. And the October lean hog contract lost $3.35.

In other markets of interest, the Euro lost more than 200 basis points against the dollar. Nearby crude oil prices gained slightly more than 50 cents per barrel. Comex gold fell $13.40 per ounce. And the CRB Index lost more than 4 points to close at 307.50.

Market Analysis: Aug 17, 2007: Tomm Pfitzenmaier, Summit Commodities Pearson: Here now to lend us his insight on these and other trends is one of our senior market analysts, Tomm Pfitzenmaier. Tomm, welcome back.

Pfitzenmaier: Thanks, Mark.

Pearson: Well, let's talk first about this wheat market and, of course, what's been going on there. Obviously crop problems in the United States, tightening around the world. It seems like wheat growing problems everywhere.

Pfitzenmaier: Yeah, we're really the only ones that have much wheat left. We had some good sales to Egypt, probably some more sales to Iran this week. So, we had some pretty good, we've had really good business and we're trying to decide how high is high to choke that off and I guess I'm not sure $7 is even high enough. We did have a reversal kind of action this week but we had that mixed in with all the financial problems that sort of exerted some undue influence on wheat so I guess we'll have to see next week how we can sort of hold up there and see if this is just a little correction before we continue the uptrend here.

Pearson: Even with that continued uptrend, Tomm, would you make some here at this stage of the game in wheat?

Pfitzenmaier: $7 wheat you've got to start making some sales. I mean, that's just a flat out good price to take advantage and maybe we're going a little higher than that, who's to say. But that's a good place for making some sales I think.

Pearson: With the potential to produce a wheat crop, as you know, every six weeks or so around the globe should you be selling some wheat for 2008 at this point?

Pfitzenmaier: Well, I certainly would. I think these are the kind of rallies that can make you for next year because you know a lot of acres are going to be switched away from corn and beans back into wheat next year and here's an opportunity to make that switch, get back into a crop that you're probably a little more comfortable producing and get a heck of a good price for. So, I would certainly think you'd have to take a piece of this.

Pearson: Let's talk about what's going on in the corn market. And, again, as we hit the second half of August crop looks pretty good out there, USDA confirmed it in their report last week. What's ahead for producers in terms of corn prices? We've got to get through this season then what will happen in 2008 with corn?

Pfitzenmaier: Well, that's the question. I think we're in the process now of determining, on this summer's crop, whether it's good or it's really good. I think the fact that it's not going to be so good that's behind us. Everybody is fairly certain we're going to have a decent crop. So, we're going to wrap that concern up fairly quickly and then we're going to start transitioning into getting concerned about demand or watching demand. The USDA report a week ago showed, again, a 50 million bushel increase in demand for feed. So, livestock producers still going to keep feeding corn. 150 million bushel increase in exports so we're keeping that side of the demand equation going. Ethanol obviously continuing to, nothing to discourage that. So, I think once you get past this good supply number and start looking at demand all of a sudden the corn market starts looking a little friendly. Then you add on top of that high wheat prices and relatively high bean prices, probably bean prices are going to go higher and all of a sudden all those incentives to plant corn that we had last year don't exist for next year. And you couple that with higher production costs in terms of cash rents and fuel and anhydrous and all the other components that are probably going to be up next year and all of a sudden you look around and say, wow, how are you going to entice people to plant more corn next year. And the only way to do that is to rally corn. And $2.80 to $3.10 cash corn doesn't do it.

Pearson: That's right. So, at this stage of the game we look at new crop -- you're holding off on sales for the time being?

Pfitzenmaier: It depends on who you are and what your situation is. If you have cash corn that you have to move and don't have the ability to store then you've got to use these little rallies that come along to get that stuff moved. If you've sat on last year's crop and let all these good prices go by and have to make some sales to make room for this coming crop then you need to use any little rallies that come along. You're facing probably widening basis because there's a lot of that corn sitting out there, everybody knows it's sitting out there and there's not a lot of incentive to pay for it. So, rallies that come along are probably more likely going to be futures rallies than they are cash rallies widening the basis out on corn. In terms of next year's crop that's another concern, you know, we have to rally, it seems to me, December of '08 corn in order to entice farmers to plant more corn.

Pearson: You talked about the cash market -- let's talk about soybeans too. Same issue there really -- we had a serious pullback this week in the bean market. And like you say, there's a lot of factors, it was a strange week in the futures and financial worlds. But as you look ahead in terms of enticing more bean acres this bean price is still pretty low.

Pfitzenmaier: We've got to keep it fairly high to entice South Americans to plant more soybeans and then you have to look at the U.S. situation. There has been beau cou complaining about the basis on beans ever since, from spring on through. And that's what happens when you have a 600 million plus carryout. But we're not going to have that next year. We're going to have a 200 barely million bushel carryout on beans. The basis situation under those circumstances is completely different than it is when you've got a 600 million bushel carryout. So, again, if you've got the storage you've got to store the beans just like you do the corn. We're going to -- there's a gigantic premium for anybody that's got the ability to store. 35 cent carry on corn from December on out to July. Good carry in beans on out to July and the potential to snap that basis back. So, there's some really good returns here on storage on both corn and beans in terms of capturing carry and waiting for basis improvement.

Pearson: Alright, so really the key is going to be merchandising the crop.

Pfitzenmaier: Absolutely, you know, in the past we had a pretty close safety net and you look around now at the prices we're at and that safety net is a long ways under you. So, yeah, you're going to have to be your own merchandiser here and do what elevators have done for years and capture those little things that give you advantages.

Pearson: Tomm, let's talk about the cotton market. This week, again, a victim of a sell off and as you look ahead for cotton China is such a big factor and obviously crop prospects.

Pfitzenmaier: Well, you know, we rallied cotton up pretty well because everybody was a little concerned about the crop and it turns out the crop is maybe not going to be as bad as they thought. You add in all these financial problems and the fact that China hasn't been stepping up to buy cotton. Worldwide when everybody gets a little spooked cotton is one of those things that suffers. So, I think you're going to find good support on cotton in that 54, 55 cent area but you're also going to find really good resistance up in that 58 to 60 cent area if it gets up there. And if it gets up there you'll probably need to be starting to make sales.

Pearson: Let's talk about this cattle on feed report released Friday afternoon, Tomm, your reaction to it. Face value it looked fairly friendly?

Pfitzenmaier: Well, like you said earlier in the show definitely the numbers were bullish. We did rally some pretty hard on Friday in anticipation of a friendly number so to some extent that's taken into account. There is no question numbers are down, that's why you see feeders up at $1.16 to $1.19 on the futures because there aren't that many of them around. I think we need to get the demand, export demand business back. That's going to come but it's going to be slow, we've got a lot of setbacks. Domestic demand I guess that's the big question. How this cattle market goes is going to depend on how we can move beef going into the September holiday and just see how the consumer reacts here. If they come in and continue to support beef then I think you could see beef run back up to that dollar level again.

Pearson: I'm hearing stories, anecdotal about what hay prices are doing out, they're extremely high. As you look at that and you look at this calf market going forward what do you see?

Pfitzenmaier: We've had high corn prices and you still had calf prices stay high. As long as we've got the fat market as high as it is I don't see that pulling back much at all.

Pearson: Alright, now let's talk about another market that has been pulling back and that's the hog market. Big move up? Was that all the rumor about the sales to China that drove the market up there?

Pfitzenmaier: Yeah, there were sales to China that didn't actually really amount to anything and then you got the double whammy this week where you had, again, they got caught up in the financials falling apart and then you also had China saying not only are we not going to buy any, we're not importing, we're shutting down our imports. So, that pretty much took, knocked the pegs right out from under the hog market and I think the hog market is going to struggle to respond to that. I mean, you saw cattle up $1.50 to $1.90 on Friday and hogs were barely able to stay higher. This hog market is going to struggle here for a while. We may even see October hogs pull back into the low 60's. Now, I recognize that the indexes and the cash market are well above the futures and that should help support it but the futures are anticipating that that's going to fall.

Pearson: Alright, so as a producer what do you recommend at this stage?

Pfitzenmaier: Well, I think you have to continue to use any rallies that come along as selling opportunities in the hog market. On the cattle market you can be a little patient but in hogs you probably need to be a little more aggressive.

Pearson: Talked to a lot of livestock producers through the past couple of weeks and they were, you know, they got a big scare September of last year when this market took off and weren't covered for feed needs. Now, you mentioned this problem we've had with basis values dropping off with all that product being out there. What would you tell a livestock producer right now in terms of covering feed needs?

Pfitzenmaier: All these things that grain producers are complaining about are creating great opportunities for feed purchases. And December corn we're trading around $3.40, it got as low as $3.24 here a couple of weeks ago. If you go back and as you're heading into harvest and you have a little pullback in corn and it sags down to those levels those are areas where livestock producers really need to be aggressive. I mean, you've heard all this complaining from livestock producers about ethanol and the effects and how it's hurt them. Well, here's your chance, fellas, to get stepped in there and get some feed covered on corn as well as in meal.

Pearson: Alright, some great thoughts, some great insights, as usual. Tomm Pfitzenmaier, thank you so much. That's going to wrap up this edition of Market to Market. But if you'd like more information from Tomm on where these markets may be headed why not visit the market plus page at our website where you'll now find streaming video of our program. And you can also download audio podcasts of our market analysis and market plus segments free of charge at our website. And, of course, be sure to join us again next week when we'll examine the efforts of one upscale grocery chain that found it's easy to be green. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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