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Market Analysis: Jun 22, 2007: Tomm Pfitzenmaier

posted on June 22, 2007


An attempt to declare energy independence by the 4th of July may be well on its way. In the wee hours of the morning Friday, the U.S. Senate passed the 2007 Energy Act, establishing a U.S. production mandate of 36 billion gallons of ethanol annually -- a 700 percent increase over last year's production.

The measure also requires auto manufacturers to raise passenger car fuel economy to 35 miles per gallon by 2020. The 28 percent increase, if approved, would be the first new fuel efficiency standards in 17 years.

The announcement appeared to have little effect on the markets. The downward trend this week may be attributed to weather conditions across the grain belt and uncertain prospects for next week's acreage report.

For the week, July wheat declined more than 14 cents, while the nearby corn contract gave up 51 cents.

Anticipation of next week's acreage report, which will likely set the tone for the rest of the year, pressured soybean prices. For the week, the nearby bean contract plunged more than 50 cents. The July meal contract also followed suit, losing $18.

In the fiber market, cotton put together another winning week with the December contract posting a gain of $1.29.

In livestock, the June live cattle contract was down almost $3. Nearby feeders advanced $1.25. And the July lean hog contract lost almost $2.50.

In the financials, Comex gold declined $1.00 per ounce. Nearby crude oil prices flirted with the 70 dollar mark. The Euro gained 12 basis points against the dollar. And the CRB Index gained two and a-half point to close at 315.50.

Here now to lend us his insight on these and other trends is one of our regular market analysts, Tomm Pfitzenmaier. Tomm, welcome back

Market Analysis: Jun 22, 2007: Tomm Pfitzenmaier Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Tomm Pfitzenmaier. Tomm, welcome back.

Pfitzenmaier: Thanks, Mark.

Pearson: Well, Tomm, let's talk about these markets this week where we had the big move up last week. I mean, we said this earlier and you commented on it, so have other analysts, that hey, we're going to have a lot of volatility this summer. We've seen it, we've been whip sawed here since that last acreage report at the end of March, prices down, prices rallied back, prices down now. We have another acreage report coming out here soon. Let's talk about the wheat market first of all. There's been a lot of concern, of course, we have phenomenal wheat prices in the last week, we backed off from those highs. There is still concerns about wheat production worldwide. What do you see ahead? What should a producer of wheat be doing right now if he's not in the combine?

Pfitzenmaier: Well, I mean, obviously wheat prices above $6 are a heck of a good price for wheat and I think you'd be kind of silly not to take advantage of some of that by making some sales up here. The Ukraine is giving you a little boost, wet weather at harvest is giving you another boost in price. I think with the beans and corn plummeting like they did this week and the wheat market getting a little overbought it was kind of a natural and I think it was pretty lucky that we only lost the few cents that we did on wheat this week. But I just don't think that selling wheat over $6 can be a bad decision.

Pearson: Alright, so take advantage of it would be your idea. As we go forward and producers are looking at, you know, 2008 and what's ahead and the idea we're going to need more corn acres and we're going to reduce, perhaps, soybean acres, we've got all these acreage issues out there. What about some of those deferred contracts in wheat? Should they be used as a hedge or an option strategy?

Pfitzenmaier: I guess I'd hold off a little bit on that and kind of wait and see how the acreage develops. It depends on, you know, a lot of wheat acres got switched to corn and I guess we're going to have to wait and see how those, if those yields are a bust it might be a gravitation back toward wheat. If they aren't, if they do well, yield well, have good profitability then some of them might stay in corn. So, I guess I'd like to get a little further down the road before I get too excited about selling deferreds.

Pearson: Let's talk about the corn market, you know, 50 cent sell off this week in corn and, again, a lot of people wondering what the funds are doing. Are they turning around now or are we going to see, you know, the funds and more dollars come back into this market next week prior to this report?

Pfitzenmaier: Well, they're going to have to have a reason to come back in. If you look at the technicals on the market we went up and made a new contract high, came back, closed lower, plummeted through the rest of the week and closed the week lower, closed under almost every one of the major moving averages. Stochastic turned over, the Bollinger bans in there, I mean, every technical indicator that you can look at turned negative this week and it's going to take some pretty substantial fundamental to turn that around. Now, I suppose if we come in Sunday night, Monday morning and all the rain is gone and the heat comes in then maybe that is going to bring us back. There is a lot of nervousness about this acreage number. There was a lot of acres switched to corn and I think there is a fear that maybe that number is going to, that acreage number is going to jump a little bit on this report. We haven't gotten an official range of estimates but I'm guessing it's probably going to be pretty wide because, you know, just what you read around the industry there is a pretty wide opinion on what exactly acreage did do this year. You know, did the wet spring shift some acres back to beans? Did the price of corn break at the time people were making those final planting decisions and so they didn't shift corn? So, there is a lot of uncertainty there and a lot is going to be riding on that report on the 30th.

Pearson: Alright, after this sell off what is your position? What would you be doing right now as a producer?

Pfitzenmaier: As a producer I guess I'm going to wait for some kind of a recovery rally, a 50 to 60 cent break off the highs this week is a pretty good correction and I expect at some point you're going to get some rally on that. Having said that, I still think you need to get some sales. That high this week could very well have been the summer high. If we don't have any serious weather problems in the next three or four weeks that was probably the high. I guess all along I had wanted to get some sales made ahead of that July 3rd, you know, that 4th of July holiday which can be pivotal sometimes and maybe Monday was the day you should have done that. I guess I'm expecting to get some kind of a recovery rally to start to makes sales. But you've seen the basis widen out on the old crop months, I think if we have a good crop that's just going to continue. Those narrow basis days are maybe over if we don't have any production problems. So, I don't know that you're going to want to wait too long to start cleaning up those old crop sales.

Pearson: Alright, let's talk about soybeans and, again, it was a down week for soybeans. But, again, I mean, big picture, Tomm, as you look forward if we're going to meet this ethanol standard and look at what the Senate just passed, I mean, so there seems no slow down from the government encouraging that. If you look at that we've got to rob more acres from soybeans next year.

Pfitzenmaier: Well, you know, everybody the last two, three, four, six months has been scratching their head on why the heck are soybean prices so high and I think that's why. You can see the writing on the wall that corn production is going to chase soybean acres out of the country and, you know, we're going to have to have at least five million, maybe more acres of corn produced next year and you've seen the carry out on beans jump from, I mean, drop from 615 this year down to 320 next year, almost cut in half already. So, there is a lot of nervousness. I think that is going to tend to support soybean prices on this break. That's not to say they might not have another, you know, 20 cents, 30 cents down but somewhere down in here you're going to find pretty good support on the beans. Plus, June and July aren't all that critical for soybean production, really August is the time everybody kind of focuses on. So, beans right now tend to be a follower and tend to be led by the bean oil market. You saw the Malaysian palm oil drop some this week, that has hurt. You mentioned on the show crude is strong banging on $70, that helped hold the bean oil market up and kind of helped beans up until the very end of the week when, you know, the pressure from everything else kind of came in and hurt them.

Pearson: Alright, real quick, cotton market as we look at what's been going on there which went the other way this week, a little bit stronger. A couple of international factors going on there, aren't there?

Pfitzenmaier: Well, one really China, we had a really good export number this week, we have had for the last two or three weeks and most people attribute that to Chinese demand and China really is the big wild card in our cotton demand. If they're in there buying that is going to be supportive to cotton prices. We've also had kind of dry weather in the southeast, wetter weather in that Texas area that has made everybody a little uneasy about, you know, the production side. You've had acreage shifting away which everybody has kind of known that we've been sort of nervous about here for the last few months.

Pearson: Let's talk livestock, Tomm. Sell off on the board this week. What is your feeling? What is your position on this fed cattle market? Just anecdotal, you know, you just hear a lot of people not talking about really much expansion in the fed cattle arena and the cow-calf business. What do you see ahead?

Pfitzenmaier: Well, demand has been a bit of a problem. Weights have crept up, I think finally those cattle that suffered all winter are finally kicked in and put some pretty good gains on as we headed into the summer time period so we've seen weights kick up. We also see a decline in prices and when you do that producers tend to resist, plant their heels, hold those cattle, resist in the lower prices and that tends to put weight on too. At the same time you've seen some consumer resistance switching to pork and poultry. There is a little concern that the 4th of July falls on a Wednesday and so you don't have that long holiday of everybody eating beef all weekend, you've just got kind of a one shot, one day deal and that's probably going to hurt demand a little bit. There is a disappointment that the Father's Day holiday didn't bring as much demand as they were hoping. And so domestic demand has been weak, some thought it was going to be shored up a little bit by exports and exports while they are growing haven't grown enough to off set that. So, you're having a little correction there, we had a cattle on feed report on Friday showing placements up about 3% higher than the trade was expecting so that's probably going to pressure the deferred months. Marketings were a little, pretty decent so I think the front end is going to find some support in these areas.

Pearson: Alright, of course, this calf market went the other way as we show here this week obviously with corn prices backing off.

Pfitzenmaier: Yeah, we've said all along the feeder market is just a function, an inverse relationship to corn prices. You see corn drop 50 cents you're going to see firmness in the feeder market.

Pearson: This drop in corn prices, 50 cents, is good news to hog producers out there. What is your outlook for hogs? And is this a buying opportunity? You mentioned that spreading basis which, of course, is a little bit different than what we've seen too.

Pfitzenmaier: Yeah, I think number one for livestock producers this break is probably wanting to start looking at getting some inputs tied up and wrapped up if you possibly can. Again, that wider corn basis benefits in that regard. As far as pork prices go I guess I've been fairly optimistic on pork prices. The one thing that I am hearing out in the country that bothers me a little bit is this circle virus vaccine has really, really helped a lot of hogs and if that is as effective as they say it is, it might punch numbers up going into the end of the year.

Pearson: Could be a surprise when we hit the end of the year.

Pfitzenmaier: Exactly.

Pearson: Tomm Pfitzenmaier, as usual, some great insights, we appreciate it, thank you so much. And that is going to 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 visit the market plus page, it's at our Market to Market site where you'll now find streaming video of our program. And remember, you can download audio podcasts of our market analysis and market plus segments absolutely free at our Website. And be sure to join us again next week when we'll examine how ethanol is racing its way to prominence on the Indy circuit. Until then, thanks for watching. I'm Mark Pearson. Have a great week.


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